Memorandum submitted by Laurence Matthews
EXECUTIVE SUMMARY
The Committee asks whether personal carbon allowances
(PCAs) are desirable, and whether they are practical. There remain
doubts about their practicality, and PCAs are only desirable because
of the ends they achieve—they cap personal carbon emissions
effectively and equitably. Cap & Share achieves these same
ends, but is simpler, faster and cheaper to implement. Under Cap
& Share the UK emissions cap is shared out equally to the
adult population: everyone receives certificates which they sell,
via banks, to the primary fossil fuel suppliers. Cap & Share
delivers personal carbon trading implicitly, avoiding many of
the problems with PCAs (impacts, operational feasibility, public
acceptability) that concern the Committee.
CONTENTS
1. Introduction
2. Cap & Share
3. A comparison of Cap & Share with
PCAs
4. The advantages of Cap & Share
5. Psychological stumbling blocks
6. The personal indirect emissions sector
7. Equity and the global situation
8. Operational considerations
Appendices:
1. Treatment of electricity
2. A numerical worked example
3. Upstream auctions and carbon taxes
4. The EU ETS, hybrids and transitional
arrangements
ABOUT THE
AUTHOR
I am a writer, previously a university lecturer,
and with 20 years' experience in the transport industry. I gave
evidence to the Efracom Inquiry into "Climate Change: the
Citizen's Agenda" in January 2007, and I am now working with
the Cap & Share campaign (www.capandshare.org), which is developing
and promoting Cap & Share.
RECOMMENDATION
That the Committee evaluate Cap & Share
as a practical alternative to personal carbon allowances, with
a view to advocating the early adoption of Cap & Share as
the preferred method of implementing the forthcoming Climate Change
Bill.
1. INTRODUCTION
1.1 Cap & Share (C&S) is a regulatory
and economic framework for climate stabilisation, originally developed
by Feasta, the Foundation for the Economics of Sustainability
(www.feasta.org).
1.2 The world has only a very brief window
of opportunity to prevent catastrophic climate change. The UK,
with its draft Climate Change Bill, is in a position to lead by
example, gain valuable operational experience, and demonstrate
an approach that could be used globally from 2013 onwards as a
successor to the Kyoto protocol. In addition, any global agreement
will require practical tools to implement agreed caps domestically.
In the UK, a domestic framework is also needed if the exhortations
(by Defra and others) for individuals to "do their bit"
are not to be undermined by free-riders. C&S is just such
a framework.
1.3 The emissions from some large companies
are being addressed by the EU ETS (not without teething problems),
but this does not cover the emissions caused by households. At
the moment personal carbon trading is the most prominent proposal
for bringing these household emissions under an overall cap.
1.4 The mechanism for implementing personal
carbon trading is to operate Personal Carbon Allowances (PCAs)
using personal carbon debit cards. The overall approach is "economically
efficient", but many see it as impractical, possibly intrusive,
and at the very least costly and cumbersome—given the history
of government computer systems. A typical comment in this vein
is:
" ... carbon allowances are an administrative
nightmare, impossibly complex to run, and could be circumvented
in an almost infinite number of ways ... Carbon rationing is an
elegant and completely impractical option."—(Chris
Goodall, "How to Live a Low-carbon Life", Earthscan,
2007, page 41).
1.5 The C&S campaign strongly supports
the aims of personal carbon trading, but sees a better way of
achieving those aims. We want to deliver the benefits fast, at
a fraction of the cost of PCAs, and in a way which side-steps
many problems and objections which might bog down PCAs. C&S
achieves precisely the same ends but by different means: means
which are simpler, more flexible, more effective and, we believe,
more publicly acceptable.
1.6 However, although C&S is a simple
idea, it is relatively new. C&S appears at first glance to
be very different from personal carbon trading, and we have found
that many people initially reject it as a solution—seemingly
because of what is called in psychology a "framing effect".
There is a story about a visiting Soviet official who asked who
was in charge of the supply of bread to the population of London:
his question betrayed his frame of reference. It is worth making
the effort to jump out of the "frame of reference" of
PCAs, because the advantages (fast, cheap, public appeal) are
so great.
2. CAP &
SHARE
2.1 Cap and Share is most naturally explained
by standing right back and considering what we are trying to do.
In Section 3 we will compare C&S with PCAs, but for the moment
let's forget PCAs and look at the big picture.
2.2 Climate change is a global problem,
so we need to cap and reduce CO2 emissions globally.
(For clarity we will talk in terms of CO2 only; for
other greenhouse gases see paragraph 8.12 below). The best science
currently available suggests that to avoid a climate catastrophe
humanity needs to maintain global average temperatures at or below
2 degrees C above pre-industrial levels. Emissions reduction paths
(a series of caps for each year into the future) that have a reasonable
prospect of limiting the temperature rise to this figure can be
calculated. The annual caps must cover all CO2 emissions
from the combustion of fossil fuels: there can be no exclusions
(such as excluding international aviation "because it is
not covered in the Kyoto Protocol").
2.3 Methods have been proposed for working
out the UK's share of each year's annual global cap (see Section
7), to give an emissions reduction path for the UK. The total
amount of CO2 emissions allowed for each year would
be the "Cap" used by "Cap and Share".
2.4 UK emissions would be limited to the
level set by the cap by means of emissions permits. But before
proceeding to consider trading mechanisms, C&S pauses to ask
the question: who should own these permits? Do they belong to
the government, to big companies, or to you and me? Who owns the
sky? C&S takes the view that the Earth's atmosphere and natural
sinks are a fundamental common resource, and that the rights to
emit the limited amount of greenhouse gases which can be safely
be emitted should be shared out equally among everybody in the
world (in practice, among all adults). That is the "Share"
in "Cap and Share".
