Memorandum submitted by Cap & Share
UK
THE ROLE OF CARBON MARKETS IN PREVENTING
DANGEROUS CLIMATE CHANGE
SUMMARY
— Recent scientific findings about tipping
points in the climate system point increasingly to the existence
of a global climate emergency.— Addressing this emergency
requires (among other things) swift and sweeping reductions in
greenhouse gas emissions, realistically achievable only by "capping
carbon".— An effective capping system would guarantee
that a cap was met, would do so in a manner attracting public
support, and ideally would do so efficiently.
— In stark contrast, the EU ETS has so
far been ineffective, opaque (to the public and even to regulators),
iniquitous (rewarding existing polluters at the expense of the
general population) and inefficient (delivering the wrong economic
incentives).
— This design of the EU ETS appears to
demonstrate regulatory capture by the carbon-intensive industries,
akin to that demonstrated recently by the financial services industry.
— The EU ETS can be reformed by embedding
it within an upstream system, which would be not only effective,
but also transparent, fair, and even inspiring.
— An EU system could be linked with other
carbon markets elsewhere, but a global system would be simpler,
more transparent, more effective and may be the only option open
if we are to address the crisis effectively in the very short
time remaining to us.
INTRODUCTION
1. Dramatic developments in climate science
are suggesting the need for much lower targets (than those given
in the 2007 IPCC report) for greenhouse gas concentrations—in
the range 300-350 ppm CO2e or even lower. Such targets take the
policy discussion out of the range that the Stern Review even
considered politically achievable, but failure to stabilise at
these lower levels is likely to lead to a runaway process resulting
in increases of 6 degrees C or more. In the history of the planet,
changes of this magnitude were associated with the extinction
of 95% of all species. This is now a global emergency. If dangerous
climate change is to be avoided or at least contained, it is crucial
that very rigorous measures are taken now—and the goals
set by the UK and EU are nowhere near ambitious enough.
2. Rapidly fluctuating energy prices are focussing
minds on energy security. Meanwhile, the banking and financial
collapse and severe deterioration in the global economic situation
are mirrored by a growing collapse in public confidence in sophisticated
financial instruments, and a heightened awareness and cynicism
about financial scams, tax avoidance and the like. This does not
bode well for the future of the EU ETS if and when it is perceived,
correctly, to reward the worst climate polluters with windfall
profits at the expense of the public and those in fuel poverty.
3. A central question of this Inquiry is whether
the EU ETS can be extended into a global carbon market system
which could transform the global energy economy to the degree
sufficient to address the climate crisis. As the EU ETS now stands,
our answer to this question is "no". The EU ETS is a
flawed system, and its design demonstrates that the European (and
national) political systems appear to be powerless to mobilise
against, and impose an adequate countervailing power over, vested
interests whose economic power is based on the use of carbon energy.
These interests must be reined in if climate change mitigation
is to be effective on anything like the necessary scale.
CAP & SHARE
4. To avert runaway climate change, it is imperative
that we rapidly set an absolute global cap on CO2 emissions (decreasing
year by year), which is low enough to bring the concentration
of CO2 in the atmosphere down to the required level. An EU cap
can be seen as a step towards this goal, so we start by considering
an EU-wide scheme.
5. In discussing the EU ETS we will use for comparison
the Cap & Share scheme, running at the EU level. Under this
Cap & Share scheme, there is a single overall cap for EU emissions.
This cap is applied "upstream" by regulating the amount
of fossil fuels—coal, oil and gas—introduced into
the EU economy (being imported or extracted from the ground).
The cap is enforced by requiring fossil fuel suppliers to acquire
permits for the greenhouse gas content of the fossil fuels they
want to bring into the economy. The number of permits in circulation
is determined by the size of the cap. The revenue raised (in selling
these permits) goes equally to all adult members of the population,
to compensate for higher energy prices. (Cap & Share is related
to Cap & Dividend, which is getting wide exposure in the USA;
see www.capandshare.org for more details).
6. The advantages of Cap & Share are many.
Since there are only a very small number of fossil fuel suppliers,
it's easy to cap fossil fuels entering the economy. Since all
emissions are controlled upstream, there is no need for any downstream
rationing system: the price of capping carbon is built in to fuel,
and simply flows through the economy, as with a carbon tax. (Indeed
a carbon tax with the tax revenues returned to the population
is very similar to Cap & Share; with the critical difference
that with Cap & Share a cap is in place—the problem
with carbon taxes is that they cannot guarantee any given reduction
in emissions). An upstream cap is transparent and highly visible;
thus the cap is hard to evade. Finally, the system is transparently
fair; popular support comes both from this and from the fact that
the benefits accrue to the households and citizens of Europe,
rather than its polluting businesses or its governments. Overall,
this system could provide a model for the rest of the world and
make a major contribution towards meeting the very low greenhouse
gas targets in the short time that the emergency demands.
