An electronic scheme for per capita carbon quotas! -- ECOSUSTAINABLE COMMUNITY

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Subject: An electronic scheme for per capita carbon quotas!

Author:
Richard Starkey and David Fleming
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Date Posted: 05/19/02 6:39
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An electronic scheme for per capita carbon quotas!

Adapted from a paper entitled 'Domestic Tradable Quotas (DTQs)' by Richard Starkey and David Fleming.
In essence, the idea is that every citizen would be given, free, an equal number of carbon units to cover domestic fuel needs, including private transport; businesses and other organisations would have to buy their units from government. Those who used less than their entitlement would sell their surplus units to others who needed more. The scheme would embody an obligation to pay for using the capacity of the environment to absorb carbon emissions and a right for every citizen to share in its value. It would complement at national level the international contraction and convergence model for sharing carbon emission rights proposed by the Global Commons Institute. Unlike previously proposed rationing schemes, this is an electronic scheme, not one based on paper coupons.

'An obligation to pay for using the capacity of the environment to absorb carbon emissions'

Introduction
In the first half of the 21st century there will be a virtual phase-out of dependency on fossil fuels. This will be in response to the need to reduce carbon emissions sufficiently to stabilise the climate and it may be in the setting of supply constraints affecting crude oil and gas. An economic instrument is therefore required which will reduce demand for fossil fuels without causing profound economic damage and which will distribute reduced supply without injustice and intolerable hardship. An efficient solution to this is a model which allocates emission rights by a combination of entitlement and tender, and maintains a secondary market which is open to all. An instrument designed to achieve this - Domestic Tradable Quotas - has been published (Fleming 1996, 1997, 1998b); it was the subject of an EC DG XII workshop in Brussels in 1998 (Fleming 1998a) and it is outlined below.

A summary of Domestic Tradable Quotas
DTQs are an economic instrument to enable national economies to reduce their carbon emissions. They are designed for application within the economy; they are to be distinguished from international instruments designed for trading between nations. They allow national authorities to take control over the rate at which fossil fuel consumption is reduced, while allocating the available resource fairly and maintaining price flexibility so that the economy can distribute it efficiently. The nation implementing the scheme sets an overall Carbon Budget that is reduced over time. The 'carbon units' making up this budget are issued to adults and organisations. All adults receive an equal and unconditional entitlement of carbon units; organisations acquire the units they need from a tender, a form of auction modelled on the issue of government debt. There is a national market in carbon units in which low users can sell their surplus and higher users can buy more.
It is a hands-off scheme, with virtually all transactions being carried out electronically, using the technologies and systems already in place for direct debit systems and credit cards. The scheme has been designed to function efficiently not only for people who participate in it but for those who do not participate - eg for overseas visitors, for the infirm and for those who do refuse to co-operate. The advantages claimed for the scheme are that it is effective, equitable and efficient.

How the quota market works
The numèraire of the model is the 'carbon unit', defined as one kilogram of carbon dioxide (or CO2-equivalents in the global warming potential of nitrous oxide and methane), and estimates of the carbon units associated with the main fuels and electricity are set out below:

Translating emissions into fuels

Estimates of the global warming potential (GWP)

of gases released by production and combustion of fuels.

1 kg carbon dioxide = 1 carbon unit.

The GWP of methane and nitrous oxide is measured

as carbon dioxide equivalents.

Fuel Carbon units

Natural gas 0.2 per kWh

Petrol 2.3 per litre

Diesel 2.4 per litre

Coal 2.9 per kg

Grid electricity (night) 0.6 per kWh

Grid electricity (day) 0.7 per kWh
For the domestic market, the start of the sequence is the Register; this is a computer database which holds individual carbon accounts for all participants in the scheme. The Register is based on the model of credit cards and collective investments such as unit trusts and investment funds.

'The share of emissions accounted for by households is issued to all adults on an equal per capita basis'
There is a rolling annual issue of carbon units - with an initial issue for one year, topped up each week. Carbon units are issued into the market in two ways. First, there is the Entitlement for all adults. The share of emissions accounted for by households (about 45 per cent in the UK) is issued to all adults on an equal per capita basis. (Children's carbon usage would be provided for in the existing system of child allowances.) The remaining share (55 per cent) is issued through the tender to commercial and industrial companies and to the public sector, using the system already established for the tender of government debt. It is distributed by the banks to organisations using direct credit (for the units) and direct debit systems (for the payments).

When they make purchases of fuel or energy, consumers and firms surrender quota to the energy retailer, accessing their quota account by (for instance) using their QuotaCard or by direct debit. The retailer then surrenders carbon units when buying energy from the wholesaler. Finally, the primary energy provider surrenders units back to the Register (QuotaCo) when the company pumps, mines or imports fuel. This closes the loop.

