Further memorandum submitted by Richard
Starkey
The Tyndall Centre for Climate Change
Research, University of Manchester
PCT DEFINED
1. PCT schemes generally deal with emissions
from the combustion of fossil fuel and Figure 1 is a simplified
schematic of emissions arising within a nation from fossil fuel
combustion. These can be divided into direct and indirect emission.
An individual or organization emits directly when they themselves
combust fossil fuel and, in Figure 1, direct emissions by organizations
are divided into those produced from the generation of electricity
and those produced from other combustion activities. In the remainder
of this section, the bracketed numbers refer to the box numbers
in Figure 1.
2. As the following equation shows, total
emissions with a nation are the sum of all direct emissions.
Equation 1
| Total emissions (1) = |
| Individual direct emissions (2)
+
Organizational direct emissions—electricity (3)
+
Organizational direct emissions—other (4)
|
3. An individual or organization emits indirectly, when
they consume goods or services, the provision of which involved
direct emissions by one or more (other) organizations. As can
be seen in Figure 1, an electricity generator's direct emissions
(3) can also be regarded as the indirect emissions of its customers
(5, 6). Hence, Equation 1 can be modified as follows.
Figure 1: Emission arising from fossil fuel combustion.
Equation 2
|
Total emissions (1) = |
| Individual direct emissions (2)
+
Individual indirect emissions—electricity (5)
+
Organizational indirect emissions—electricity (6)
+
Organizational direct emissions—other (4)
|
4. It is customary for individuals and organizations
to refer to their combustion of fossil fuel and use of electricity
as "energy use". Therefore the direct emissions of an
individual or organization from their combustion of fossil fuel
combined with their indirect emissions from electricity use are
referred to as their energy emissions. Hence, Equation 2 it can
be modified as follows.
Equation 3
|
Total emissions (1) = |
| Individual energy emissions (2+5)
+
Organizational energy emissions (6+4)
|
5. As Figure 1 shows, organizations use fossil fuel and
electricity to produce consumer goods and services. Therefore,
organizations' indirect electricity emissions (6) and non-electrical
direct emissions (4), ie their energy emissions (6+4), can be
regarded as individuals' indirect emissions arising from their
consumption of goods other than fossil fuel and electricity and
of services. These are referred to below as OG&S (other goods
and services) emissions (7). Hence, Equation 3 can be modified
as follows.
Equation 4
|
Total emissions (1) = |
| Individual energy emissions (2+5)
+
Individual OG&S emissions (7)
|
6. I now describe a number of different emissions trading
schemes which vary with regard to (a) the entities to which emissions
rights are allocated and (b) the entities that surrender emissions
rights.
7. The Sky Trust proposal (TR, Section 3.2) is an upstream
scheme under which emissions rights are auctioned to fossil fuel
suppliers who surrender them when they sell fuel to combusters.
The auction revenue is allocated to individuals on an equal per
capita basis.
8. Under DTQs and the scheme proposed by Robert Ayres
(TR 3.2) emissions rights are surrendered by energy end-users
ie individuals and organizations other than electricity generators
whenever they purchase fuel or electricity. In other words, individuals
and end-user organizations surrender emissions rights to cover
their energy emissions (See Equation 3). Under DTQs, a proportion
of emissions rights are allocated to individuals on an equal per
capita basis and the remainder are auctioned onto a carbon market
on which organizations must purchase the emissions rights they
need and on which individuals may purchase emissions rights additional
to their original allocation. In contrast, under the Ayres scheme,
all emissions rights are allocated on an equal per capita basis
to individuals, from whom organizations must purchase (via market
makers) the emissions rights they require.
9. The RAPS scheme (TR 3.2) is one under which all emissions
rights are allocated to and surrendered by individuals. Here,
individuals surrender emissions rights whenever they buy energy
and also other goods and services. In other words, they surrender
emissions rights to cover not only their energy emissions but
also their OG&S emissions (see Equation 4).
