Memorandum by Richard Starkey and Dr Kevin
Anderson
DOMESTIC TRADABLE
QUOTAS (DTQS):
A SUMMARY
Introduction
1. Domestic Tradable Quotas (DTQs) are a
`cap and trade' scheme designed to reduced greenhouse gas emissions
from energy use. The novel feature of the DTQs scheme is its allocation
of emissions rights directly to all energy end-users—firms,
other organizations and adult individuals. Individuals receive
their emissions rights free and all individuals receive the same
amount. In short, DTQs is based on the principle of equal per
capita emissions and would create a nation of potential carbon
traders.
2. DTQs were formulated by Dr David Fleming,
an independent environmental policy analyst and writer, who first
published the idea in 1996. In July 2003 Richard Starkey and Kevin
Anderson started work on a project to research DTQs funded by
the Tyndall Centre for Climate Change Research.
3. Is the DTQs scheme fair? Is it administratively
and technologically feasible? And might it be preferable to other
emissions reduction instruments? These are some of the questions
the Tyndall project seeks to explore.
4. This evidence briefly describes the DTQs
scheme as originally formulated by Dr Fleming, the findings of
the Tyndall project to date and planned future work.
Original DTQs proposal
5. There are four elements to Fleming's
original DTQs proposal: 1) setting the carbon budget 2) allocating
carbon units 3) surrendering carbon units 4) trading carbon units.
These are described below
Setting the carbon budget
6. As noted above, DTQs were formulated
as an instrument for reducing emissions from energy use (around
85 per cent of all UK greenhouse gas emissions). The carbon budget
is defined as the maximum annual quantity of greenhouse gas emissions
from energy use that can be emitted by a nation implementing the
DTQs scheme. This carbon budget is reduced year-on-year so as
to meet national or internationally-agreed energy emissions reduction
targets.
7. In any given year of the scheme, carbon
budgets are set 20 years into the future so as to give the market
a long-term emissions reduction signal. Fleming (1997) divides
the 20-year budget into three periods. Period 1 is a 5-year binding
Commitment, which cannot be revised; this is a requirement for
an orderly market. Period 2, the 5-year Intention, is inflexible;
the presumption is `no change', but it can be revised for stated
reasons at an annual review. Period 3 is a 10-year Forecast, which
is indicative only.
Allocating carbon units
8. Each carbon budget is divided into carbon
units—1 carbon unit representing 1 kg of carbon dioxide
equivalent—and divided between individuals and organizations.
The proportion of carbon units allocated to individuals is equal
to the proportion of energy emissions resulting from individuals'
purchase of fuel and electricity over a given period prior to
the introduction of the scheme.[1]
Emissions are allocated to individuals free and on an equal per
capita basis. The remaining carbon units are allocated to firms
and other organizations through a government-regulated auction,
with the revenue raised going to government.
Surrendering carbon units
9. All fuels and electricity are assigned
a carbon rating based on the quantity of greenhouse gases (measured
in carbon units) emitted by the combustion of a unit of each fuel
and by the generation of a unit of electricity.[2]
When citizens and other final users purchase fuel or electricity,
they surrender to the retailer the number of carbon units corresponding
to their purchase. For accounting purposes, these units are passed
up the supply chain and on reaching the primary energy producer
are surrendered back to government.
Trading carbon units
10. There is a national market in carbon
units in which individuals and organizations with surplus units
may offer them for sale to those wishing to purchase additional
units.[3]
The DTQs scheme depends on information technology
11. Central to Fleming's scheme is a computer
database in which the carbon unit account for all citizens and
organizations is held, and in which all carbon unit transactions—issuing,
surrendering, buying, selling or transferring, are recorded. All
transactions are conducted electronically. For example, a customer
purchasing petrol would simply have their `carbon card' swiped
by the petrol station attendant, thereby transferring the carbon
units corresponding to their purchase from their carbon unit account
to that of the company owning the petrol station. For those purchasers
of fuel and electricity without carbon units to surrender at the
point of sale, for example, foreign visitors and individuals who
have used all their units, the relevant number of carbon units
are simply purchased electronically on the national market by
the fuel or electricity seller on behalf of the purchaser. The
purchaser then pays the seller for these units and surrenders
them in the usual manner.
Assessment criteria and typology of instruments
12. Prior to the Tyndall project, no detailed
academic assessment of Fleming's proposal had been conducted.
The project therefore aimed to assess DTQs and other emissions
reduction instruments in terms of the 3Es: equity, effectiveness
and efficiency. These are criteria well established as appropriate
for assessing environmental policy instruments.
13. The project has adopted the OECD typology
of greenhouse gas emissions reduction instruments—see Table
1 (OECD 2001, 2002). The IPCC adopts a similar typology.
14. Taxes and tradable permits are often
described in the literature as "price instruments" with
other measures collectively described as "non-price instruments".