Some fuel purchasers will not have any carbon units to offer at point of sale - for example, foreign visitors, people who have forgotten their card, people who have used all their quota and small firms and traders that do not bother to make regular purchases of units through their banks. All these must buy quota at the time of purchase, in order to surrender it. Individuals who cash in all their quota when they receive it and who then have to buy quota to cover their fuel purchases pay a cost penalty for this: they have to buy carbon units at the market's offer price and surrender them at the (lower) bid price - and the difference between these two prices is the cost of their non-participation.

'Purchases and sales of quota are made through ATMs, over the counter or by direct debit arrangements'
Carbon units can be bought and sold on the secondary market. People who use less than their entitlement can earn a revenue from the sale of their surplus, and people who use more must buy their additional requirement. The government receives a revenue from the tender. Trading revenues are earned by the market-makers - quoting bid and offer prices. Purchases and sales of quota are made through automatic teller machines (ATMs), over the counter of banks and post offices and energy retailers, or by direct debit arrangements with energy suppliers.

The Carbon Budget
The 20-year Carbon Budget, which determines the number of units issued, is defined over three periods:
Period 1 is a five-year binding commitment, which cannot be revised; this is a requirement for an orderly market.

Period 2, the five-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 ten-year forecast, which is indicative only.

The Carbon Budget is at the heart of the scheme. First, it guarantees the targets for reduction in carbon emissions. Secondly, it provides a long term quantity signal. Serious reductions in carbon emissions will take time; people will therefore need to take action in the light of their knowledge of what quantity of carbon units will be available in the future. However, it is very hard to issue a long-term signal with a tax (and finance ministers refuse to do so) for reasons such as these:

Economic cycles would make a fixed price inappropriate - too high in a downturn, too low in an upturn.

It is impossible to forecast with confidence how the market will react to a future price, especially to a price which will apply in ten years time - not least because the economy's behaviour will evolve as it learns to cope with changed conditions.
For DTQs, with their fixed quantity and flexible prices, none of this is a problem. The Carbon Budget provides a long term signal; there is an automatic price adjustment; there are automatic rewards (and punishments) in the form of lower (or higher) prices in response to how well (or badly) the economy does in reducing carbon emissions.

'The Carbon Budget would be set by an independent body - to provide some protection from the political process'
The Carbon Budget would be set by an independent body - like the UK's Monetary Policy Committee. This would relieve the government from having to defend the Carbon Budget itself; it would provide some protection for the Carbon Budget from the political process and it would allow governments to concentrate fully on helping the economy to achieve the targets which the independent body had set. Since the scheme is restricted to fuels, the Carbon Budget can focus on the source of carbon emissions over which households and firms have most direct control; other sources, such as waste tips, agriculture and sinks such as plantations, would fall within the remit of different programmes and instruments.

Carbon reduction as a collective programme
The reduction of dependency on fossil fuels on the scale indicated by the science may well rank as the most demanding co-ordinated objective ever undertaken by western society. This is not an agenda that can be fulfilled simply by giving individuals inducements to reduce their own fossil fuel dependency; it will have to be a co-operative programme with the objective of carbon reduction being adopted as the major priority for public action. A motivational structure is therefore required in which (a) it is in the individual's interests not only to reduce his or her own carbon emissions but also to co-operate with others in encouraging, persuading and collaborating with them to reduce their emissions; and in which (b) the programme of reducing carbon emissions is widely accepted as a proper objective of public policy, playing a central part in shaping the social norms and values of the day.

'The most demanding co-ordinated objective ever undertaken by western society'
The claim, which needs to be rigorously evaluated, is that the model of DTQs does possess these properties of 'collective motivation' for the following two reasons:

(1) By influencing other agents to reduce their demand, agents are helping to keep their own costs down.

The fixed quantity means that it is obvious to everyone that excessive consumption by one person means that there is less for everyone else. This means that other people's carbon consumption becomes my business: there are the beginnings, here, of a structure in which people will want to try to influence each other's behaviour.

It is in the interests of all agents who must buy carbon units on the market that their price should be low. The lower the demand for units, the lower the price. If the public believes that - with sufficient effort to reduce demand for carbon units - they could have an effect in keeping prices low, then this creates an incentive to co-operate with each other in doing so. If public opinion is sufficiently engaged in the issue, then there will be an expectation that the price of carbon units is, to some extent at least, responsive to collective public effort to plan reductions in their demand. There will also be a recognition that, in the absence of any such effort to reduce demand, carbon prices could rise to levels which were likely to be unacceptable, and that public pressure, supported by the government and media, to cut back on carbon dependency, is therefore justified and effective.

It is also, indirectly, in the interests of all players who can sell carbon units on the market - ie sell part or all of their unused entitlement - that their price should be low, despite the advantage of a high price at the margin. The lower the price of units, the lower the energy costs of national product. Since the average consumer will spend a greater amount on the cost of carbon units embodied in goods and service than the maximum amount that he or she can receive for the sale of units, he or she stands to lose more from the higher costs of output than he or she can gain from the revenue from unit sales.