2.5 In a C&S scheme for the UK, all
adults would receive certificates entitling them to an equal share
of the emissions permitted under that year's cap. These would
arrive monthly (or maybe quarterly or annually; see Section 8),
and would then be sold, via banks or post offices, to primary
fossil fuel suppliers—the companies who import fossil fuels
(or extract them from the ground). Each primary fossil fuel supplier
would have to acquire and surrender certificates equal to the
emissions from burning the fossil fuels that they introduce into
the economy. In other words, C&S enforces the cap at the upstream
end.
2.6 That's the system in a nutshell. But
what are the consequences? The price of certificates (paid by
the fossil fuel suppliers) is built into the cost of fossil fuels,
which then flows through the economy (as it would under a carbon
tax—see Annex 3). So for consumers, "carbon-intensive"
products and services become more expensive—but on the other
hand, consumers get the money from selling their certificates.
People with lower than average carbon footprints will come out
ahead.
2.7 Since only the fossil fuel companies
need to be policed, this is a cheap system to run and a quick
one to implement. It is clearly equitable, and engages the public
imagination with a positive psychology: my certificate is my tangible
connection to the national effort to reduce carbon—and I
even get paid for it! All this is achieved without the need for
the machinery of carbon debit cards—and we could also do
away with the red tape of carbon trading for companies both large
and small.
2.8 C&S is potentially a global system.
In the future, with a successor to Kyoto in place, it could be
the mechanism for averting catastrophic climate change while also
helping Africa to "make poverty history". We have found
a public appetite for the "global justice" aspects of
a transfer of wealth from (say) the EU to Africa if both blocs
were trading in a future scheme.
2.9 However, C&S is flexible and can
be introduced initially at the EU level, at the UK level, or even
at a sectoral level. So let's stick with the UK for the moment.
The following section compares C&S with PCAs.
3. A COMPARISON
OF C&S WITH
PCAS
3.1 Using the standard terminology, we can
regard each individual as responsible for two types of CO2
emissions: personal direct emissions and personal indirect emissions.
Personal direct emissions cover the CO2 emitted directly
by the individual when burning petrol, gas or other fossil fuels.
Personal indirect emissions are caused by organisations producing
the goods and services bought by the individual.
3.2 Figure 1 illustrates these two types
of emission, and shows the flows of fossil fuels from the primary
fossil fuel suppliers on the left-hand side of the diagram to
the individual citizens on the right-hand side.
Figure 1
3.3 A downstream system applies the cap
at the downstream end of each of these energy flows. For personal
direct emissions, this is usually taken to mean personal carbon
trading using PCAs.
3.4 PCAs (and many carbon footprint calculators)
focus on the personal direct emissions. Household electricity
is generally also included, although strictly speaking this is
an indirect source of emissions. This complicates the situation
and for clarity I will ignore electricity for the moment (the
full picture is given in Annex 1 where electricity is separated
out).
3.5 Personal indirect emissions cannot be
covered downstream in this way. To do so would entail Rating All
Products and Services (RAPS), that is, working out how much embedded
carbon was contained in all goods and services (every pair of
scissors, every haircut). This is widely seen as impractical.
So instead, personal indirect emissions are usually tackled by
considering them as the direct emissions of the companies which
provide these goods and services.
3.6 This is done by having companies trade
carbon too, for example in an emissions trading scheme (ETS).
It is usually assumed that around 40% of the total UK cap is allocated
to the PCA scheme (on the basis that 40% of UK emissions arise
from the personal direct emissions sector at the moment), with
the remainder going to the ETS. Notice that by rejecting RAPS
and moving to an ETS, we have tackled the personal indirect emissions
sector by moving (halfway) upstream.
3.7 Proposals for downstream systems thus
take the form of a combined PCA+ETS package, as illustrated in
Figure 2. TEQs (alias DTQs) are an economy-wide proposal which
has two parts like this (although the two parts can trade in a
single combined market, or the ETS could be replaced by a process
of tendering). In such a downstream scheme all CO2
emissions are being capped at the point of combustion.
3.8 In Figure 2, and subsequent diagrams,
the small rectangles straddling the horizontal lines represent
the emissions permits and indicate the point at which each energy
flow is capped.
Figure 2
3.9 An upstream system, on the other hand,
applies a cap by requiring the fossil fuel suppliers to surrender
certificates. Examples of upstream systems are an upstream auction
of emission certificates (see Annex 3), and C&S. Figure 3
illustrates this.
Figure 3
3.10 In its simplest form, C&S is a
substitute for TEQs, or in other words it can replace the whole
of a combined PCA+ETS package.
3.11 However, C&S is flexible, and we
can apply C&S in just the personal direct emissions sector
if desired, leaving an ETS to cover the personal indirect sector.
In order to compare C&S directly with PCAs, we will confine
C&S to the personal direct emissions sector for the rest of
this section.
3.12 On this level, the main point is that
C&S delivers the same result as PCAs. And we stress that C&S
is not just a vaguely similar alternative approach; C&S delivers
precisely the same effects as explicit personal carbon trading.
3.13 To illustrate this, let's just consider
two people, A (for affluent) and B (for basic), whose only purchases
are petrol. (The following example is described in more detail
as a numerical worked example in Annex 2).
3.14 Suppose that last year A and B bought
100 litres and 20 litres per week, respectively: a total of 120
litres. Now suppose we bring in a cap for this year which limits
them to (the emissions from) 110 litres per week. Consider how
this is achieved by PCAs and by C&S.
3.15 In "PCA-world", A and B are
each issued with a carbon debit card and are allocated emissions
allowances equivalent to 55 litres per week each. A and B must
each swipe their carbon debit cards at each petrol purchase.
