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On global warming, what US can learn from Europe

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Momentum is building in the United States to fight global warming. And the most popular proposal to do that, at the moment, is through a nationwide "cap and trade" system.

At least three major Senate bills incorporate the idea. Large corporations, including big oil firms that until recently opposed such regulation, are backing the approach in theory. On Friday, the United Nations is slated to release a key report on the scientific consensus on global warming, which will put even more pressure on nations to act, analysts suggest.

But the real trick to effective legislation is in its details, a lesson that the European Union (EU) has learned the hard way as it prepares to cut greenhouse-gas emissions next year under the Kyoto treaty. So many companies emit so much carbon dioxide that the potential market for emissions trading is huge. Missteps could be costly, involving billions of dollars in unwitting subsidies or penalties for industries.

"Cap-and-trade markets for carbon gases are definitely on their way to the US," says Andrew Ertel, CEO of Evolution Markets, an energy and carbon-emissions trading firm in White Plains, N.Y. "The lesson from Europe is to keep it simple."

In theory, cap-and-trade systems hold much promise. They allow companies to find the most cost-effective way to reduce emissions. If one firm finds it cheap to cut its emissions below its federally mandated cap, then it can sell the difference – known as a carbon emissions allowance – to a firm that finds it much more expensive to cut emissions. As the government tightens the cap, credits get more expensive, which pushes companies to trim emissions.

Trading is harder in practice

In practice, cap and trade is more difficult.

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