Carbon units also lend themselves to practical local collective initiatives for action, since carbon units can be locally pooled as a fund, providing the basis for co-ordinated local action for renewables and conservation, funded in part by sales of unused units (or, at least, by savings relative to the carbon units that would be required if households were operating in isolation).
(2) The system will provide the framework for establishing carbon reduction as a proper objective of public policy, playing a central part in aligning social norms and values with individual responsibility for reducing carbon emissions.

'All loving to hate the Carbon Policy Committee'
The DTQ model places all actors 'in the same boat'; households, industry and the government itself have to work together, facing the same Carbon Budget, trading on the same market for carbon units (and all loving to hate the Carbon Policy Committee which sets the budget to which they all have to adapt). All actors are given a literal stake, in the form of property rights, in the system. There will be a sense that one's own efforts at conservation will not be wasted by the energy profligacy of others, but matched by complementary action in pursuit of a common goal. That is, there will be a sense that the new carbon arrangements are founded on justice.

In all these ways, the proposal connects with recent theoretical work that has explored the evolution of systems of collective interaction, in which norms, incentives and institutions are mutually reinforcing and self-policing. (Carling, 1991, 1997, 1998; Skyrms, 1996).

Advantages of DTQs
Effectiveness:
It is claimed that DTQs are an effective instrument, first, because they are set up within a framework of collective motivation, integrating private preferences with public goals, and integrating the programme of reducing carbon emissions within the set of social values and priorities for which there is a broadly-based support and commitment.

Secondly, they provide a long term signal, giving the economy clear information about the quantity of fossil fuel that will be available for all users in the future. The short term elasticity of demand for fossil fuels is low; the long-term elasticity of demand is high. DTQs build a framework in which the economy can take action now in the knowledge that this is the only way in which it can cope with the reduced supply conditions which - it knows for certain - will exist in the future. Such a signal is only possible if it is tolerant to sharp and unpredictable changes in the price of fuel: the Carbon Budget builds price flexibility into the model of DTQs.

Equity:

Equity is a necessary condition for political acceptability. Unless the instrument used is clearly equitable, then there will be no public and political acceptance for it and the task of reducing carbon emissions on a significant scale within a democratic society is likely to prove impossible.

The instrument gives consumers themselves a central role in the reduction of carbon emissions. It does not act over their heads; it involves them. It is therefore transparent: it is clear to consumers how the scheme works and how prices are set. There is no sense that there is some anonymous government body setting the prices for them. It is citizens' own scheme; there is a sense of justice.

Efficiency:

If the claim that DTQs effectively stimulate collective motivation is correct, there are positive efficiency implications: for any given quantity of carbon emissions, the fuel price (ie fuel + quota/tax/other) is likely to be lower under a DTQ regime than under alternative regimes. Cost savings in the transition to a low-carbon regime would have major economic advantages, with positive benefits for real incomes and employment.

Potential objections to DTQs
At first sight, it might appear that DTQs have disadvantages under each of the three criteria, as well as the advantages outlined above. These objections, along with the answers indicated below, will be tested in the research programme.
Effectiveness:

If no practical efforts were made by households and industry to reduce their demand in line with the Carbon Budget, then prices of carbon units would rise rapidly. The frustration of demand, the hardship stories and the political fallout could be so powerful that the government's nerve might crack; at worst, the scheme itself could be abandoned. And yet every other instrument including carbon taxes would be vulnerable to a failure to respond to the challenge of reducing carbon emissions. DTQs, with their combination of the collective motivation and the clear long term quantity signal with flexible prices, are specifically designed for the task of reducing emissions rapidly and decisively.

'The concept is far simpler than the rationing systems which were well-established in Europe'
DTQs would require setup costs and infrastructure, which need to be researched before a definitive judgement on their feasibility can be sustained. However, most of the technology and infrastructure already exist and are in place; and the concept is far simpler than the rationing systems which were well-established in Europe before the advent of electronic information technology.

Equity:

Neither DTQs nor any other instrument can claim to be wholly equitable. For example, people who live in remote areas would (relative to city-dwellers) have the disadvantage of having further to travel to work, and people with low incomes would have the disadvantage of being less able to buy top-up carbon units on the market than those on high incomes.

'People with low incomes would have the disadvantage of being less able to buy top-up carbon units'
And yet, there are compensations: people in rural areas would have the advantage of being able to generate much of their electricity, and (in a scheme in which collective motivation had been highly developed) heavy users would have the disadvantage that their conspicuous consumption will expose them to public rebuke and ridicule. There may, therefore, be equity anomalies in the scheme, but it is part of the job of any scheme to identify such anomalies and to provide a framework in which they can be resolved.