Almost all analysts advocate a mixture of both price and non-price
instruments. Assuming that the same non-price instruments can
be used in combination with any price instrument, then an assessment
needs to be made as to which price instrument(s) is/are the most
appropriate. Given that upstream trading schemes are, from the
perspective of the final purchaser of fuel, equivalent to a carbon
tax, to date much of our analysis has been a comparison of DTQs
and a carbon tax (see paragraph 17 below):
|
| Policy Type | Classification
|
|
| Fiscal | Taxes (tax, tax exemption, tax reduction, tax credit)Fees/charges, refund systemsSubsidies (transfers, grants, preferential loans)
|
| Tradable permits | Emissions tradingGreen certificatesProject-based programmes (including CDM and JI)
|
| Regulatory instruments | Mandates/standardsRegulatory reform
|
| Voluntary agreements | "Strong""Weak"
|
| Research, developmentand demonstration (RD&D)
| Research programmesTechnology developmentDemonstration projectsTechnology information dissemination
|
| Policy process and outreach | Advice/aid in implementationConsultationOutreach/information disseminationStrategic planningInstitutional development
|
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Table 1 OECD typology
Equity
15. Is the allocation of carbon units amongst individuals
on an equal per capita basis equitable? Certainly this approach
(particularly in the form of the "contraction and convergence"
proposal) has gained increasing support over the last decade.
However, little effort has been made by supporters of this allocation
to offer a justification for this allocation.
16. Academically, such a justification is to be sought
with the branch of political philosophy known as distributive
justice. The literature on distributive justice specifically addresses
the question of what constitutes a fair share of resources, rights,
opportunities amongst individuals.
17. It would be very convenient if all major approaches
to distributive justice endorsed this emissions allocation. A
defence of such an allocation would not then require a defence
of any particular approach to distributive justice. However, our
work thus far indicates that whilst the "left-libertarian"
and the "egalitarian liberal" approach both support
an equal per capita allocation, the right-libertarianism approach
does not.
Consequences of an equal per capita allocation
18. Under a DTQs scheme all individuals receive an average
number of carbon units. Therefore below average emitters are better
off under DTQs than prior to such a scheme being introduced as
they can sell their surplus units into the national carbon unit
market. Under a pure carbon tax, by contrast, below-average emitters
are worse off as, faced with higher fuel prices, they can afford
to buy less fuel. If some sort of rebate scheme is introduced
which allows at least below-average emitters on the lowest incomes
to continue to buy the same amount of fuel as prior to the tax,
then at best they are no worse off than prior to the tax. Hence
below-average emitters are better off under a DTQs scheme than
under a carbon tax and better off than if neither scheme were
introduced
Effectiveness
19. The effectiveness of a greenhouse gas emissions reduction
instrument is the extent to which it achieves an agreed emissions
reduction target. For DTQs to be an effective instrument it must
be both 1) technologically feasible 2) administratively feasible
and 3) command a sufficient degree of public acceptance.
Administrative feasibility
20. Under a DTQs scheme, a government would allocate
carbon units to all "eligible individuals". In the case
of the UK, such individuals would consist of citizens resident
in the UK and foreign nationals with rights of residence in the
UK who are over a threshold age (this could be anywhere between
16 and 18). In order to make this allocation, the government would,
ideally, need a complete list of all eligible individuals.
21. In addition the government needs to identify all
"potentially eligible individuals" ie British citizens
resident in the UK and foreign nationals with long term rights
of residence in the UK who are under the threshold age.
22. Hence, in order to run a DTQs scheme, the government
would, ideally, need a register that contained a complete list
of all eligible and potentially eligible individuals. The register
would be needed to accurately be able to record when:
— individuals become eligible (potentially eligible
individuals reaching the threshold age or foreign nationals being
granted residence)
— eligible individuals ceased be so (through death
or emigration)
— potentially eligible individuals ceased to be
so (through death or emigration)
23. In other words, what the government would need is
a population register (and also a register of all organizations).
In November 2003, the Home Secretary, David Blunkett, announced
that the Government planned to introduce an identity (ID) card
scheme. According to the Government's consultation document on
the introduction of an ID card scheme (Home Office, 2002, p 16),
such a scheme would comprise:
— a central database ("the central register")
capable of covering all of the resident population of the UK.
The central register would hold core personal information which
is commonly used by all service providers such as name and address;
— secure procedures for establishing entries on
the central register and for keeping the information up to date
so that people would not have to provide the same information
time after time to different service providers;
— the issuing of plastic cards to everyone on the
central register. The cards may incorporate some information and
features on a microchip embedded into the card. These are commonly
known as "smartcards".
24. Hence, if an ID card scheme was implemented, the
cost of the central register would not be borne by the DTQs scheme.
However, communications with the Home Office indicate that it
is unlikely that the ID card could "double up" as a
carbon card.