10. The Personal Carbon Allowances scheme (PCAs) proposed
by Hillman (2004), under which individuals surrender rights covering
emissions from their energy use and their use of public transport,
is conceived of as a staging post on the road to a fully-fledged
RAPS scheme (or, at least, to a scheme as close to RAPS as can
practically be achieved). [12]
11. Under the cap and share (C&S) scheme proposed
by the Irish NGO, Feasta (cap and share, 2007), emissions rights
are allocated downstream to individuals, who then sell them upstream
to energy suppliers. Energy suppliers then surrender these rights
when they sell fossil fuel to combusters. Hence, under the cap
and share scheme, individuals are initially allocated all of the
emissions rights but do not surrender any, whilst energy suppliers
surrender all of the rights but are not initially allocated any.
12. The term personal carbon trading can be used as an
umbrella term for either (1) all emissions trading schemes under
which individuals are allocated emissions rights or (2) all schemes
under which individuals are allocated and surrender rights. Under
the first usage, DTQs, the Ayres scheme, RAPS, PCAs and C&S
are all PCT schemes whereas under the second, C&S is not.
Below, I adopt this second usage, as proponents of C&S claim
that an advantage of their proposal is that it avoids the technology,
administration and costs associated with the surrender of emissions
rights under the other schemes.
POLICY SPACE
FOR PCT
13. Considerable attention has been devoted to assessing
the appropriateness and feasibility of PCT. However, before looking
at these issues, I discuss whether a policy space exists for PCT
as this is a significant issue in the light of current and soon-to-be-implemented
policy instruments.
14. It might be that, if one was implementing from scratch
a policy regime to tackle climate change, one would favour the
use of a PCT scheme as the central policy instrument for reducing
fossil fuel emissions. However, this is not the situation that
presently exists. Currently, EU ETS covers around 50% of the UK's
CO2 emissions (DTI, 2007). The proposed Carbon Reduction
Commitment will cover slightly less than 10% of additional CO2
emissions[13] and the
proposed Supplier Obligation, which might take the form of a cap
and trade scheme (Defra, 2007b), could cover around another 15%
of CO2 emissions. [14]The
Commission has proposed the inclusion of aviation emissions within
the EU ETS in Phase 3 and the UK government has proposed that
emissions from surface transport also be included. Hence, it is
possible that the majority of UK emissions will be captured under
one or other cap and trade scheme by 2013.
15. Implementing a PCT scheme in parallel with these
trading schemes would thus result in the majority of UK emissions
being covered by PCT and another trading scheme. In other words
there would be a very considerable degree of "double counting".[15]
16. Assuming the continued existence of EU ETS, then,
in theory, the only way to implement PCT and avoid such double
counting would be to modify the allocation rules of EU ETS so
that it was permissible to allocate emissions rights to energy
end-users. [16](Currently,
under EU ETS, emissions rights in the electricity sector must
be allocated to generators and it is proposed that surface transport
be incorporated into EU ETS by allocating emissions rights to
fuel suppliers.) In this case, the Carbon Reduction Commitment
and the Supplier Obligation could be removed, and their coverage
being subsumed in an economy-wide PCT scheme, one part of which
would constitute the UK's implementation of EU ETS.
17. There may be benefits (for instance, in terms of
simplicity and efficiency) in having all fossil fuel emissions
covered by a single instrument such as PCT rather than the proposed
patchwork. If so, then there would be merit in taking steps to
ensure that the implementation of PCT at a later date was not
precluded.
TECHNICAL FEASIBILITY
AND APPROPRIATENESS
18. The remainder of this memorandum assumes a policy
space for PCT could be found and addresses issues of feasibility
and appropriateness.
19. Certain recurring arguments regarding the feasibility
and appropriateness of PCT are, in my view, unconvincing and these
are set out in the next section. Equally, there are, in my view,
some unconvincing arguments in favour of PCT which I set out in
the following section. The final section of the memorandum discusses
what I regard as the substantive debate around PCT.
UNCONVINCING ARGUMENTS
AGAINST PCT
The technology for PCT doesn't currently exist
20. In a speech on 7 November 2006, Chris Huhne, the
Liberal-Democrat Shadow Environment Secretary argued that:
the technology at present in my view is not available to make
such a PCA scheme workable in the ten to fifteen years in which
we need to act. So we must rely on existing technologies (Huhne,
2006).
In fact, PCT would rely on tried and tested existing credit
card technologies and, thus, is currently technologically feasible.