Efficiency:

Volatility in the price of carbon units would be inefficient, and it has been argued that there would be greater short-term price instability in a quota regime than under carbon taxes (Weitzman, 1974; Pizer, 1998). There has to be a presumption that this is true, since carbon taxes are fixed for stated periods, and quota prices respond to day-to-day shifts in the market. However, the assumption of a difference between the volatility of prices under carbon taxes and under DTQs may be exaggerated or mistaken. This is for two reasons:

First, the price of quota would be governed (ceteris paribus) by expected long term demand, relative to the Carbon Budget, with current unit prices being primarily a function of long-term (ten-year) price forecasts, discounted back to the present. If quota prices varied in response to significant changes in demand from period to period, then carbon taxes, too, would have to vary, unless they were to abandon the quantity targets for which they had been set. In fact, these variations would have to be even greater if, as claimed, the tax signal were less efficient than the quantity signal.

Secondly, dropping the ceteris paribus assumption, we should note the recent warning by the International Energy Agency of the likelihood of sharp volatilities in oil prices starting early this century (Bentley, 1998; Campbell, 1998, 1999; Fleming, 1999; Hatfield, 1997; International Energy Agency, 1998; Textor, 1999). Rapidly-rising oil prices would transform the Kyoto agenda and would require decisive national action to address this new problem. In the context of DTQs, higher oil prices would reduce the demand for quota and so reduce quota prices, and this would tend to have a stabilising effect on net (fuel + quota) prices. Since quota prices would adjust faster than carbon taxes there is the possibility of net prices being, in fact, more stable under a quota regime than under taxes. Meanwhile, high fuel prices would make the imposition of yet higher prices by carbon taxes redundant and inappropriate. The problem would have developed beyond the scope of pricing signals and would require a different architecture, consisting of direct, but fair, action on quantity.

Conclusion
The task of achieving a massive decarbonisation of society by a reduction in the market economy's dependency on fossil fuels should not be underestimated. It will require the substitution of the market's central technology and energy resource and it will require solutions to be developed at speed. Although it is often assumed that alternatives can be achieved by efficiency gains and technological shifts, this view fails to acknowledge the scale of the task (di Fazio, 1998).
What will be required is an energy revolution which penetrates every vein and tissue of the economy, changing behaviour, land-use patterns and expectations, and bringing every individual along willingly in the collective task of adapting to a world almost without fossil fuels.

'An instrument which engages every individual with the personal challenge to achieve the required deep reductions'
Taxation is an indirect instrument which assumes business-as-usual, a robust economy, a widely-distributed ability to pay taxes and a steady and strong supply of oil. These assumptions may not all apply in the present case. An instrument is needed which directly reduces carbon emissions, which maintains price-flexibility and builds-in long term quantity signals to allow time for major adjustments, which achieves a fair distribution of access to fuel while achieving a rapid reduction in the total quantity, and which engages every individual with the personal challenge to achieve the required deep reductions in carbon dependency.

The hypothesis is that DTQs offer these advantages. The concept is now ready for the next stage: development and evaluation.

References
Bentley, Roger (1999), Oil: The Next Ten Years. Department of Cybernetics, University of Reading, (DP).
Campbell, Colin (1998), The Coming Oil Crisis. Brentwood, UK: Multi Science.

Campbell., C. J. (1999), 'Oil Reserves and Depletion'. PESGB (Petroleum Exploration Society of Great Britain) Newsletter, March, pp 87-90.

Carling, Alan (1991) Social Division London: Verso)

Carling, Alan (1997) 'Rational Vervet: Social Evolution and the Origins of Human Norms and Institutions', Imprints, 2:2, 157-73.

Carling, Alan (1998) 'Social Selection and Design' Proceedings of the Warwick/LSE Complexity Conference, 112-23.

Commission of the European Communities, COM (98)353, 'Climate Change - Towards an EU Post-Kyoto Strategy'.

di Fazio (1998), 'So you reckon that efficiency will save us? Well, think again', Town & Country Planning, 67, 9, October, pp 293-295.

Fleming, David (1996), 'Stopping the Traffic', Country Life, vol 140, 19; 9 May, pp 62-65).

Fleming, David (1997), 'Tradable Quotas: Using Information Technology to Cap National Carbon Emissions.' European Environment, 7, 5, Sept-Oct. pp 139-148.

Fleming, David (1998a), 'Domestic Tradable Quotas as an Instrument to Reduce Carbon Dioxide Emissions', European Commission, Proceedings, Workshop 1-2 July, EUR 18451.

Fleming, David (1998b), 'Your Climate Needs You', Town & Country Planning, 67, 9, October, pp 302-304).

Fleming, David (1999), 'Decoding a Message about the Market for Oil', European Environment, 9, 3, May-June.

Hatfield, C. B. (1997), 'Oil back on the global agenda', Nature, Vol. 387 8 May.