3.16 Now A is used to buying more than his
allocation of 55 litres. To achieve this, A can buy some allowances
from B (probably through a broker). A buys the right to buy more
litres of petrol, and B gets money for selling the right to buy
those same litres. But there are only 110 litres of allowances
in total, so A and B will have to reduce their joint petrol purchases
slightly compared with last year.
3.17 Now let's see what happens to their
counterparts in "C&S-world". Here, A and B are both
allocated certificates equivalent to 55 litres. They sell them
at the bank or post office. The fossil fuel suppliers must buy
them (in order to be allowed to introduce 110 litres of petrol
into the system) and they then pass this cost on, resulting in
higher petrol prices. So A and B find that the petrol price is
higher; but in compensation they get the money from selling their
certificates.
3.18 In C&S-world, there are no explicit
restrictions on what A or B can buy; but the price is higher than
it was, so A and B will not buy quite as much as last year. Initially,
one might suppose that A and B would try to carry on as before,
swallowing any petrol price rise, but here is the crucial point:
in C&S-world too, there are only 110 litres in the system
(as that is the limit the fossil fuel suppliers can sell). So
if the demand is high, the price of petrol rises until demand
falls back to 110 litres per week (see Section 5 for more discussion
on this point).
3.19 In fact, because the cap is the same
as it was in PCA-world (110 litres), the price will rise until
A and B buy exactly the same amount of petrol as in PCA-world.
Moreover, A and B are each exactly as well off financially as
they were in PCA-world. It turns out that the extra paid by A
in C&S-world (to buy petrol at the higher price, minus the
amount he got for selling his certificates) is exactly the same
amount of the money A would have spent in PCA-world to buy the
allowances from B. Meanwhile B has come out ahead in C&S-world
(because for him the money he gets for selling his certificates
outweighs the petrol price rises), and the amount by which B is
ahead is exactly the same amount he would have received from A
in PCA-world. The numerical example in Annex 2 shows in detail
how this happens.
3.20 This is what is meant by saying that
C&S delivers implicit personal carbon trading. The end result,
both in terms of petrol sold, and in terms of A's and B's financial
positions, is the same in both worlds.
3.21 But although the two worlds may produce
the same result, they feel very different. In PCA-world, A and
B have their every petrol purchase tracked; they have to keep
checking they have enough allowances; and they buy and sell allowances
accordingly. In C&S-world, A and B simply sell their certificates
once a month: they never have to worry about carbon budgets; they
don't have carbon credit cards; they simply choose to buy petrol
or not, according to the pump price.
4. ADVANTAGES
OF CAP
& SHARE
Advantages which C&S and PCAs have in common.
4.1 Effective
PCAs and C&S are both mandatory systems
which guarantee that a cap is met (unlike relying on incentives
and voluntary solutions, which are inadequate responses to the
crisis we face).
4.2 Complete coverage
Both PCAs and C&S give complete coverage
of the personal direct emissions sector. C&S also gives complete
coverage of the indirect emissions sector (see Section 6), and
PCAs could achieve this by teaming up with a total-coverage ETS
or tendering system (as advocated under TEQs).
4.3 Equity
C&S is inherently equitable, and captures
the same robust fairness as PCAs. It also resonates strongly with
global equity issues (see Section 7). Equity is a very strong
plus point when considering public acceptability. In tackling
windfalls (see Section 6), C&S is more equitable than the
existing EU ETS.
Advantages of C&S relative to the alternative
of PCAs.
4.4 We start with the practical advantages,
more relevant to feasibility and efficiency, and then move on
to the more intangible points which are important to public acceptability.
4.5 Cheap
C&S has very low capital costs (setting
up a register based on the electoral roll, as opposed to setting
up a computerised transaction system); low running costs (printing
and distribution of certificates, as opposed to tracking each
individual fuel purchase); and low enforcement costs (only the
fossil fuel suppliers need to be policed).
4.6 Fast
C&S could have a lead-time of less
than a year, compared with several years for PCAs. We cannot afford
to fritter away the next five to 10 years putting a system in
place to reducing our CO2 emissions substantially.
This is particularly so if we are looking (as we should be) to
the global situation: the experience gained by operating a scheme
early on in the UK will prove invaluable in shaping global schemes
and furthering global agreements, both of which are urgently needed.
Early implementation would also mean that experience can be gained
in relatively benign conditions (when caps are mild).
4.7 Simple
"Simple" leads to "fast"
and "cheap", as already noted. But simplicity is also
valuable in itself. Firstly, simple systems are easier to implement
(some would go as far as to say that only upstream systems are
feasible in the first place: I have heard the comment "doing
it downstream is madness"). There are two further important
reasons for keeping things simple:
— As it is, we will have many other
climate-related tasks on our plate, from dealing with deforestation
to planning adaptation measures, so we cannot afford to become
bogged down with a complex method of capping CO2 emissions.
— Early adoption by the UK of an effective
system is likely to be used as a model elsewhere, and even for
an embryonic global system. Only simple systems have any hope
of being practical in this context, especially in developing countries.
4.8 Not onerous
Whilst C&S captures a feeling of involvement
in solving the climate crisis (see below), it avoids having to
persuade the whole population to adopt carbon budgeting, educating
them how to do so, providing them with help in doing so, etc.
PCAs claim the advantage that carbon budgeting raises awareness,
but this is only a means to an end, and not something we should
have to rely on in order to implement a scheme.
4.9 Robust
C&S is much less vulnerable than PCAs to
power cuts (under C&S people can simply pay for petrol with
cash), software failures and the like.
4.10 Less corruption
Policing a small number of fossil fuel suppliers
would give fewer opportunities for fraud than policing myriads
of small companies and petrol retailers. Furthermore, upstream
systems provide little opportunity for black markets. PCAs have
a white market in allowances, so avoid a black market in allowances,
but still leave open the potential for a black market in petrol.