PCT gives the rich a licence to pollute
21. The aim of cap and trade system is to reduce the
cap to a level where it no longer pollution (in the sense of forcing
further warming). Of course, within this cap, the rich can afford
to buy additional emissions rights but under a carbon tax or upstream
trading system, equally the wealthy can afford to pay and carry
on emitting. The simple truth is that the additional spending
powers of the rich means that they benefit under any scheme! And
if this is a problem, it is not a problem that PCT should be expected
to solve. (In the final analysis, the solution is, presumably,
to put an end to richness!) At least, under an equal per capita
emissions, the wealthy must pay for their above-allocation emissions
rights and the less wealthy can make money from selling their
surplus emissions rights.
Some people just won't be able to understand PCT
22. True, but not an argument against PCT. A person who
doesn't understand the scheme can make an arrangement (or someone
can make an arrangement on their behalf) to automatically sell
their emissions rights to a market maker immediately they are
allocated to them by government. The person then buys the rights
they require at the point of sale. In this way, they would deal
only in money and their experience of the scheme would be transformed
into something akin to a carbon tax.
PCT is like the poll tax
23. PCT is similar to the poll tax in that both involve
equal quantities. However, equal quantities are involved in diametrically
opposed ways. Under a poll tax, everyone must give an equal quantity
of money to the government. This makes a poll tax regressive.
Under PCT everyone receives an equal quantity of emissions rights
from the government. This makes PCT broadly progressive (but see
paras 34-35).
Carbon cards would be like ID cards
24. Not even those groups most vehemently opposed to
ID cards would seem to endorse this view. In her evidence to the
Home Affairs Select Committee on ID cards, the Director of Liberty
characterized ID cards as a "single identifier that is used
for multi-purposes" (HAC, Ev 20). This she contrasted with
"purpose specific identity material". The carbon card
would be an example of the latter, as it would be used to verify
identity only for the specific purpose of surrendering and trading
emissions rights. Whilst Liberty opposes to the use of single
identifiers for multiple purposes, the Director noted that Liberty
has:
no problem with purpose-specific identity material that is
used for a specific purpose. We have for example NHS cards already
and we have National Insurance cards (HAC, Ev 20).
25. However, it is important to address the issue of
how much information is held on the central PCT database and who
has access to that data. An expert seminar convened by the Royal
Society of Arts concluded that it was possible to implement a
"privacy-friendly" version of PCT.
People could be cut off if they didn't have emissions rights
to cover their utility bills
26. Yes, some could be, but this does not constitute
a departure from the situation that exists today. Under PCT, if
a customer does not have emissions rights within their account
to cover their utility bill, the utility purchases the relevant
number of emissions rights on the national carbon market and add
the cost to the customer's bill. If the customer is a non-vulnerable
customer and does not pay their bill then, just as today, they
could be cut off. However, if the customer is a vulnerable customer
then just as today, their utility could not cut them off.
The country could run out of emissions rights
27. The whole point of a hard cap such as that under
PCT is to limit the quantity of greenhouse gases emitted by a
nation in a given period. If, under the cap, there was a high
demand for fossil fuel there would also be a high demand for emissions
rights which would result in an increased price. This price would
incentivize investment in energy efficiency and conservation measures
and low/zero carbon energy supply. The same would be true under
a hard cap implemented upstream.
28. Under a hard cap government could play a role enabling
the economy to flourish through taking measures to remove barriers
to the take up of energy efficiency and conservation measures
and to the provision of low-carbon supply. But clearly, there
would need to be provision for expanding the cap in exceptional
circumstances (for example, a very cold winter and wartime).
UNCONVINCING ARGUMENTS
FOR PCT
PCT is necessarily fairer than a carbon tax or other trading
schemes
29. The fairness of a carbon tax depends upon how the
tax revenue is used. If the revenue is recycled to individuals
on a lump-sum (equal per capita) basis then, arguably, it is equivalent
to the equal per capita allocation of PCT. Likewise the revenue
from an upstream cap and trade scheme under which rights are allocated
by auction could be recycled to individuals on a lump-sum basis.
The equal per capita allocation of PCT is obviously the fairest
allocation
30. A number of people have argued that an equal per
capita allocation is not entirely fair, as those whose life circumstances
require them to use more energy, for example, those who live in
the countryside and those who live in colder parts of the country,
should receive a greater quantity of emissions rights. I have
forwarded a separate memorandum on this issue. [17]
PCT benefits all those on low income
31. Under DTQs, individuals are allocated emissions rights
covering their energy emissions. Dresner and Ekins (2004) found
that, if a DTQs scheme was implemented today, then, whilst the
majority of households would be better off, around 30% of households
in the lowest two income deciles would actually be made worse
off due to having above-average energy emissions (mainly as a
result of fuel poverty). Hence if DTQs were to be implemented
in a way that did not disadvantage any low income households,
fuel poverty issues would also need to be addressed (TR 3.4).