International Energy Agency (1998), World Energy Outlook, Paris: IEA/OECD.

Pizer, William A. (1998) 'Prices vs Quantities Revisited: The Case of Climate Change'. Washington: Resources for the Future. Discussion paper 98-02.

Skyrms, Brian (1996) Evolution of the Social Contract Cambridge: CUP)

Textor, Donald (1999), 'Oil: An Update on Recently Announced Oil Production Cuts', Goldman Sachs US Research, New York: Goldman Sachs.

Weitzman, Martin L. (1974), 'Prices vs Quantities', Review of Economic Studies, 41, 4, pp 477-491.

Contacts
Richard Starkey, CCEM, HUBS, University of Huddersfield, Huddersfield HD1 3DH, UK (tel: 01484 472946; fax: 01484 472633; e-mail: R.STARKEY@hud.ac.uk).

Dr David Fleming, The Lean Economy Initiative, 104 South Hill Park, London NW3 2SN, UK (e-mail: ellerdale@gn.apc.org or ellerdale@gn.apc.org).

Aubrey Meyer, The Global Commons Institute, 42 Windsor Road, London NW2 5DS, UK (tel 020 8451 0778; fax 020 8830 2366; e-mail: aubrey@gci.org.uk: web: www.gci.org.uk).

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>An electronic scheme for per capita carbon quotas! > >Adapted from a paper entitled 'Domestic Tradable >Quotas (DTQs)' by Richard Starkey and David Fleming. >In essence, the idea is that every citizen would be >given, free, an equal number of carbon units to cover >domestic fuel needs, including private transport; >businesses and other organisations would have to buy >their units from government. Those who used less than >their entitlement would sell their surplus units to >others who needed more. The scheme would embody an >obligation to pay for using the capacity of the >environment to absorb carbon emissions and a right for >every citizen to share in its value. It would >complement at national level the international >contraction and convergence model for sharing carbon >emission rights proposed by the Global Commons >Institute. Unlike previously proposed rationing >schemes, this is an electronic scheme, not one based >on paper coupons. > > >'An obligation to pay for using the capacity of the >environment to absorb carbon emissions' > >Introduction >In the first half of the 21st century there will be a >virtual phase-out of dependency on fossil fuels. This >will be in response to the need to reduce carbon >emissions sufficiently to stabilise the climate and it >may be in the setting of supply constraints affecting >crude oil and gas. An economic instrument is therefore >required which will reduce demand for fossil fuels >without causing profound economic damage and which >will distribute reduced supply without injustice and >intolerable hardship. An efficient solution to this is >a model which allocates emission rights by a >combination of entitlement and tender, and maintains a >secondary market which is open to all. An instrument >designed to achieve this - Domestic Tradable Quotas - >has been published (Fleming 1996, 1997, 1998b); it was >the subject of an EC DG XII workshop in Brussels in >1998 (Fleming 1998a) and it is outlined below. > >A summary of Domestic Tradable Quotas >DTQs are an economic instrument to enable national >economies to reduce their carbon emissions. They are >designed for application within the economy; they are >to be distinguished from international instruments >designed for trading between nations. They allow >national authorities to take control over the rate at >which fossil fuel consumption is reduced, while >allocating the available resource fairly and >maintaining price flexibility so that the economy can >distribute it efficiently. The nation implementing the >scheme sets an overall Carbon Budget that is reduced >over time. The 'carbon units' making up this budget >are issued to adults and organisations. All adults >receive an equal and unconditional entitlement of >carbon units; organisations acquire the units they >need from a tender, a form of auction modelled on the >issue of government debt. There is a national market >in carbon units in which low users can sell their >surplus and higher users can buy more. >It is a hands-off scheme, with virtually all >transactions being carried out electronically, using >the technologies and systems already in place for >direct debit systems and credit cards. The scheme has >been designed to function efficiently not only for >people who participate in it but for those who do not >participate - eg for overseas visitors, for the infirm >and for those who do refuse to co-operate. The >advantages claimed for the scheme are that it is >effective, equitable and efficient. > > >How the quota market works >The numèraire of the model is the 'carbon unit', >defined as one kilogram of carbon dioxide (or >CO2-equivalents in the global warming potential of >nitrous oxide and methane), and estimates of the >carbon units associated with the main fuels and >electricity are set out below: > >Translating emissions into fuels > >Estimates of the global warming potential (GWP) > >of gases released by production and combustion of >fuels. > >1 kg carbon dioxide = 1 carbon unit. > >The GWP of methane and nitrous oxide is measured > >as carbon dioxide equivalents. > >Fuel Carbon units > >Natural gas 0.2 per kWh > >Petrol 2.3 per litre > >Diesel 2.4 per litre > >Coal 2.9 per kg > >Grid electricity (night) 0.6 per kWh > >Grid electricity (day) 0.7 per kWh >For the domestic market, the start of the sequence is >the Register; this is a computer database which holds >individual carbon accounts for all participants in the >scheme. The Register is based on the model of credit >cards and collective investments such as unit trusts >and investment funds. > > >'The share of emissions accounted for by households is >issued to all adults on an equal per capita basis' >There is a rolling annual issue of carbon units - with >an initial issue for one year, topped up each week. >Carbon units are issued into the market in two ways. >First, there is the Entitlement for all adults. The >share of