The black market incentive arises because in PCA-world petrol
itself is still cheap if it can be acquired illegally without
parting with allowances. In C&S-world, petrol itself has the
certificate price built in, so the incentive disappears.
4.11 Positive psychology
C&S does not have the negative connotations
of a "tax", or the restrictive connotations of "allowances"
or "rations". Instead, everyone is given a certificate,
which they can then sell. Consumers do not face any explicit restrictions
on their purchasing decisions, other than those set by price and
their own financial constraints—constraints which they are
used to.
4.12 Not intrusive
As already mentioned, there is no need to track
individual fuel and energy purchases. C&S avoids civil liberties
implications, whereas mandatory carbon debit cards are already
seen in some quarters (rightly or wrongly) as being akin to ID
cards.
4.13 Public engagement
Under simple C&S (covering the whole economy)
my certificate is exactly my equal share of the country's carbon
budget, and is my tangible connection with the national effort
to reduce carbon. I am part of the solution to climate change,
not part of the problem. (Under a global system, it would be my
global share of humanity's emissions—see Section 7). By
contrast, my PCA is only my share of 40% of the country's carbon
budget.
4.14 Rights-based
My certificate is my entitlement to my share
(of the country's carbon budget), which I then sell upstream;
it is not an "allowance" or "ration" handed
down to me. It is not a state handout (which I may or may not
trust the government not to raid in the future).
Disadvantages of C&S
4.15 The main handicap suffered by C&S
is its recent emergence and hence its unfamiliarity (compared
with PCAs). As discussed in the next section, this means it sometimes
faces difficulties in persuading people (not least policymakers
and commentators) of its effectiveness.
5. PSYCHOLOGICAL
STUMBLING BLOCKS
5.1 But it can't work, can it? On hearing
about C&S, many people instinctively feel that something doesn't
add up; it can't be that simple. In communicating C&S, I have
encountered this reaction many times, even among economists versed
in PCAs, and so it is worth exploring what the stumbling blocks
are. Ironically, public understanding is sometimes easier to achieve.
5.2 The first point is that C&S is functionally
equivalent to (achieves the same results as) PCAs in the personal
direct sector, but it is not psychologically equivalent. People
often fail to make this distinction. C&S has no apparatus
of downstream rationing, and so it doesn't feel like PCAs; but
that does not mean that it can't deliver the same result.
5.3 The first step then is to realise that
functional equivalence is different from psychological equivalence.
We can then look more dispassionately at whether or not C&S
might be functionally equivalent to PCAs, for example by looking
at the numerical worked example in Annex 2 in detail.
5.4 However, even if this is convincing
intellectually, people often still have a residual feeling of
unease. This second psychological block amounts to a distrust
of upstream systems, and is best encapsulated by the question,
"What's to stop someone just buying more petrol?"
5.5 What seems to lurk behind this question
is that we think we know how rationing works—from tales
(and experience) of rationing during and following the second
world war. In such a system, everyone is issued with ration coupons
and they are highly visible to individual citizens. The coupons
are issued and everyone must stay within their limit. Moreover,
when buying goods you have to surrender some of your precious
supply of coupons, so you can see the limit being enforced.
5.6 Ration coupons were not legally tradable,
but if they had been, we would have had a system very similar
to PCAs. So, ask the same question in PCA-world: what's to stop
someone just buying more petrol (by buying a few allowances off
someone)? Indeed, in PCA-world, people would be allowed to buy
allowances at petrol stations. In PCA-world, the answer is more
obvious: buying and selling allowances does not affect the total
number in circulation, and so it's easy to see that the cap is
still being enforced.
5.7 What this amounts to is that to cap
the volume of petrol used, we rely on counting up all the petrol
coming out of all the petrol pumps in the country, and then accounting
for it all by checking it off against PCAs. This is one way of
capping the petrol used. It simply remains to realise that another
equally valid way to cap the volume of petrol coming out at the
bottom end of the system is to cap the amount going in at the
top. This is true even if the petrol comes out at the bottom end
at a remote location and at a later point in time.
5.8 Nevertheless, a niggle remains about
how this is achieved: with an upstream system, there seems to
be no control at the point of sale. What if I want to buy more
petrol—surely this will breach the cap?
5.9 Again, the missing element is the time
factor. C&S works at the consumer level through the price
mechanism. If there is more demand than supply (at a given fuel
pump price) in a given week, say, then the system quickly adjusts.
The fuel retailers will demand more petrol from the fossil fuel
suppliers. But these suppliers only have a fixed supply to sell
(governed by the quantity of emissions permits they have bought),
and so will put up the price to the retailers in accordance with
supply and demand. The retailers will pass this cost on, and the
pump prices will rise. The next time the motorists fill up, they
will face a higher price. Over a (fairly short) period of time,
the price will rise until the demand levels off (see the numerical
example in Annex 2). Meanwhile, the fossil fuel supplier would
dearly like more permits, to meet the demand for fuel from the
retailers, and so he seeks further permits, driving the permit
price up. (This means that all citizens get more money when they
sell their next batch of certificates.)
5.10 Markets adjust to supply and demand.
For example, the housing market operates on the basis of there
being a finite supply of land. The fact that "there is nothing
to stop me buying another house if I want" doesn't increase
the amount of land.
5.11 Also, it is worth pointing out that
the same problem lies buried in PCAs. PCAs do not form a self-contained
solution to emissions capping, as they only apply to the personal
direct sector. They can only work if combined with a scheme (such
as an ETS) to tackle the indirect personal emissions. And as we
noted in paragraph 3.6, these emissions are capped not downstream
at the consumer level, but (halfway) upstream.