THE EXISTING
EU ETS
7. By contrast, consider the EU ETS. A number
of shortcomings of the EU ETS are apparent, which include:
7.1 Lax, ineffective caps
No EU-wide cap was set. Instead, in Phase I national
governments and power generators gamed the system for their own
interests, overestimating the number of permits that they would
need, which led to oversupply and a collapse in the carbon price,
so no real reductions in carbon emissions can be said to have
been achieved. Current plans for a revised directive regulating
the post-2012 EU ETS state that an EU-wide cap on emissions will
be set for Phase III. However, even this is not an absolute cap
but one linked to permits allocated during the second trading
period.
7.2 Windfall allocation of permits
As the vast majority of permits were given away free
of charge, but the companies then charged the customers the market
value of the permits as a cost of production, these companies
made windfall profits whilst consumers experienced rising fuel
and food prices. With this "grandfathering" the EU succeeded
in turning the "Polluter Pays" principle on its head,
instead establishing a system based on "Pay the Polluter".
Despite calls for auctioning of permits, in the second trading
period less than 4% of the permits are expected to be auctioned,
and even according to most recent plans, only 70% of all permits
will be auctioned by 2020 "with a view to reaching 100% by
2027". Power companies in EU countries stand to earn windfalls
totaling several tens of billions of euros during the second phase,
and further action to protect Europe's worst polluters was confirmed
at the Brussels meeting in December 2008.
7.3 Perverse economic incentives
Grandfathering means that carbon polluters reap
the benefit of the carbon revenues, while the renewables sector
gets no such benefits. (Currently, the industry is lobbying to
reserve a large proportion of ETS certificates as a revenue source
for the development and start-up costs of CCS, despite its shortcomings).
The design faults in the current EU ETS have also led to a carbon
price far too low to set incentives for investment in low-carbon
production mechanisms.
According to current plans, most countries will
meet their targets only through recourse to Clean Development
Mechanism (CDM) projects, rather than making more difficult emissions
reductions at home. This is highly controversial as there are
many doubts as to whether CDM projects achieve any additional
CO2 reductions. Furthermore, CDM use is increasing. But developed
countries have prime responsibility to set their own houses in
order, as they are historically responsible for the increase of
CO2 concentration in the atmosphere.
The EU ETS does not cover carbon emissions for
goods consumed in the EU but manufactured elsewhere. According
to recent research, CO2 emissions for which the UK is responsible
have actually risen by 0.3% between 1990 and 2004, despite appearing
to have fallen by 5.6% (the 5.6% figure did not take embedded
emissions in imported goods into account). Similarly, the EU ETS
only covers large installations, leaving a myriad of small emitters,
and the personal/household sector, outside the system. (A particular
issue is transport, a sector where emissions are increasing. Coverage
of aviation and shipping is planned in the EU ETS third phase;
however, it would be much more effective if the whole transport
sector were covered, for example by a Cap & Share scheme.
Cap & Share can work for individual sectors of the economy—the
Irish government is considering its adoption for its transport
sector, and reports commissioned by Comhar from AEA and Cambridge
Econometrics were very positive).
Extension to smaller installations and the possible
addition of personal carbon trading only add to the existing complexity
of EU ETS arrangements. This complexity renders the EU ETS opaque
to the public, and even to regulators. As the system has become
ever more complex, to suit the needs of each vested interest,
the ETS has been described as "even more complicated than
the German tax system"—which is saying something. It
is a difficult subject for public opinion to get a handle on:
hardly a topic for sound-bites.
8. With all these shortcomings, why has the
EU ETS worked out this way? It appears to be a wonderfully clear
example of the concept of "regulatory capture". A system
ostensibly set up to act in the public interest, by imposing necessary
restraints on business interests, has instead had its design and
subsequent implementation taken over and managed to suit exactly
those interests.
9. This has been possible because corporate
groups with high-stakes interest in the outcome of climate policy
were far better resourced and thus influential than the NGOs and
other groups who were trying to protect the climate. The energy
companies are some of the most powerful economic interests in
Europe (when Gordon Brown was asked, as Chancellor, who were the
most powerful people in Britain, he cited Lord Browne, at that
time CEO of BP, as more powerful than himself). It is hardly surprising
that the chosen EU ETS design is complex, evadable, and malleable
to lobbying by vested interests, resembling a tax system with
a cosy network of tax haven arrangements. It all serves the "greenwash"
function of making it appear that the EU and its member governments
are doing something about climate, while in reality the situation
continues to deteriorate.
10. There is a parallel here with the banking
crisis, where instruments of such complexity were invented that
the resulting informational asymmetry rendered even the regulatory
authorities and experts unable to understand and control what
was happening. The same is true of the EU ETS and, rather like
banking regulation, climate regulation using the EU ETS has become
almost totally ineffective. But while life may go on as the financial
system collapses in ruins, a collapse of the climate system threatens
life on a truly fundamental level.
