Under Europe’s system of carbon limits, factory emissions have risen.

By JAMES KANTER

BRUSSELS - Practical experience with carbon markets in the European Union raises a critical question: Will such systems ever work?
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.
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. In May, the European Environment Agency reported that emissions from factories and plants that trade pollution permits had risen 0.4 percent in 2006 over the previous year, and 0.7 percent in 2007, the first two years under the system.
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 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.
Electricity producers, oil and steel companies and airlines are among those fighting to protect their interests. Some threaten 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 biggest question hanging over the European system is whether the rules can be tightened enough that they achieve the social goal of reducing the emissions that are warming the planet.
Henrik Hasselknippe, the director of emissions trading analysis at Point Carbon, a consultancy in Oslo, said the European system was beginning to show signs of success. He said the price of carbon had been rising, and that would prompt factories and installations covered by the system to move toward cleaner power generation, such as burning natural gas instead of coal. And he predicted that emissions from industries covered by the European system would finally decline this year, by 2 percent.