5.12 Note that these arguments are different
from the related objection to trading, on the grounds that "rich
people can just go on buying petrol" (with an implied "what
about the poor?"). This objection applies equally of course
to PCAs. Rich people can also buy apartments in Mayfair; life
is like that. However PCAs and C&S both result in a transfer
of wealth from the rich to the poor. (Fuel poverty is discussed
in paragraph 8.6).
5.13 After all this we have a final stumbling
block, a feeling that "surely it can't be that simple".
Once people have grasped the idea of C&S, they can still find
it hard to shake off thought-patterns from the more complicated
systems. A typical question is, "Yes, I see how C&S works,
but how do people work out their allowances?" The answer,
of course, is that they don't: there are no such things as allowances.
There is no need for carbon budgeting: people make choices based
on price alone. The budgeting is all done for them. There are
many similar questions which a "visiting Soviet official"
(see paragraph 1.6) might ask.
6. THE INDIRECT
EMISSIONS SECTOR
6.1 C&S sees no distinction between
personal direct and indirect emissions. In its simplest form,
C&S replaces both parts of the ETS+PCAs package. Although
this inquiry is into the PCAs, the personal indirect emissions
sector is relevant (as we shall see below), and is briefly considered
in this section.
6.2 In the personal indirect emissions sector,
an upstream system has the same advantages over a downstream ETS,
as C&S enjoys over PCAs in the personal direct emissions sector:
it is effective, cheap, simple, fast, has no red tape, and renders
completely irrelevant the "visiting Soviet official"
questions about which companies should be included, how to treat
new entrants, how to treat retiring plant and so on. In addition,
an upstream system completely avoids threshold problems (of deciding
where the threshold should be between large companies in the ETS
and smaller ones outside it) by delivering complete coverage at
a stroke. Finally much of the "crowded policy landscape"
(CCL, CCAs etc.) can be dismantled, or at the very least not extended.
6.3 Given that an ETS scheme is up and running,
however, there will a be natural desire not to have to scrap it
and start again. Fortunately, it is simple to construct an upstream
system which dovetails with an ETS in an upstream/ETS hybrid system
(see Annex 4).
6.4 Why is this relevant to the personal
direct emissions sector? There are two reasons. Firstly, unless
there is complete coverage of the indirect sector, the overall
PCA+ETS scheme does not have the complete coverage of the economy
that is required.
6.5 Secondly, C&S shares out 100% of
CO2 emissions among the population, on the basis that
emissions are caused by us all, whether directly in our own homes,
or indirectly by companies providing goods and services on our
behalf. Under PCAs only (around) 40% is shared among the population.
This leaves the remaining 60% outside the public's control. This
is reflected in people's frustration when trying to minimise their
personal carbon footprints (of say four tonnes of CO2
per year): they find they are only weakly able to affect their
indirect footprint (another six tonnes).
6.6 Moreover, the 60% of the money in the
ETS system is at present given to the ETS companies (who pass
on embedded costs downstream to the consumer and pocket the windfall
profits). Replacing the current system of grandfathering by an
auction with proceeds recycled to the ETS companies would not
alter this. If the proceeds went to the government instead, it
would be seen as a tax. Only if the proceeds are returned to the
population would the situation prior to the introduction of the
ETS be restored. Since this would be part of the introduction
of C&S, it would hugely add to the public attractiveness of
C&S, and would also go a long way to alleviating concerns
over fuel poverty.
7. EQUITY AND
THE GLOBAL
SCENE
7.1 C&S is based on a robust equity
of equal shares for all. Although everyone could claim to be a
special case, this equality has a simple fairness that is hard
to argue against, like the one-person-one-vote basis for democracy.
7.2 C&S can work at the UK level, EU
level, or at global level, and as such a UK scheme can serve as
a model for an EU scheme, and an EU scheme for a global one.
7.3 C&S arose as a way of implementing
Contraction & Convergence (C&C), a framework for sharing
global emissions between nations, developed by the Global Commons
Institute (www.gci.org.uk). C&C proposes that national emissions
converge to a global per capita average (during this process the
total global level of emissions is also being reduced). C&C
is itself based on the same robust equity, and a belief that anything
more complicated is less likely to be agreed. Given a global emissions
path (set by science), C&C can provide the corresponding UK
emissions path, as mentioned in paragraph 2.3. C&S resonates
strongly with C&C.
7.4 Climate change is a global problem,
and any domestic scheme for the UK will be of limited use unless
other countries adopt similar measures. However, the swift adoption
of a UK cap would do two things: it would furnish operational
experience with an effective domestic scheme, and possibly influence
the shape of systems later adopted globally; and it would strengthen
negotiators' efforts to bring in a global solution such as C&C.
In the end, only with such a global agreement will our efforts
in the UK be meaningful. C&S can deliver such a domestic scheme
for the UK with the kind of speed that is urgently required.
7.5 In the interim, while global agreements
are not yet in place, there will always be objections that adopting
a scheme in advance of everyone else will lead to competitive
disadvantage. This objection is reduced for the UK if C&S
is adopted at an EU level. Nevertheless, there will still be border
effects.
7.6 One particular issue is the inclusion
of international aviation and shipping. Emissions from these activities
must be included in the overall global cap (it has been pointed
out that excluding them is tantamount to going on a diet, but
not counting calories from chocolate) and an obvious way to do
this is that, for each flight between two countries, half the
flight's emissions are allocated to each of the two countries.
For a downstream system, an obvious way of doing this is to count
emissions only from departing aircraft and ships (analogous to
the one-way tolls on the Severn Bridge). Under C&S, it is
only necessary to classify incoming "tankerage" (bringing
in excess fuel) as importing fossil fuels and hence requiring
permits. Otherwise, everything is taken care of automatically.
(Aviation kerosene should be multiplied by 2.7 when calculating
emission equivalents, to account for the particular effects of
emissions at altitude).
