A serious breach between Europe and America is the deep-seated difference over facing up to global warming. But after years of dragging their feet, 2007 is likely to be seen as the year when Americans finally made up their mind that global warming required action. That is a huge opportunity for the transatlantic relationship.

Climate change is a critical issue for this partnership because action to avoid its most catastrophic consequences requires that the Western industrial pattern, now imitated or imposed in virtually every part of the globe, undergo a carefully managed transition to a low-carbon economy.

Europe has been the de facto global leader on this issue for the past decade. The European Trading System (ETS) inaugurated in 2005 has revealed some design weaknesses during its announced “learning period,” but remains the world’s first and only carbon trading system. Europeans now have a chance to strengthen its second phase beginning in 2008.

But removing the biggest obstacle on the road to a global system of carbon limits requires that the United States pass a national carbon cap-and-trade system, without “escape hatches” or other vitiating gimmicks. It must then join Europe’s dialogue with China and the other giant economies of the South to build a bridge over which the US, China, Brazil, India and others can walk to join the young international regime of carbon limits. This new and truly global system should succeed the Kyoto Protocol in the year 2012.

We present here a list of policies that Europe should consider while it is waiting to see if the US will enact a carbon cap.

The first category consists of measures that will encourage those countries that have not yet “taken a carbon cap” to do so. We call this category "carbon diplomacy."

The second category, “slow and steady,” contributes to climate stabilization and will drive down the costs of low-carbon technologies so that the they do not push a country’s marginal cost of energy generation or goods production far outside the relevant global marginal cost curves.

The third category we call "win/win" policies that both contribute to climate stabilization and increase the global economic competitiveness of countries that adopt them.

“Carbon diplomacy”

• Modify the ETS to provide quantity-limited “docking stations” so that sub-national jurisdictions such as American, Brazilian, Indian or Australian states and Chinese provinces that “take a cap” could trade a limited amount of allowances on the European carbon market.
• Europe should get on board with the global effort to develop a system of “Compensated Reductions” under which the rainforest nations can receive credits in the international trading system if they stop deforestation. (Deforestation accounts for roughly 20% of global greenhouse gas emissions.)
• Europe should expand its dialogue with China on climate and energy security to:
• Explore a “low-carbon zone” that would provide advantageous financing and low-barrier IP arrangements for the globe’s largest consumer market and its largest provider of goods.
• Explore ways for Europe to finance the marginal costs of making China’s next generation of coal plants carbon-neutral provided China joins a global system of carbon caps.

“Slow and steady”

• Set energy portfolio standards that require more renewables.
• Make carbon capture and sequestration safe and affordable, and thereby break the back of the coal problem. The outcome of the present debate in Europe over requiring carbon neutrality for all fossil fuel plants by 2020 will have an enormous impact around the world.
• Set reasonable carbon reduction targets within the framework of the ETS, but this time with the long time horizons necessary to affect capital investment decisions.

Win/win

• Accelerate the drive for energy efficiency. Europe is in a position to ramp up its efficiency targets now.
• Shift agricultural subsidies to payments for carbon sequestration. Agricultural sequestration will be necessary as a “bridging” device for offsetting carbon emissions from traditional sources until they can be replaced with low-carbon sources. The US and Europe pay their farmers several hundred billion dollars per year in counter-productive subsidies. It will be far easier to redirect these politically sensitive subsidy systems into carbon capture than to dismantle them.
• Set efficiency standards for vehicles and aircraft which sharply increase mileage efficiency, achieve significant net carbon emission reductions, and decrease reliance on imported fuel.