32. However, if a PCT scheme was implemented today under
which emissions rights covering energy and OG&S emissions
(ie total emissions—see Equation 4) were allocated to individuals
on an equal per capita basis, [18]then
it is not clear what percentage of low income households would
be disadvantaged. [19]Research
into this question would be very useful.
SUBSTANTIVE DEBATE
AROUND PCT
33. In para 32, I noted that the lump-sum recycling of
revenue from a carbon tax or upstream auction is equivalent to
an equal per capita allocation of emissions rights. It has been
argued that a tax or upstream auction with lump sum recycling
would be significantly cheaper than implementing a PCT scheme.
For instance, Dresner (2005) writes:
An ecobonus is a payment of equal size given to each individual
to redistribute the revenues from an ecotax (say, a carbon tax)
and has the same distributional effect as a personal quota assigned
equally, it's just that the individual is given money, rather
than a personal quota they can trade. In the same way, the Sky
Trust proposal to equally distribute the revenue from an upstream
emissions auction ... is distributionally equivalent to a personal
quota.
However, there's a huge difference administratively. Now we
have a largely integrated tax and benefits system, an ecobonus
or the equivalent from an upstream emissions auction can be delivered
just by increasing the personal tax allowance, benefits and tax
credits by a certain amount. It could be made more explicit and
popular by making it an additional item shown in everyone's benefits
or a credit in the calculation of their tax. Either way, the marginal
administrative costs are virtually zero because you're using systems
that already exist. And because it's collected upstream, the administrative
costs of tax collection or an upstream auction are very low, actually
much less than those of the Climate Change Levy, which could be
abolished.
34. And note in para 16, it is also argued that C&S
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 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.
35. Under a carbon tax or upstream auction, individuals
are faced with a price signal whereas under PCT and C&S they
hold an allowance emissions rights. The hypothesis regarding PCT
and C&S is that actually holding emissions rights will increase
individuals' "carbon consciousness", ie 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 that under other instruments. However, unlike
C&S, PCT involves the surrender of emissions rights with (at
least) each purchase of fuel or electricity. And the hypothesis
is that the physicality/visibility of this surrender process and
the receipt of a regular carbon statement will give a more frequent
reminder to individuals of their emissions and, thus, their carbon
consciousness will be greater increased under PCT than under C&S.
36. However, it is important to distinguish between two
types of surrender. The first is surrender from a carbon account
either by direct debit when paying utility bills or carbon card
when buying fuel at a petrol station. Surrender by direct debit
is hardly a physical or visible process but will result in entries
upon a carbon statement. By contrast, surrendering emissions rights
by card is certainly a visible, physical process and one in which
those who run a vehicle engage more frequently than the paying
of utility bills (TR, 5.6).
37. The second type of surrender involves purchasing
emissions rights at the point of sale which are then immediately
surrendered. As noted in para 26, this second type of surrender
is required to cater for those who do not understand PCT. And
whilst, technically, emissions rights are purchased only to be
immediately surrendered, from the customer's perspective, the
entire transaction is cash-based, with the purchase of rights
appearing as simply an item on the receipt (rather like VAT).
Hence, this type of surrender of emissions rights is a largely
invisible process which generates no entries on the individual's
carbon statement (TR 5.6). And, of course, this is entirely appropriate
from the perspective of those who don't understand the scheme.
38. However, it should be noted that this form of surrender
is open not just to those who don't understand PCT, but to all.
So it is, in theory, perfectly possible for all individuals to
decide to sell their emissions rights immediately upon receipt
and buy (and immediately surrender) all the emissions rights they
require at the point of sale. Of course, as a result of the bid
and offer spread, they would have to buy rights at a slightly
higher price than that at which they sold them, but may decide
that the convenience of purchase at the point of sale justifies
this cost. And if everyone chooses to purchase at the point of
sale, then, arguably the benefit of increased carbon consciousness
is lost and PCT could be characterized a rather expensive way
of implementing a carbon tax. Hence, an important piece of research
is to assess the likely split between the two types of surrender.