7.7 There is a final point on equity and
competitiveness. Sometimes the claim is made that whoever moves
first will be at a competitive disadvantage when it comes to negotiating
the final agreement. This argument recalls the arts of haggling
(if you are buying something in a market, it is better to start
by getting the seller to declare a price than to start by making
an offer yourself). However, when you move up to an obvious line
(global equality) and invite others to join you, the very obviousness
and fairness of the line chosen provides a natural focal point
or "attractor" and reduces this effect.
8. OPERATIONAL
CONSIDERATIONS
8.1 A decision would have to be made on
whether a UK scheme or an EU scheme should be adopted. A UK scheme
could easily trade with other schemes in the EU, and these could
merge into an EU-wide scheme.
8.2 The cap should be set by an independent
committee, along the lines of the Committee on Climate Change
envisaged by the draft Climate Change Bill, according to the latest
science and with regard to international agreements. (The committee
would also produce CO2 conversion rates for oil / gas
/ coal etc according to their emissions per tonne, and advise
on the treatment of other greenhouse gases). The cap applies to
fossil fuel extraction and imports. C&S would guarantee that
the cap is met.
8.3 The cap provides a single lever (akin
to the MPC setting interest rates), leaving other institutions
such as markets to take decisions accordingly. A long term signal
should be given by setting the cap at least 5-10 years ahead,
with a firm indication of the direction beyond that timescale.
8.4 Certificates would be distributed annually
(or maybe quarterly or monthly). There are arguments in favour
of an annual distribution (lower distribution costs, annual excitement
generated) and in favour of more frequent distribution (less worrying
about when to cash in your certificates). A compromise might be
to issue annually a book of monthly vouchers. In either case,
futures markets are well suited to providing a service to smooth
out end-of-year price fluctuations.
8.5 The distribution would be to adults
(18 or over) only. People with large families will claim that
this is unfair, but adjustments should be made through other targeted
means, such as through Child Tax Credit. Making exceptions for
everyone who claims that they are a special case in some way would
undermine the simplicity and robust fairness of the scheme.
8.6 Fuel poverty is also an issue best addressed
separately. Introducing C&S for the whole economy (rather
than just to the personal direct emissions sector) would reduce
this problem, but it remains an issue of concern, just as it does
with PCAs.
8.7 A register would be based on the electoral
roll. There would have to be detailed decisions on how to treat
expatriates, resident foreigners, and so on.
8.8 Banks and other market makers would
be encouraged to set up arrangements to buy certificates from
the general public and broker them to the primary fossil fuel
suppliers.
8.9 There would be more muted opportunities
for developing domestic carbon markets than if all companies and
individuals were indulging in carbon trading, but still scope
for an international carbon market (between a UK or EU scheme
and other reputable schemes around the world).
8.10 Primary fossil fuel suppliers would
have to buy certificates to cover the CO2 emissions
produced by burning the fossil fuels they introduce into the economy.
Certificates are denominated in tonnes of CO2, so the
number of certificates required would depend on the CO2
emissions per unit burnt of the fossil fuel in question.
8.11 Individual citizens would be allowed
to sell, keep, retire or hold back (save) their certificates.
Fossil fuel suppliers would be allowed to hold over their certificates
for a limited time, but not to borrow against future emissions.
8.12 The simplest method for dealing with
other greenhouse gases would be to include them in the cap on
the basis of their global warming potential (GWP) relative to
CO2. However it may be preferable to maintain separate
schemes (or regulation) for separate gases (as some are restricted
to specialised industrial sectors).
8.13 Policing is only required of the primary
fossil fuel suppliers (and companies within an ETS). No compliance
is required by other companies, or by individuals. The regulatory
authorities would have to be vigorous in looking for anti-competitive
behaviour among the fossil fuel suppliers, but this process would
take place in the full glare of public interest and scrutiny.
8.14 The inclusion or not of personal public
transport (a question debated among supporters of PCAs and TEQs)
is irrelevant to C&S.
8.15 Very few conditions are needed as prerequisites
for the introduction of C&S. A scheme could be running in
the space of a single parliamentary session. The main research
questions relate to public attitudes and to acceptability of the
scheme. Pilots and trials might iron out wrinkles in the administration
of the scheme, but are probably best carried out by panels and
role-play simulation than live regional pilots. However, there
is an opportunity to pilot the scheme by introducing it at a sectoral
level. Transport is a suitable case, being considered by the Irish
government at the present time.
8.16 In all this it is vital to address
the urgency of the issue. Governments must get to grips with the
urgent, scientifically-grounded need for action. If action had
been taken 15 years ago the situation today would be less serious
than it is; similarly, a delay of a further 10 years before any
effective scheme is implemented will lead to a critical state
requiring draconian measures. We have no time to waste before
getting started.
ANNEX 1: TREATMENT
OF ELECTRICITY
A1.1 For clarity, in the main text I have
ignored electricity. This annex gives the full picture. Figures
1a, 2a and 3a below are the equivalents of Figures 1, 2 and 3
respectively in the main text, but treating electricity separately.
A1.2 For PCAs, household electricity is
usually lumped together with personal direct emissions. This is
sensible, because the generation of electricity causes CO2
emissions and we would therefore like consumers to focus on reducing
their use of electricity; and also because there are tradeoffs
between household electricity and domestic gas and other fuels.
A1.3 Strictly speaking, electricity is a
cause of personal indirect emissions (since the CO2
is emitted at the power station), and the electricity supplied
by the power generator contains "embedded" carbon emissions.
If we treat electricity generation separately, Figure 1 becomes
Figure 1a.
Figure 1a
A1.4 In a downstream system, electricity
is capped at the point of use of the electrical power, as shown
in Figure 2a. Thus household electricity is included in PCAs (likewise,
electricity use by large companies is included in an ETS—see
Annex 4).
