House of Commons - Environmental Audit

Select Committee on Environmental Audit Fifth Report

3 Evaluating personal carbon trading as a policy option

The need to restrain personal carbon use

16. The UK Government has committed itself to reduce carbon dioxide emissions to 20% below 1990 levels by 2010. Further targets in the proposed Climate Change Bill aim to reduce emissions by at least 60% below the 1990 baseline by 2050. This may eventually be raised as high as 80% following criticism of the 60% target as inadequate. Carbon emissions from households and personal transport account for around 40% of UK carbon emissions. It is quite clear that if the Government is to stand the slightest chance of meeting its 2050 target it cannot afford to neglect the domestic and personal sector. Reductions in carbon emissions from business and industry will be meaningless unless accompanied by significant and equal reductions from households and individuals. This is a matter of urgency. Ambitious targets must be accompanied by equally ambitious emissions reduction trajectories and bold policies.

17. Awareness of climate change and carbon emissions has increased significantly over the last decade. Opportunities to reduce emissions, through improving technology, consumer-friendly labelling, and grant schemes have multiplied. But, in general, individuals are relied upon to reduce emissions either through the promptings of their own conscience, or to avoid the rather minimal attempts at green taxation. The Energy Saving Trust's Green Barometer programme reveals that 80% of people believe that climate change is having an impact on the UK, with 75% feeling pressure to change the way they live because of climate change. However, while 39% say that they are 'doing a few, small things' to reduce their contribution to climate change, 40% are doing nothing at all.[9]

18. Dr Nick Eyre, Director of Strategy at the Energy Saving Trust, summarised the challenge the Government faced in changing attitudes:

There is a big group of people in the middle who are now convincible to take action but not convinced. They conceptualise the problem as your problem. They see it as an issue for government, perhaps for politicians, perhaps for big business. I do not think we have yet won the argument with the majority of the British public that it is also an issue for them.[10]

For behavioural change to take place individuals must accept a degree of responsibility for their own emissions.

19. There is no denying the commitment of certain individuals and the efforts made by many to change aspects of their lifestyles. However, existing initiatives are unlikely to bring about behavioural change on the scale required, with many individuals choosing to disregard the connection between their own emissions and the larger challenge. We conclude that more radical measures must be introduced if emissions reductions from the individual and household sector are ever to make a meaningful contribution to UK targets. Personal carbon trading might be the kind of measure needed to bring about behavioural change.

The potential of personal carbon trading

20. Under a personal carbon trading scheme, a cap is placed on total emissions from households and individuals, and allowances to the value of that cap are distributed within the market. In theory, irrespective of where and how emissions reductions are made, emissions will remain within the cap as further emissions rights will simply not be available. The Centre for Sustainable Energy noted that the potential of personal carbon trading lay in its ability to deliver guaranteed reductions in emissions from individuals, a 'theoretical certainty' that was not shared by all instruments.[11] Personal carbon trading could guarantee a reduction in emissions because it places a ceiling on the carbon available for consumption, rather than seeking solely to reduce demand.

21. One of the key strengths of a personal carbon trading scheme would be the incentive of saving (or even gaining) money by cutting personal emissions. Carbon accounts and statements, receipts at point of purchase, and energy bills, would show the positive results of a change in behaviour. As well as penalising those who emitted carelessly, a personal carbon trading scheme would reward those who were making the effort to change. In this sense it has a potentially progressive impact, unlike carbon taxes which are regressive and would apply to even low emitters, including the poorest households. The combination of incentive and visibility could be a potent mix for ensuring engagement in the scheme.[12]Personal carbon trading has a greater potential for engaging individuals in climate change than 'upstream' emissions trading schemes.[13] This potential could spread beyond simple adherence to the scheme: personal carbon trading would spearhead behavioural change across a range of environmental concerns by bringing the environment to the forefront of decision-making and massively raising awareness of the challenge of climate change.