emissions accounted for by households (about >45 per cent in the UK) is issued to all adults on an >equal per capita basis. (Children's carbon usage would >be provided for in the existing system of child >allowances.) The remaining share (55 per cent) is >issued through the tender to commercial and industrial >companies and to the public sector, using the system >already established for the tender of government debt. >It is distributed by the banks to organisations using >direct credit (for the units) and direct debit systems >(for the payments). > >When they make purchases of fuel or energy, consumers >and firms surrender quota to the energy retailer, >accessing their quota account by (for instance) using >their QuotaCard or by direct debit. The retailer then >surrenders carbon units when buying energy from the >wholesaler. Finally, the primary energy provider >surrenders units back to the Register (QuotaCo) when >the company pumps, mines or imports fuel. This closes >the loop. > >Some fuel purchasers will not have any carbon units to >offer at point of sale - for example, foreign >visitors, people who have forgotten their card, people >who have used all their quota and small firms and >traders that do not bother to make regular purchases >of units through their banks. All these must buy quota >at the time of purchase, in order to surrender it. >Individuals who cash in all their quota when they >receive it and who then have to buy quota to cover >their fuel purchases pay a cost penalty for this: they >have to buy carbon units at the market's offer price >and surrender them at the (lower) bid price - and the >difference between these two prices is the cost of >their non-participation. > > >'Purchases and sales of quota are made through ATMs, >over the counter or by direct debit arrangements' >Carbon units can be bought and sold on the secondary >market. People who use less than their entitlement can >earn a revenue from the sale of their surplus, and >people who use more must buy their additional >requirement. The government receives a revenue from >the tender. Trading revenues are earned by the >market-makers - quoting bid and offer prices. >Purchases and sales of quota are made through >automatic teller machines (ATMs), over the counter of >banks and post offices and energy retailers, or by >direct debit arrangements with energy suppliers. > > >The Carbon Budget >The 20-year Carbon Budget, which determines the number >of units issued, is defined over three periods: >Period 1 is a five-year binding commitment, which >cannot be revised; this is a requirement for an >orderly market. > >Period 2, the five-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 ten-year forecast, which is indicative >only. > >The Carbon Budget is at the heart of the scheme. >First, it guarantees the targets for reduction in >carbon emissions. Secondly, it provides a long term >quantity signal. Serious reductions in carbon >emissions will take time; people will therefore need >to take action in the light of their knowledge of what >quantity of carbon units will be available in the >future. However, it is very hard to issue a long-term >signal with a tax (and finance ministers refuse to do >so) for reasons such as these: > > >Economic cycles would make a fixed price inappropriate >- too high in a downturn, too low in an upturn. > >It is impossible to forecast with confidence how the >market will react to a future price, especially to a >price which will apply in ten years time - not least >because the economy's behaviour will evolve as it >learns to cope with changed conditions. >For DTQs, with their fixed quantity and flexible >prices, none of this is a problem. The Carbon Budget >provides a long term signal; there is an automatic >price adjustment; there are automatic rewards (and >punishments) in the form of lower (or higher) prices >in response to how well (or badly) the economy does in >reducing carbon emissions. > > >'The Carbon Budget would be set by an independent body >- to provide some protection from the political >process' >The Carbon Budget would be set by an independent body >- like the UK's Monetary Policy Committee. This would >relieve the government from having to defend the >Carbon Budget itself; it would provide some protection >for the Carbon Budget from the political process and >it would allow governments to concentrate fully on >helping the economy to achieve the targets which the >independent body had set. Since the scheme is >restricted to fuels, the Carbon Budget can focus on >the source of carbon emissions over which households >and firms have most direct control; other sources, >such as waste tips, agriculture and sinks such as >plantations, would fall within the remit of different >programmes and instruments. > > >Carbon reduction as a collective programme >The reduction of dependency on fossil fuels on the >scale indicated by the science may well rank as the >most demanding co-ordinated objective ever undertaken >by western society. This is not an agenda that can be >fulfilled simply by giving individuals inducements to >reduce their own fossil fuel dependency; it will have >to be a co-operative programme with the objective of >carbon reduction being adopted as the major priority >for public action. A motivational structure is >therefore required in which (a) it is in the >individual's interests not only to reduce his or her >own carbon emissions but also to co-operate with >others in encouraging, persuading and collaborating >with them to reduce their emissions; and in which (b) >the programme of reducing carbon emissions is widely >accepted as a proper objective of public policy, >playing a central part in shaping the social norms and >values of the day. > >'The most demanding co-ordinated objective ever >undertaken by western society' >The claim, which needs to be rigorously evaluated, is >that the model of DTQs does possess these properties >of 'collective motivation' for