Figure 2a
A1.5 Conversion factors apply; a tonne of
CO2 as part of a PCA is equivalent to a given number
of kWh, depending on the generating method used. (Of course it
would equate to a very large number of kWh for electricity generated
from renewables).
A1.6 In an upstream system like C&S
however, the generators are just like everybody else: they buy
fossil fuels from the fossil fuel suppliers and produce their
own direct emissions (Figure 3a). The fossil fuel price, of course,
includes the price of the permits bought by the fossil fuel supplier,
and the electricity generator passes on this cost, by means of
an increased price for electricity. To the consumer, the price
of permits is simply built in to the cost of electricity, just
as it is into the price of all other goods and services, and there
is no need for carbon budgeting for electricity use. Of course,
there are strong economic effects of all this: an incentive for
all companies and households to economise on electricity, and
an incentive for generators to develop renewable sources.
Figure 3a
ANNEX 2: A NUMERICAL
WORKED EXAMPLE
A2.1 This example (referred to in Section
3) illustrates how Cap & Share works, and how it achieves
the same results as personal carbon trading using PCAs. In this
simplified example we suppose petrol is the only fossil fuel and
that the country only has two people, A (for Affluent) and B (for
Basic).
A2.2 Suppose that last year petrol was 90p
per litre, and that A used 100 litres per week and B used 20 litres
per week, so that their total consumption was 120 litres. Now
suppose that this year we wish to achieve a cap on emissions that
equates to 110 litres per week. Let's see how this works out both
in "C&S-world" and in PCA-world".
A2.3 In C&S-world, we issue certificates
totalling 110 litres (the certificates are actually denominated
in tonnes of CO2, but since in this example petrol
is the only fossil fuel, I have converted all amounts to litres
of petrol for simplicity). The fossil fuel suppliers have to acquire
these certificates, and are thus limited to supplying 110 litres
of petrol into the system. But A and B are used to consuming 120
litres between them, so there is more demand than supply. This
means that the petrol price goes up.
A2.4 As the price goes up, A and B reconsider
their use of petrol, and start to use slightly less. The more
the price goes up, the less they will use. Suppose that by the
time they have reduced to 110 litres between them, the price has
gone up to £1.20 per litre. We might have A using 92 litres
(down by 8%) and B using 18 litres (down by 10%).
A2.5 Meanwhile let's look at the fossil
fuel suppliers. Suppose they are used to making 22p per litre
profit. They are now only selling 110 litres instead of 120 litres,
so they increase their margin by 2p per litre to make the same
amount of profit overall (since 120 x 22p = 110 x 24p). They are
charging 30p more for petrol (it is now £1.20, up from 90p),
and so can afford to pay up to 28p per litre for the certificates.
So (in a competitive market) the certificate price will be 28p.
A2.6 Under C&S, A and B get certificates
for 55 litres each, and they sell these certificates at the bank,
getting 28p each for them. So A and B fare as follows in C&S-world:
| A | B
| |
| Petrol cost | £110.40 |
£21.60 | at £1.20 per litre
|
| Income from certificates | -£15.40
| -£15.40 | 55 x 28p |
| Total cost | £95.00 |
£6.20 | |
| Total cost last year | £90.00
| £18.00 | |
| Better / worse off by | -£5.00
| £11.80 | |
A2.7 Next, let's look at the same scenario in PCA-world.
We start with the same situation last year: petrol at 90p per
litre, A using 100 litres per week and B using 20 litres per week,
giving a total consumption of 120 litres.
A2.8 Suppose once again that this year we have a cap
of 110 litres. This time we issue A and B with a quota of permits
for 55 litres each. These permits are needed to buy petrol.
A2.9 In PCA-world the fossil fuel suppliers aren't involved.
But, as in C&S-world, they can only sell 110 litres instead
of 120 litres, so they increase their margin by 2p per litre to
make the same amount of overall profit, and the pump price rises
to 92p per litre.
A2.10 A is used to consuming 100 litres, so wants 45
more than his allocation of 55; and B is used to consuming 20
litres, so his allocation of 55 is 35 more than he needs. So A
wants more permits than B has available to sell, and the price
of permits goes up.
A2.11 As the price goes up, A and B reconsider their
use of petrol, and start to use slightly less. The more the price
of permits goes up, the more A has to pay for each permit, and
the more B can get for any unused permits. The price of petrol
is effectively the inclusive price (of the pump price plus the
going rate for a permit—under PCAs people would be allowed
to buy permits while buying petrol, thus paying this inclusive
price). The more this inclusive petrol price goes up, the less
petrol A and B will use. Assuming the same reactions to price
rises apply in PCA-world as in C&S-world, A and B will behave
exactly as they did in C&S-world. This means that by the time
they reduce to using 110 litres, the effective price has gone
up £1.20 per litre. At this point the going rate for permits
will be £1.20—92p = 28p.
A2.12 As in C&S-world, we will have A using 92 litres
and B using 18 litres. This is achieved by B selling 37 permits
to A. So A and B fare as follows in PCA-world:
| A | B |
|
| Petrol cost | £84.64 |
£16.56 | at 92p per litre
|
| Buying/ selling permits | £10.36
| -£10.36 | 37 x 28p |
| Total cost | £95.00 |
£6.20 | |
| Total cost last year | £90.00
| £18.00 | |
| Better / worse off by | -£5.00
| £11.80 | |
A2.13 Notice that the total cost is exactly the same
in both worlds; so is the amount of petrol bought.
ANNEX 3: UPSTREAM
AUCTIONS AND
CARBON TAXES
A3.1 This annex compares C&S with two other schemes:
upstream auctions and carbon taxes.
