These are the wrong points. Before exploring why, let's just say that it is not easy for a Washington-based reporter to get the right kind of picture of a complicated European policy (although it can't be too much trouble to consult some US based environmental economists). On the other hand, why write about it if you don't know anything about it? Anyway, the following paragraph is rather disgusting:

As U.S. lawmakers work on the details of their greenhouse-gas legislation, they are looking carefully at Europe's experience. Five Senate proposals all use the same basic approach, known as "cap and trade," that Europe has used for the past two years. But what the snappy name "cap and trade" means is that the market will put a price on something that's always been free: the right of a factory to emit carbon gases. That could affect the cost of everything from windowpanes to airline tickets to electricity.

To start discussion with the 3rd point, it should be noted that rising prices and increased profits for energy companies (and quite a few other companies as well) is exactly what neoclassical economics predict happens under a cap-and-trade system, when tradable emission rights are handed out for free. The companies treat the freely given rights as a 'lump sum' subsidy, that is, they will calculate the 'opportunity costs' of spending the rights rather than selling them. These costs are than added to the price of the product the company is selling, giving it a 'windfall profit'. Far from being undesirable, this prevents the (internal) market from being distorted: it means that in terms of price competition, companies that are handed out rights for free do not get a competitive advantage over firms that have to buy the rights. Companies that are handed out relatively more rights than others also don't get a competitive advantage, in terms of price.

The added cost of a good is determined solely by the price of emission rights on the market for emission rights. That is how the market is supposed to function. The reporter has no idea of this and as a result the piece is replete with error.

If this practice is somehow interfered with by the national government and companies are kept from raising their prices, this is market-distorting behaviour and would be frowned upon (and probably litigated) by DG Competition. What governments can do without distorting the market is taxing the windfall.

A couple of things might be noted here. First, why does the Washington Post hate the free market? Second, this consequence was probably intended and if it was not, was entirely expected and is most certainly not a side-effect.

I have some overview of the literature and Commission documents that were preduced in advance of the ETS, and side-effect #1, the competitive disadvantage, was definitely noted, voiced quite loudly by industry, etcetera (in the mean while, industry is quite optimistic). That leaves European industries offshoring or outsourcing a part of the production chain -the part that pollutes the most- which, if novel to me, is also a result that could have been expected.

However, it is hard to see how you can deal with these two problems as some nations (e.g. the US and Australia) play free rider on climate change and other nations don't have quantitative goals. Some in the EU have offered the idea of a border tax. But this would meet a lot of international resistance (kiss yr Doha round goodbye). A more practicable idea might be to use something like a European 'globalisation adjustment fund' to subsidise the implementation of technologies and processes in industries facing global competition that cut back on energy use and greenhouse gas pollution.

The more important challenges of the ETS are not or barely noted in the piece, and as a result, people reading the WaPo - including, I'd guess, many a policy-maker - get a picture that is doubly wrong. The first challenge, which is addressed only in passing, was/is the lack of scarcity on the market in the first trading period due to overly liberal national 'allocations'. The adequate policy response in the EU and the US: plan for scarcity; make conservative growth estimates; don't allow the (Member) States too much say.

The second challenge is the short time horizon of the trading periods: companies can only really plan their reduction strategies when they have a 20-30 year time horizon. The second period of the ETS runs from 2008 until 2012. The EU has now alleviated much of this problem by committing unilaterally to a 20% reduction of greenhouse gases by 2020 (compared to 1990 levels) and offering more if others join in. The policy response in the US should be the same: couple an emission trading scheme to a strong long-term greenhouse gas reduction commitment to give companies an adequate planning horizon.