The New York Times reports today that after three years the much ballyhooed cap-and-trade system in Europe is not working and that instead of reducing greenhouse gases that carbon dioxide emissions are actually increasing.

Backers of these markets, which involve setting limits on greenhouse gases and then allowing companies to buy and sell emission permits, see the approach as one of the cheapest and most effective ways to control the gases in advanced economies. The presidential candidates Barack Obama and John McCain have both endorsed the idea.

Yet in Europe, which created the world’s largest greenhouse gas market three years ago, early evidence suggests the whole approach could fail. Carbon dioxide emissions are still rising in many industries, not falling.

“We currently are in danger of losing yet another decade in the fight against global warming,” said Hugo Robinson of Open Europe, a research group in London.

This week, the European Environment Agency reported that emissions from factories and plants that trade pollution permits rose 0.4 percent in 2006 over the previous year, and 0.7 percent in 2007, the first two years of the system’s operations.

Europeans took an early lead in efforts to curb global warming, championing the Kyoto Protocol and imposing a market-based system in 2005 to cap emissions from about 12,000 factories producing electricity, glass, steel, cement, pulp and paper. Companies buy or sell permits based on whether they overshoot or come in beneath their pollution goals.

European Union officials acknowledge that establishing such a vast market has been more complicated than they expected.

“Of course it was ambitious to set up a market for something you can’t see and to expect to see immediate changes in behavior,” said Jacqueline McGlade, the executive director of the European Environment Agency. “It’s easy, with hindsight, to say we could have been tougher.”

A major stumbling block arose at the outset, when some participating governments allocated too many trading permits to polluters when the market was created. That led to a near-market failure after the value of the permits fell by half, and called into question the validity of the system.

Since then, officials have promised changes, and the price of carbon permits has largely recovered. Yet a ferocious lobbying battle is under way as European Union regulators seek to overhaul dysfunctional parts of the market by charging polluting companies more and reducing the supply of permits. Brussels is also seeking to consolidate its oversight of the market, rather than leave it partly in the hands of national governments that have proved susceptible to corporate lobbying.

“The politics you’re seeing in Europe now are the real politics of carbon,” said David Victor, the director of the Program on Energy and Sustainable Development at Stanford.

Energy-intensive industries, like power, steel and aluminum, have challenged proposals that would force them to buy many more permits than in the past. During the three years in which they participated in the first phase of the market, carbon emissions in the iron and steel sector in Britain alone rose more than 10 percent while emissions in the cement industry rose more than 50 percent, according to transcripts from the British Parliament.

Electricity producers, oil companies, steel companies and airlines are among those fighting to protect their interests, with some threatening to freeze investments in Europe unless the system is tweaked to suit them.

Meanwhile, poorer countries in the union, led by Hungary, are clamoring to overturn emissions allowances that they say are too stingy and risk undermining their economic growth.

The proposals are also under attack from environmentalists, who want to restrict polluters from using large numbers of permits from an offsetting program run by the United Nations. It funnels money to poor countries for investments that purportedly reduce carbon emissions, but the effectiveness of the program has been questioned.

“The sheer amount of lobbying creates so much uncertainty about the way these markets operate that nobody really is investing in cleaner technologies in Europe,” said Mr. Robinson of Open Europe.

This doesn’t bode well for the U.S. despite the fact that the Senate blocked the Warner-Lieberman bill that included a cap-and-trade provision. It is expected to return next year since the Democrats are expecting to add to their majority and therefore may have the necessary votes to pass the bill. But even then it isn’t clear sailing as the Times reports.

Americans were likely to experience many of the same problems already playing out in Europe, said Mr. Victor, the Stanford expert. “The challenge for the United States now will be to have enough pork to get people to the meal, but not to give away so much that we end up squandering public resources,” he said.

Imposition of cap-and-trade should have been far easier than it has been to date.  Many European countries, particularly in the Eastern bloc were notorious for their antiquated factories that virtually oozed pollutants.  There certainly was plenty of low hanging fruit in this case.  Yet at some point the lofty goals of reducing CO2 emissions will undoubtedly clash with the need for economic growth.  According to a study by the International Council for Capital Formation if the UK actually achieves the Kyoto Protocal reductions of 60% in greenhouse gases from 1990 levels it will result in job losses of 390,000 by 2020 and clip GDP by 1.7 percent. 

In the quest to be green economic considerations are often thrown out the window.  Ethanol comes to mind as another example of being green taking precedence over the cost of going green.  If the liberals win this battle be ready to empty your piggy bank.

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