25. Given the ambitious nature of the ID card scheme
and the Government's record on procurement of large IT systems
the success of the scheme is, arguably, less than certain. In
addition there is also the possibility that the scheme may be
derailed through political opposition as happened in Australia
and New Zealand. Hence the precautionary principle demands that
the administrative feasibility of DTQs is examined in the presumed
absence of an ID card scheme. This work is ongoing and we are
in discussion with the team at the General Registrars Office working
on the Citizen's Information Project.
Technological feasibility
26. As noted in paragraph 11, a database will be required
that holds a carbon account for each eligible individual and organization.
Is such a database technologically feasible? The project team
was able to interview an expert on the design and implementation
of large databases at Oracle, one of the world's leading providers
of very large databases. We were pleasantly surprised to learn
that the size of database required would not by present-day standard
be anything like approaching leading-edge and current day technology
could facilitate real-time transfer of carbon units between accounts
and allow access to accounts through channels including landline
phones, the internet and mobile phones.
27. We are currently in discussion with technology experts
as to which type of card (smart card, 2D barcode) would be most
suitable as a "carbon card" (see paragraph 11 above).
Public acceptability
28. The fuel protests of 2000 illustrated the public
antipathy that can arise in response to even small rises in carbon
taxation;[4] such antipathy
could escalate if substantially higher levels of taxation were
introduced to bring about significant emissions reductions. DTQs
may provide an opportunity to mitigate such antipathy through
the explicit inclusion of citizens in the task of emissions reduction.
Rather than confronting citizens with higher prices, DTQs actively
enlists them as environmental stakeholders through the direct
allocation of emissions rights. Moreover, as a result of the particular
allocation under DTQs, citizens are made equal stakeholders. If
the public perceive this equal allocation to be broadly fair,
this will contribute to the public acceptability of DTQs.
29. The Tyndall project plans to hold a number of citizens'
panels to assess public attitudes to DTQs. In addition research
on the expected price fluctuations in carbon unit prices is planned
as there is a possible link between price volatility, ease with
which public can use the scheme and public acceptability.
Efficiency
30. Using Government cost estimates for the ID card scheme
and estimates supplied by a consultant at Oracle, we have very
approximately estimated the average annual cost of the DTQs scheme
over the first 13 years of its life as £50-100 million. This
cost assumes the implementation of an ID card scheme but that
the ID card is not used as a carbon card and so separate carbon
cards are issued. We are seeking to compile a more robust cost
estimates for the DTQs scheme both with and without the implementation
of an ID card scheme.
31. As the IPCC notes (IPCC, 2001, p513)
"An important part of climate policy debates is underpinned
by a lasting controversy between believers and non-believers in
the existence of a large untapped efficiency potential in the
economy . . . Several major studies concretize this view in Europe
as well as in North America (USA and Canada). For Europe, the
monumental IPSEP reports (summarized in Krause et al. (1999))
conclude that emissions could be reduced by up to 50 per cent
below the 1990 level by 2030, at a negative overall cost. We take
the view that such "large untapped efficiency potential"
does indeed exist. If this is the case, then the set up and running
costs referred to in paragraph 30 will be offset by tapping into
this potential.[5]
Ten-minute rule bill on DTQs
32. Colin Challen, Labour MP for Morley and Rothwell
heard one of the Tyndall project team interviewed on Radio 4's
Today programme about DTQs in January 2004. Since then
he has been working closely with the project team and presented
a ten-minute rule bill on DTQs in July 2004.
References
Burke, T (2000) Is this the End for the Green Agenda?, New
Statesman, 25 September, pp 12-14
DeCanio, S (2003) Economic models of climate change Palgrave-MacMillan
Krause, F, DeCanio, S, Hoerner, A and Baer, P (2003) Cutting Carbon
Emissions at a Profit (Part I): Opportunities for the United States,
Contemporary Economic Policy, 20, 4, 339-365 Fleming, D
(1997) Tradable Quotas: Using Information Technology to Cap National
Carbon Emissions, European Environment, 7, 5, pp 139-148
Home Office (2002) Entitlement Cards and Identity Fraud: a
Consultation Paper, CM 5557, Stationary Office
IPCC (2001) Climate Change 2001: Mitigation
OECD (2001) Dealing with Climate Change: Policies and Measures
in IEA Member Countries—2001 Edition, OECD, Paris
OECD (2002) Dealing with Climate Change: Policies and Measures
in IEA Member Countries—2002 Edition, OECD, Paris.
1
In the UK, this is currently about 40 per cent. Back
2
The carbon rating for electricity will vary with generation mix
and efficiency. Back
3
A Quota is the total number of carbon units held by an individual
or organization. These carbon units are tradable, hence the name
Domestic Tradable Quotas. Back
4
These protests caused one former government advisor to remark
that they had "driven a stake through the heart of any new
proposals for British, or indeed European, carbon or energy taxes"
(Burke, 2000). Back
5
Two important publications supporting this view that we would
commend to the Committee are Krause et al (2002) and DeCanio
(2003). Back
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