Memorandum submitted by Professor Paul
Ekins, Policy Studies Institute
The two overarching questions asked by EAC about
PCAs are:
The questions will be briefly addressed in turn.
DESIRABILITY
Desirability depends, firstly, on what they
are intended to achieve, and, secondly, on whether they can achieve
this better than other instruments.
What are PCAs intended to achieve?
The main objectives for PCAs that have been
put forward are:
1. To keep personal and household carbon
emissions within, or reduce them to, a desirable target.
2. To increase individuals' and households'
awareness of their contribution to climate change
If appropriately implemented, PCAs could certainly
do both these things (and some elements of the "appropriately"
will be addressed under Practicality). On the first objective,
it may be noted that they will reduce personal and household emissions
by the envisaged amount only if these emissions are capped and
households cannot buy permits from other schemes, such as CDMs
or from the unregulated carbon offset market. There is considerable
doubt about the extent of carbon emission reduction that comes
from such other schemes.
That understood, my view is that PCAs are theoretically
sound in themselves.
Will PCAs achieve their objectives better than
other instruments?
This all depends on the design. PCAs have a
number of potential theoretical advantages:
— They equalise the marginal cost of
abatement across the covered sectors (they share this advantage
with other economic instruments such as carbon taxes)
— They allow the emissions to be made
by those who place the highest value on emitting, up to the level
of their initial allocation (which may or may not be equal per
capita). This is because no-one, however poor, is forced to sell
their initial allocation.
— The initial distribution may be as
"progressive" (ie go disproportionately to poorer people)
as is socially desired. (It is often assumed that only an equal
per capita distribution would be "fair" but in fact
other models of fairness could be postulated, eg based on "perceived
need".)
These are potentially strong advantages, so
that it is right that PCAs should be examined seriously. However,
it may be noted that carbon taxes have some of these advantages
too, except that they fix the price of carbon rather than the
quantity (and there are good reasons for preferring this approach
in the short term), and they might be more difficult to design
not to be regressive. On the plus side, however, they are likely
to be far more easily understood than PCAs and with proper communication
(eg on people's bills) they could also raise awareness about climate
change. They is no reason therefore automatically to prefer PCAs
to carbon taxes for the household sector, as is sometimes alleged[4].
Whether either instrument delivers on its objectives depends on
the design. This leads to Practicality.
PRACTICALITY
It is a tautology to say that for PCAs to work
they will need to be practical: politically (in order to be implemented)
and technologically and institutionally (in order to work). Political
practicality need not detain us here. At present, mitigating climate
change is not politically practical, as witness the continually
rising energy use and emissions in practically all countries.
Such practicality may change. It is important that, if it does,
the thinking has been done to implement instruments that are effective
in such mitigation. PCAs (and carbon taxes) may be one such instrument.
Apart from politics, the practicality of PCAs
depends on:
1. The technology and institutions through
which they are implemented; and
2. The degree to which carbon as a new form
of "money" is understood.
There is no doubt that PCAs could be implemented
technologically and institutionally. In my view the best way to
do this would be through the banking system with every eligible
person given a carbon bank account with an associated debit card
and cheque book, with allocations into the accounts on a monthly
basis in advance and the usual systems against fraud that apply
to normal bank accounts. Such a scheme would not be cheap to set
up, but it would allow people to use their carbon money, as they
consume fuel, in exactly the same way as they use normal money.
Obviously arrangements would have to be thought through as to
whether and how people could go into "debt" on their
carbon accounts (eg when they are buying petrol on a credit/debit
card), but these details do not need to be gone into here.
The great advantage of such a scheme would be,
I believe, that it maximises the chances of PCAs being understood.
Other points raised by the EAC in its Inquiry
Note, to be very briefly addressed here, but more fully explored
in oral evidence if desired, are:
Potential impact of PCAs
Again, this very much depends on the scheme's
implementation. If it is to reduce emissions from the household
sector by 60% by 2050, and if permits cannot be bought in from
outside, PCAs will come severely to constrain the degree to which
household can consume fossil fuels, both in their homes and their
cars, and in any other area that is included in the scheme (eg
perhaps aviation). This will provide a powerful incentive for
low-carbon and energy-efficiency and conservation technologies
to be developed and implemented. To the extent that these technologies
turn out to be cheaper than fossil fuels (and no-one can predict
the price of oil even in 2010 let alone 2050), households, business
and the wider economy will benefit; to the extent that they are
more expensive, the reverse. It may be expected that low-carbon
technologies will get cheaper as they are implemented (because
they are relatively immature), while the price of oil and gas
will rise as they are depleted. That means that early action may
be difficult, but that bold policy now may be rewarded later on
in narrowly UK terms (this is not the same argument as Stern was
making, that the reduction of climate damages warranted early
strong action globally). The other main determinant of the impact
will be the initial distribution of PCAs. It is often assumed
that this would be on an equal per capita basis, but as noted
above, this need not be the case, and will be one of the most
hotly contested elements of any proposed scheme.
Operational feasibility
As noted above, it is my view that PCAs could
be made perfectly operational through the banking system.
Different models
PCAs are normally taken to refer to individual
and household emissions (from household energy and private car
use), rather than those from business,. The exception is aviation.
Potential complications are that electricity is, and aviation
soon will be, in the EU ETS. It is not clear that it is desirable
to have the same emissions in two different schemes (for example,
electricity saving by households could release permits for sale
by generators, though it would also reduce their profits), but
it could not, as suggested by the Centre for Sustainable Energy
in its study for DEFRA, lead to a rise in the overall emissions
from the two schemes, as it will not have affected either cap.
It could, however, reduce the abatement action required in the
scheme that did not reduce its own emissions, because some of
its emissions will have been reduced by the actions of others.
This would reduce the price of permits in the second scheme, because
they will have been made relatively more abundant.
The allocation of permits is a political decision.
However it is done, it will be hotly contested, as noted above.
A voluntary scheme would be unlikely to be effective
in terms of emissions reduction and would not justify the trouble
of putting PCAs in place. A rewards-based scheme would have to
be paid for by taxes elsewhere and it is not clear that it would
be preferable to the current Energy Efficiency Commitment (which
also rewards those who get involved at the expense of others),
and again would be unlikely to justify the cost of setting up
a PCA scheme.
Public acceptability
At present no scheme of significant carbon reduction
is publicly acceptable. Whether PCAs are more likely to be acceptable
than carbon taxes (for the same level of carbon reduction) is
a moot point, and both instruments have (different) relative advantages
(and, in my view, one or the other will certainly need to be introduced
if household emissions are to be substantially reduced). Were
a PCA scheme to be introduced, one may anticipate that the usual
forward etc. markets would soon come into being, as well as the
kind of fraudulent practices that exist in all money markets.
There would have to be a substantial public education effort undertaken
before PCAs were introduced, to ensure that people understood
both the similarities and differences between PCAs and normal
money (eg the latter only relates to energy, it appears in accounts
automatically without needing o be earned etc). There seems to
be no reason why people should not be able to learn these differences
quite quickly.
July 2007
4 Eg the study carried out for DEFRA in 2006 by the
Centre for Sustainable Energy. Back
|