REFORM OF
THE EU ETS
11. Can the EU ETS be reformed, rather than
completely torn up? Yes. The current (or an improved) EU ETS can
work in conjunction with the EU Cap & Share system outlined
above, with the latter covering all non-ETS emissions. In other
words, Cap & Share can dovetail with an EU ETS. (This is explained
further in the Memorandum submitted by Laurence Matthews of Cap
& Share UK to the EAC's Inquiry into Personal Carbon Trading).
The combined scheme simply requires the following changes:
— the EU ETS permits form part of the overall
cap (and as such are bought by the fossil fuel suppliers, not
given away);
— in the Cap & Share scheme, fossil fuel
suppliers still need permits for (the greenhouse gas content of)
all fossil fuels brought in, except that now fossil fuels supplied
to EU ETS companies are exempt;
— to regain credibility, CDM (orJI) schemes
are suspended or drastically curtailed;
— border tariffs cover embedded emissions
in goods imported to the EU (this both maintains competitiveness
of EU industry, and discourages flight of manufacturing and capital
to "uncapped" parts of the world).
12. The combined EU-wide scheme would be simple
to implement, and would enforce a fixed cap. Its effectiveness,
inherent fairness, and the revenue coming to each citizen would
make for a popular scheme and (with the EU leading the world in
effective measures rather than just in rhetoric) an inspiring
one.
INTERNATIONAL SCHEMES
13. As a first step in extending this EU system
to the world, trade with other blocs is certainly possible. Provided
that this is trade with other markets which have caps (as opposed
to CDM-like arrangements), the overall combined cap would remain
intact.
14. Such inter-bloc trading would always leave out
some countries, so there would still be border tariffs. More desirable
(and a necessary goal before long in any case) would be a global
cap. The question then is how to allocate shares of this global
cap to countries, and a variety of mechanisms have been proposed
("Contraction & Convergence" is the best known,
and there are several more recent elaborations). Developing countries
have indicated their unwillingness to accept any climate regime
which does not deliver to them the financial and technological
resources that would enable their development along a low-carbon
path, and carbon trading (possibly under bilateral government
control) between carbon markets would allow such transfers of
resources.
A GLOBAL SCHEME
15. Here complexity is creeping back in again,
though. We can cut through all this with Cap & Share, but
now implemented on a global scale. A global Cap & Share system
would equally deliver resources to the developing nations—at
the simplest level it would be the equivalent of "Contraction
& Convergence" with instant convergence. This may seem
politically impossible to achieve, but the simplest and fairest
systems stand the best chance. In any case the alternatives are
far worse, and a dramatic worsening of the climate situation (and
the economic situation) may focus minds.
16. A global Cap & Share system would put up
the price of carbon-intensive goods, but since most people in
the world have low-carbon lifestyles they would gain considerably.
The world's poor would have an interest in a high carbon price,
which would also incentivise the movement to low-carbon forms
of economic development—designed around new infrastructures,
renewables, energy saving, and the ecological design and redevelopment
of residential settlements, reintegrated with localised food-growing.
17. Such a global system would have considerable
implications for the oil and gas exporting countries. The current
tendency of oil and gas prices to lurch chaotically between high
and low prices is not in the interest of the fossil energy suppliers
and, in any case, climate change will have profoundly destructive
consequences for countries like Russia and Saudi Arabia too. It
is actually in their interests to accept a global deal in which
the "scarcity rent" of fossil fuels, driven by a global
carbon cap aimed at stabilising the climate, goes largely to the
world's poor.
GETTING FROM
HERE TO
THERE
18. To deliver any such scheme, we need a publicly-backed
political force with sufficient power to resist the vested interests
and to drive down the level of emissions. It is necessary directly
to challenge the political and business power complex that underlies
the EU ETS, both in Europe and in the member states. The central
political task here is to draw in the public as participants and
drivers in the carbon reduction process. This would require the
following steps:
— the politics of carbon control must be
contextualised in the public mind by messages about just how serious
the climate crisis is—an awareness of a runaway process
that could lead to extinction;
— the basis for the carbon permit revenue distribution
must be demonstrably fair, nationally and internationally; the
arrangements seen to be in the interests of all (with the public
being the direct beneficiaries of the carbon permit revenues,
and with renewables and their carbon competitors clearly seen
to be put on an equal footing);
— the carbon control must be seen to be
non-evadable (through being imposed at the few points where large
and visible quantities of fuel enter the economy);
— the public must be helped to cope with
the rising carbon price, not only through distribution of carbon
permit revenues, but also through guidance on how to adapt to
the falling availability of carbon fuels, and measures to remove
disincentives to doing so (for example where neither tenants nor
landlords have any incentive to invest in energy efficiency measures
for rental property).
19. With such a programme, and with avoidance
of climate chaos an explicit and frequently repeated goal of policy,
everyone would know (and fossil energy companies would be put
on notice) that the humanity intends to withdraw from using climate-destroying
"toxic" fuels as soon as possible. This is a tall order.
But try surviving a mass extinction event ...
March 2009
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