the following two >reasons: > >(1) By influencing other agents to reduce their >demand, agents are helping to keep their own costs >down. > > >The fixed quantity means that it is obvious to >everyone that excessive consumption by one person >means that there is less for everyone else. This means >that other people's carbon consumption becomes my >business: there are the beginnings, here, of a >structure in which people will want to try to >influence each other's behaviour. > >It is in the interests of all agents who must buy >carbon units on the market that their price should be >low. The lower the demand for units, the lower the >price. If the public believes that - with sufficient >effort to reduce demand for carbon units - they could >have an effect in keeping prices low, then this >creates an incentive to co-operate with each other in >doing so. If public opinion is sufficiently engaged in >the issue, then there will be an expectation that the >price of carbon units is, to some extent at least, >responsive to collective public effort to plan >reductions in their demand. There will also be a >recognition that, in the absence of any such effort to >reduce demand, carbon prices could rise to levels >which were likely to be unacceptable, and that public >pressure, supported by the government and media, to >cut back on carbon dependency, is therefore justified >and effective. > >It is also, indirectly, in the interests of all >players who can sell carbon units on the market - ie >sell part or all of their unused entitlement - that >their price should be low, despite the advantage of a >high price at the margin. The lower the price of >units, the lower the energy costs of national product. >Since the average consumer will spend a greater amount >on the cost of carbon units embodied in goods and >service than the maximum amount that he or she can >receive for the sale of units, he or she stands to >lose more from the higher costs of output than he or >she can gain from the revenue from unit sales. > >Carbon units also lend themselves to practical local >collective initiatives for action, since carbon units >can be locally pooled as a fund, providing the basis >for co-ordinated local action for renewables and >conservation, funded in part by sales of unused units >(or, at least, by savings relative to the carbon units >that would be required if households were operating in >isolation). >(2) The system will provide the framework for >establishing carbon reduction as a proper objective of >public policy, playing a central part in aligning >social norms and values with individual responsibility >for reducing carbon emissions. > > >'All loving to hate the Carbon Policy Committee' >The DTQ model places all actors 'in the same boat'; >households, industry and the government itself have to >work together, facing the same Carbon Budget, trading >on the same market for carbon units (and all loving to >hate the Carbon Policy Committee which sets the budget >to which they all have to adapt). All actors are given >a literal stake, in the form of property rights, in >the system. There will be a sense that one's own >efforts at conservation will not be wasted by the >energy profligacy of others, but matched by >complementary action in pursuit of a common goal. That >is, there will be a sense that the new carbon >arrangements are founded on justice. > >In all these ways, the proposal connects with recent >theoretical work that has explored the evolution of >systems of collective interaction, in which norms, >incentives and institutions are mutually reinforcing >and self-policing. (Carling, 1991, 1997, 1998; Skyrms, >1996). > > >Advantages of DTQs >Effectiveness: >It is claimed that DTQs are an effective instrument, >first, because they are set up within a framework of >collective motivation, integrating private preferences >with public goals, and integrating the programme of >reducing carbon emissions within the set of social >values and priorities for which there is a >broadly-based support and commitment. > >Secondly, they provide a long term signal, giving the >economy clear information about the quantity of fossil >fuel that will be available for all users in the >future. The short term elasticity of demand for fossil >fuels is low; the long-term elasticity of demand is >high. DTQs build a framework in which the economy can >take action now in the knowledge that this is the only >way in which it can cope with the reduced supply >conditions which - it knows for certain - will exist >in the future. Such a signal is only possible if it is >tolerant to sharp and unpredictable changes in the >price of fuel: the Carbon Budget builds price >flexibility into the model of DTQs. > >Equity: > >Equity is a necessary condition for political >acceptability. Unless the instrument used is clearly >equitable, then there will be no public and political >acceptance for it and the task of reducing carbon >emissions on a significant scale within a democratic >society is likely to prove impossible. > >The instrument gives consumers themselves a central >role in the reduction of carbon emissions. It does not >act over their heads; it involves them. It is >therefore transparent: it is clear to consumers how >the scheme works and how prices are set. There is no >sense that there is some anonymous government body >setting the prices for them. It is citizens' own >scheme; there is a sense of justice. > >Efficiency: > >If the claim that DTQs effectively stimulate >collective motivation is correct, there are positive >efficiency implications: for any given quantity of >carbon emissions, the fuel price (ie fuel + >quota/tax/other) is likely to be lower under a DTQ >regime than under alternative regimes. Cost savings in >the transition to a low-carbon regime would have major >economic advantages, with positive benefits for real >incomes and employment. > > >Potential objections to DTQs >At first sight, it might