22. The RSA argued that personal carbon trading 'would by its nature be engaging and, arguably, empowering as citizens hold for themselves the right to pollute',[14] an entitlement that individuals could control as they saw fit. Simon Roberts told us: 'it also takes away from the issue any moral decision about whether flying to New York is any better or worse than any other kinds of carbon emissions—it just treats them all as equal and you make your own decisions'.[15]

23. Personal carbon trading would focus consumer attention on low-carbon alternatives. Provided that it was introduced as a long-term measure, the personal carbon trading allowance would also provide a clear signal to those individuals who could afford it that improvements and lifestyle changes involving a substantial capital outlay (such as installing certain types of home insulation or a microgeneration capacity) merited the investment—and the sooner it was done, the greater the reward. The potential to save, or even make, money could encourage action even from those with no interest in environmental issues, who would otherwise be difficult to motivate. These long-term signal should lead to significant investment in the market for green goods and services. All of this could lead to a more substantial action being taken, and sooner.

24. While the potential of personal carbon trading is evident, there is no doubt that there are many obstacles to its successful implementation, not least the administrative cost and effort. In their memorandum to us, the Tyndall Centre posed the following question:

It has been argued that a tax or upstream auction with lump sum recycling would be significantly cheaper than implementing a PCT scheme […] It is also argued that C&S [Cap and Share] would be cheaper to implement than PCT as it does not require the use of carbon accounts, carbon cards and carbon statements. The question thus arises, if the same degree of fairness can be achieved at a lower cost by other instruments, why consider a PCT scheme? The answer, I think, is that one would consider a PCT scheme if it brought with it additional benefits that justified any additional costs.[16]

Personal carbon trading must be cost-effective. More focused research will be required in order authoritatively to demonstrate where added benefit is in practice likely. In particular, the relative merits of personal carbon trading must be assessed against the Government's existing strategy of green taxation.

PERSONAL CARBON TRADING VS GREEN TAXATION

25. We have been unconvinced of the Government's real commitment to implementing meaningful green taxation. In our Report into the 2006 Pre-Budget Report we concluded:

The picture is of an ongoing retreat from the Treasury's announcement in 1997 of a policy to shift the burden of taxation towards taxing environmentally damaging activities. As the latest figures show, the proportion of all taxation made up by green taxes is markedly less than in 1997, and is indeed at a lower proportion than as far back as 1994. This Pre-Budget does contain some limited announcements of rises in green taxes, but these are still very modest when set in the context of several Budgets and Pre-Budgets in recent years in which many environmental taxes have not even been raised in line with inflation.[17]

26. We made a similar point in our Report into the 2007 Pre-Budget Report. However, the shortcomings of existing environmental taxes should not be taken to mean that green taxation is inadequate as an instrument in itself. It is clear that the actual implementation of green taxation is preventing its full potential for reducing carbon emissions from being realised.

27. Green taxation and personal carbon trading both affect individuals. While carbon taxation is a cost even to those who produce very few emissions, carbon trading rewards those with low emissions, and only penalises those who exceed their allocation. Both methods use a stick, but personal carbon trading offers a carrot, too. The UK Energy Research Centre (UKERC) concludes that 'the key arguments in favour of PCA include its effectiveness, equity, distributional impacts and certainty of delivering savings'.[18] Richard Starkey told us that the benefits provided by personal carbon trading, though different from those of taxation, were no less valid:

You are saying to people that if they are a below average emitter they will have their surplus emissions rights that will have a value and they will be better off than they were prior to the implementation of this scheme.[19]

28. With personal carbon trading, allowances are given to you, which, if you are prudent, could be converted into money. It is this direct quality—a personal allowance, greater visibility, the opportunity to benefit personally—that convinces us that personal carbon trading would also lead to far higher levels of engagement. The Tyndall Centre argues:

The hypothesis regarding PCT and C&S [Cap and Share] is that actually holding emissions rights will increase individuals' "carbon consciousness", i.e. they will become more aware of their emissions and more engaged with and focused upon the task of emissions reduction than under other instruments. And if individuals spend more time and effort considering ways to manage and reduce their emissions, then emissions reduction may be more efficient than under other instruments.[20]

29. Simon Roberts agreed that, in general, individuals are used to dealing with and absorbing price fluctuations from taxes, and need the provocation of a personal carbon allowance to make real decisions about their lifestyle.[21] Steve Sorrell pointed out that:

[…] price elasticity of energy consumption is very low in this [household] sector, which means that carbon prices would need to be very high to have a significant impact on behaviour and emissions. The associated distributional impacts are unlikely to be acceptable.[22]

These analyses suggest that 'green' taxes would need to be set at high levels in order to match the emissions-reducing potential of personal carbon allowances, seriously testing the public's level of acceptance and leading to significant disadvantage among certain groups. We believe that personal carbon trading has the potential to drive greater emissions reductions than green taxation. A carbon allowance could be more effective at incentivising behavioural change and engaging individuals in reducing their emissions than the price signals resulting from green taxation. It is also important to bear in mind the difficulty of introducing significant green taxation at a time of general concern over the burden of taxation and in a period of economic slowdown. Even so, it must be acknowledged that a period of significant recession would dampen enthusiasm for most environmental measures, and that personal carbon trading would not be exempt from this trend.

30. Cap and Share offers personal carbon trading's sense of empowerment and entitlement, yet imposes no direct form of ration or limit. Cap and Share also claims to guarantee emissions reductions through the setting of a slowly reducing cap. It relies on price signals transmitted down through the economy to deter customers from buying carbon intensive goods or services—with the same downstream effect as a carbon tax. We remain to be convinced that price signals alone, especially when offset by the income from selling the certificate, would encourage significant behavioural change comparable with that resulting from a carbon allowance. Laurence Matthews argued that raising awareness 'is only a means to an end, and not something we should have to rely on in order to implement a scheme',[23] but awareness is crucial if behaviours are to change. A meaningful reduction in emissions will only be achieved, and maintained, with significant and urgent behavioural change.

31. We acknowledge that personal carbon trading could be complex administratively and more challenging to implement than green taxation and other alternative proposals. However, its potential to change behaviours and engage individuals means the Government should seriously and urgently assess how to take personal carbon trading forward.

Obstacles and difficulties

32. The challenges surrounding personal carbon trading are multi-faceted and will not easily be overcome. Beyond technical questions, personal carbon trading would have to overcome significant obstacles of political and public acceptance. The following issues rank among the most significant obstacles to the introduction of a personal carbon trading system:

Coverage: who receives an allocation? Of what size? How frequently? Which emissions are included?

System and operation: the need to provide efficient and reliable systems which can cope with massive amounts of data, processing transactions in different formats and providing real time updates of account levels. Such systems will also need to be resilient to fraud.

Administration: the need to have a trusted and capable administrative body; and the sensitive setting of the allocation curve on the fine line between public acceptability and driving down emissions.

Finding space in the policy landscape: many carbon emissions are already counted as part of existing policy instruments, such as the EU ETS. For personal carbon trading to work, it would need to fit with other schemes.

Public acceptability: personal carbon trading would be a major initiative, affecting every individual in the country. Perceptions of the scheme as over-restrictive, unnecessary, inequitable, or burdensome, whether or not rightly founded, would prove very difficult to overcome in certain quarters.

Engagement with the scheme: measures will need to be taken to ensure that individuals understand the scheme and know how to use it. The public's involvement with the scheme will be needed, both for its effectiveness and for its acceptance. Mechanisms and strategies accounting for those who are unable or unwilling to participate will be needed.

Ensuring equity: measures would have to be taken to prevent unfair distributional impacts, including protecting high risk groups such as those suffering from fuel poverty and people with disabilities, or deciding whether or not to provide children with an allowance. The extent to which issues of inequity are deemed to have been tackled successfully will significantly affect the public's acceptance of the scheme.

Obtaining political commitment: the long-term commitment and political courage required of any government must be substantial if it is to introduce such a radical and potentially unpopular scheme. If it is to work, personal carbon trading will require support across a wide political spectrum.

Conclusion

33. We acknowledge the many difficulties that will have to be overcome in the development and implementation of personal carbon trading, not least work to bring about the public and political acceptance of such a concept; considerable further research is required on many aspects of personal carbon trading. However, we believe that, by designing and implementing a sensitive and moderate scheme, these obstacles could be overcome.