39. Another proposed benefit of PCT is in relation to
the public acceptability of large emissions cuts. In the Tyndall
Report (TR, 7.1) we wrote:
Allocating [emissions rights] directly and on an equal per
capita basis quite literally makes individuals equal environmental
stakeholders by awarding them an equal stake or share of the atmospheric
sink. Arguably, the lump-sum recycling of auction or tax revenue
does not make it as explicit to individuals that they have these
equal shares in the atmosphere. If awarding [emissions rights]
directly to the public means that they more clearly perceive they
have such equal shares, if the public perceives this equal share
to be fair, and if fairness is a condition for public acceptability,
then DTQs may promote greater public buy-in to the task of substantially
reducing emissions.
40. However, as mentioned in para 33, not every one regards
an equal per capita allocation as fair. Of course, PCT does not
have to use an equal per capita allocation but the issue of how
allocations should be adjusted to take account of individuals'
varying situations may itself become a source of some contention.
41. No detailed research has yet been carried out into
the cost of a PCT scheme. It is important to do this, to assess
the extent of additional benefits that a PCT scheme might offer
and compare this with the costs and benefits of other instruments/instrument
mixes.
REFERENCES
cap and share (2007) cap and share www.capandshare.org
Defra (2007a) Action in the UK—Carbon Reduction
Commitment, www.defra.gov.uk/environment/climatechange/uk/business/crc/qanda.htm£5,
accessed 5 July.
Defra (2007b) The Household Energy Supplier Obligation
from 2001: A Call for Evidence, London: Defra.
Dresner, S (2005) Distributional, Practical and Political
Implications of Carbon Taxing and Trading, paper delivered
at workshop run by UK Energy Research Centre. Paper and workshop
details available at www.ukerc.ac.uk/content/view/110/57
Dresner, S and Ekins, P (2004b) The Social Impacts of
Environmental Taxes: removing regressivity—The Distributional
Impacts of Economic Instruments to Limit Greenhouse Gas Emissions
from Transport (PSI Research Discussion Paper 19), London:
Policy Studies Institute.
DTI (2007) EU Emissions Trading Scheme (EU ETS), www.dti.gov.uk/energy/environment/euets/index.html,
accessed 5 July.
HAC—Home Affairs Committee (2004) Identity Cards—Fourth
Report of Session 2003-04 Vol II, London: The Stationery Office.
Hillman, M (2004) How we can Save the Planet, London:
Penguin Books.
Huhne, C (2006) The Economics of Climate Change, Personal
website:
http://chrishuhne.org.uk/speeches/51.html, accessed 5 July
2007.
Sorrell, S. and Sijm, J (2003) Carbon Trading in the Policy
Mix, Oxford Review of Economic Policy, 19(3), 420-37.
Starkey, R and Anderson, K (2005) Domestic Tradable Quotas:
A Policy Instrument for Reducing Greenhouse Gas Emissions from
Energy Use, Tyndall Technical Paper 39 www.tyndall.ac.uk/research/theme2/final_reports/t3_22.pdf
July 2007
12
Mayer Hillman, personal communication, 27 November 2006. Back
13
According to the government (Defra, 2007a) , the 6000Kwh threshold
with capture most of the emissions (15MtC) covered by the original
3000kwh threshold (Defra, 2006). Back
14
Households account for around 25% of CO2 emissions,
around 35% of which are from electricity. These electricity emissions
are already covered by EU ETS. Back
15
For more on double counting see Sorrell and Sijm (2003). Back
16
This would mean that emissions rights could be allocated to one
entity (eg electricity generators) in one country and to another
entity (eg electricity users) in another. I have not explored
in any detail whether this is feasible. Alternatively, it could
be required that all emissions rights under EU ETS to be allocated
to energy end-users (though this is hardly likely politically). Back
17
This was originally submitted to the Environment, Food and Rural
Affairs Committee in September 2006. Back
18
Lump-sum recycling the auction revenue under DTQs is equivalent
to allocating OG&S emissions on an equal per capita basis. Back
19
If low income households are spending a high proportion of income
on fuel and electricity, they will have less to spend on other
goods and services , their OG&S emissions will be lower and
they will have a greater surplus to sell. Back
| 