A3.2 An upstream auction of emission permits would be
a practical solution to capping emissions levels. Primary fossil
fuel suppliers would bid for emissions permits, which would then
allow them to introduce fossil fuels into the economy. The number
of permits to be auctioned would be set by the cap. The major
question is who gets the proceeds of the auction. If this is the
government, the auction is likely to be seen as a carbon tax (see
below).
A3.3 In the current discussion about reform of the EU
ETS, there are proposals to replace grandfathering (allocating
permits free to polluting companies, who then reap windfall profits)
with auctioning and recycling of the proceeds. However, when companies
advocate recycling of the auction proceeds, they tend to mean
recycling of the proceeds to the companies participating in the
ETS (in effect, perpetuating the windfall profits), rather than
recycling the proceeds to the general population (see Annex 4).
A3.4 The Sky Trust proposal (www.usskytrust.org) calls
for an upstream auction of emissions permits, conducted by an
organisation called the Sky Trust, which would then distribute
the auction proceeds equally to all (adult) members of the population.
This is very similar to C&S, and the distinction is a fine
one. In C&S I get an emissions entitlement and sell it; under
Sky Trust I get the money. The advantage of C&S is the public
engagement and feeling of empowerment and control from having
the emissions entitlement as a right. For example, under C&S,
if I feel passionately about climate change I can decide to "retire"
(tear up) a few of my certificates, which would have the effect
of reducing the country's carbon emissions by a small but finite
amount. Under Sky Trust, I do not have this option. This is a
subtle point, but possibly an important one, given that this note
has emphasised the importance of psychology to public acceptability.
Set against this, C&S does incur transaction costs (when selling
the certificates), which the Sky Trust scheme does not.
A3.5 A carbon tax is more problematic. C&S is functionally
equivalent to a carbon tax set at a sufficiently high level (with
recycling of the tax revenue to the adult population on an equal
per capita basis), and hence delivers the same (economic efficiency)
advantages. But it is hardly psychologically or politically equivalent.
Recent experience with fuel duty suggests that it would be politically
impossible for even a courageous government to impose a carbon
tax at a level where it significantly affected demand. There would
also be the suspicion that revenues would at some point disappear
into general taxation. Fiscal instruments may help to effect mild
changes in behaviour, but are unsuited to the more substantial
changes necessary to tackle climate change effectively.
ANNEX 4: THE
EU ETS, HYBRIDS AND
TRANSITIONAL ARRANGEMENTS
A4.1 The EU ETS has been criticised on several fronts:
caps have been set ineffectively; it has given large windfall
profits to participating companies at the expense of the consumer;
the scheme is only partial, yet the bureaucracy would be daunting
if the scheme were extended to smaller companies. The first of
these criticisms has to be addressed at the political level, while
the second can be tackled by moving from grandfathering toward
auctions. The third is a structural problem. Nevertheless, the
experience gained has been valuable, and building on the ETS would
be preferable to scrapping it.
A4.2 The current move to extend the ETS to more companies,
by reducing the size thresholds, would make the problems worse
without addressing the criticisms. More and more companies would
be involved in the red tape of carbon trading; yet the scheme
would still leave many small companies outside the scheme, so
would still be incomplete.
A4.3 The alternative is to move in the upstream direction.
Hybrid upstream/ETS systems have been proposed which could immediately
give complete coverage of the economy, yet leave the existing
ETS untouched. (See the submission by Steve Sorrell to the Efracom
Inquiry into "Climate Change: the citizen's agenda",
August 2006).
A4.4 C&S can work with an ETS in a similar hybrid
scheme, and this is illustrated in Figure 4. We now have two types
of company: one trading in the ETS and another outside the ETS.
In looking in turn at each part of this diagram, the point to
look for is that each energy flow in the diagram is captured (by
having an emissions permit straddling it).
Figure 4
A4.5 Certificates are issued to the population as under
"pure" C&S but now, instead of all of these being
bought by the primary fossil fuel suppliers, some are bought instead
by the ETS companies.
A4.6 For an ETS company, emissions and electricity are
traded in the ETS (as depicted by the permits shown next to the
ETS company in Figure 4). Each company need only look at its own
direct emissions (and electricity use); embedded CO2
from other goods and services upstream is simply included in the
prices paid for these, and is passed on downstream.
A4.7 For the non-ETS company, its direct emissions and
its electricity use are both captured upstream. It just pays a
higher rate for fuel and electricity to cover the embedded emissions,
as in any upstream system. The non-ETS company therefore has no
bureaucracy to deal with at all.
A4.8 The individual consumer is treated exactly as under
"pure" C&S, with no need for carbon trading.
A4.9 The fossil fuel supplier must acquire and surrender
certificates to supply fossil fuel, except that fossil fuels supplied
to ETS companies are exempt. In Figure 4 the electricity generator
is assumed to be in the ETS.
A4.10 The electricity generator is required to acquire
certificates to cover its own direct emissions, and passes on
the cost of these certificates downstream in the form of a higher
electricity price. There is an exception for electricity supplied
to an ETS company, which is exempt (so does not require certificates,
and can thus be sold on without attracting a markup for a certificate
price). This exception is necessary to avoid double-counting of
the electricity used by the ETS company, as can be seen by referring
to Figure 4.
A4.11 This system captures the emissions from non-ETS
companies at a stroke, without the need to extend the ETS; however
the existing ETS can carry on virtually unchanged.
A4.12 The only change to the ETS is that certificates
are no longer awarded free to participating companies. The effect
on these companies is exactly the same as if certificates were
now to be auctioned with the proceeds given to the population.
If this is deemed to be too abrupt a withdrawal of windfall profits,
it is easy to conceive of transitional arrangements whereby certificates
start off in an ETS auction (with the proceeds recycled to the
ETS companies), and then over the course of (say) 5 years are
transferred over to the C&S scheme.
July 2007
| 
