Why the U.S. Is Cutting Carbon Faster Than Europe

Cooling towers operate at the RWE coal-fueled power plant in Weisweiler, Germany Photograph by Hannelore Foerster/Bloomberg

This week, European Parliament put a dagger in the Continent’s carbon cap-and-trade system.

Rather than choosing to reduce the number of emission credits in the system to better reflect the economic slowdown, Parliament voted to keep carbon cheap—real cheap. As a result, the price of carbon in recent days traded for as little as €3 ($3.92) per metric ton, compared with €25 in 2008. This means that eight years after Europe’s emissions-trading system began, with the intention of making it far more expensive to pollute the air, doing so is now about as cheap as it’s ever been.

Meanwhile, the U.S. cut its energy-related carbon dioxide emissions by 12 percent from 2007 to 2012, according to data released on April 5 by the Energy Information Agency. At 5.2 billion metric tons, the U.S. is now emitting the least amount of energy-related CO2 since 1994. Not bad, especially compared with Europe, which reduced its carbon emissions by 8 percent from 2005 to 2011.

Who would have thought a few years ago that the U.S. would be curbing carbon emissions faster than Europe? Although the trends are going in different directions, they’re not unrelated. In a way, the U.S.’s ability to cut its carbon footprint has made it harder for Europe to do so. The Continent’s bungled cap-and-trade system is part of its problem, but it’s also being put at a disadvantage by America’s shale gas boom.

Over the last five years, as the U.S. has improved horizontal drilling techniques aimed at extracting natural gas and oil from tight shale formations, the price of natural gas has gone from about $13 per 1 million BTUs in 2008 to a low of less than $2 last April. At the same time, natural gas in Europe has stayed above $10. In the U.S., all that cheap natural gas has displaced coal as a source of electricity. The U.S. generated 30 percent of its electricity from natural gas in 2012, up from less than 20 percent in 2005. The price of coal fell, too, but it couldn’t keep pace with the steep declines in natural gas. As a result, coal’s share of electricity generation fell to about 40 percent, down from 57 percent in the mid-1980s.

All that cheap coal had to find a home somewhere, and in 2012 that home increasingly was Europe. Total U.S. coal exports (PDF) increased by 17 percent in 2012; exports to Europe jumped 23 percent. That was paced by some huge increases by individual countries. Last year the U.S. exported 52 percent more coal to Italy, 74 percent more to the U.K., 10 percent more to Germany, and 21 percent more to Spain. In 2012 the U.S. sold 1.8 million short tons of coal to Austria, a whopping 406 percent more than it did in 2011.

This week, a commodities analyst from Jefferies warned that if Europe doesn’t fix its current energy policies, it risks becoming a “global dumping ground for cheap coal.” It appears to be America’s dumping ground already.

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