appear that DTQs have >disadvantages under each of the three criteria, as >well as the advantages outlined above. These >objections, along with the answers indicated below, >will be tested in the research programme. >Effectiveness: > >If no practical efforts were made by households and >industry to reduce their demand in line with the >Carbon Budget, then prices of carbon units would rise >rapidly. The frustration of demand, the hardship >stories and the political fallout could be so powerful >that the government's nerve might crack; at worst, the >scheme itself could be abandoned. And yet every other >instrument including carbon taxes would be vulnerable >to a failure to respond to the challenge of reducing >carbon emissions. DTQs, with their combination of the >collective motivation and the clear long term quantity >signal with flexible prices, are specifically designed >for the task of reducing emissions rapidly and >decisively. > > >'The concept is far simpler than the rationing systems >which were well-established in Europe' >DTQs would require setup costs and infrastructure, >which need to be researched before a definitive >judgement on their feasibility can be sustained. >However, most of the technology and infrastructure >already exist and are in place; and the concept is far >simpler than the rationing systems which were >well-established in Europe before the advent of >electronic information technology. > >Equity: > >Neither DTQs nor any other instrument can claim to be >wholly equitable. For example, people who live in >remote areas would (relative to city-dwellers) have >the disadvantage of having further to travel to work, >and people with low incomes would have the >disadvantage of being less able to buy top-up carbon >units on the market than those on high incomes. > > >'People with low incomes would have the disadvantage >of being less able to buy top-up carbon units' >And yet, there are compensations: people in rural >areas would have the advantage of being able to >generate much of their electricity, and (in a scheme >in which collective motivation had been highly >developed) heavy users would have the disadvantage >that their conspicuous consumption will expose them to >public rebuke and ridicule. There may, therefore, be >equity anomalies in the scheme, but it is part of the >job of any scheme to identify such anomalies and to >provide a framework in which they can be resolved. > >Efficiency: > >Volatility in the price of carbon units would be >inefficient, and it has been argued that there would >be greater short-term price instability in a quota >regime than under carbon taxes (Weitzman, 1974; Pizer, >1998). There has to be a presumption that this is >true, since carbon taxes are fixed for stated periods, >and quota prices respond to day-to-day shifts in the >market. However, the assumption of a difference >between the volatility of prices under carbon taxes >and under DTQs may be exaggerated or mistaken. This is >for two reasons: > >First, the price of quota would be governed (ceteris >paribus) by expected long term demand, relative to the >Carbon Budget, with current unit prices being >primarily a function of long-term (ten-year) price >forecasts, discounted back to the present. If quota >prices varied in response to significant changes in >demand from period to period, then carbon taxes, too, >would have to vary, unless they were to abandon the >quantity targets for which they had been set. In fact, >these variations would have to be even greater if, as >claimed, the tax signal were less efficient than the >quantity signal. > >Secondly, dropping the ceteris paribus assumption, we >should note the recent warning by the International >Energy Agency of the likelihood of sharp volatilities >in oil prices starting early this century (Bentley, >1998; Campbell, 1998, 1999; Fleming, 1999; Hatfield, >1997; International Energy Agency, 1998; Textor, >1999). Rapidly-rising oil prices would transform the >Kyoto agenda and would require decisive national >action to address this new problem. In the context of >DTQs, higher oil prices would reduce the demand for >quota and so reduce quota prices, and this would tend >to have a stabilising effect on net (fuel + quota) >prices. Since quota prices would adjust faster than >carbon taxes there is the possibility of net prices >being, in fact, more stable under a quota regime than >under taxes. Meanwhile, high fuel prices would make >the imposition of yet higher prices by carbon taxes >redundant and inappropriate. The problem would have >developed beyond the scope of pricing signals and >would require a different architecture, consisting of >direct, but fair, action on quantity. > > >Conclusion >The task of achieving a massive decarbonisation of >society by a reduction in the market economy's >dependency on fossil fuels should not be >underestimated. It will require the substitution of >the market's central technology and energy resource >and it will require solutions to be developed at >speed. Although it is often assumed that alternatives >can be achieved by efficiency gains and technological >shifts, this view fails to acknowledge the scale of >the task (di Fazio, 1998). >What will be required is an energy revolution which >penetrates every vein and tissue of the economy, >changing behaviour, land-use patterns and >expectations, and bringing every individual along >willingly in the collective task of adapting to a >world almost without fossil fuels. > > >'An instrument which engages every individual with the >personal challenge to achieve the required deep >reductions' >Taxation is an indirect instrument which assumes >business-as-usual, a robust economy, a >widely-distributed ability to pay taxes and a steady >and strong supply of oil. These assumptions may not >all apply in the present case. An instrument is needed >which directly reduces carbon emissions, which >maintains price-flexibility and builds-in long term >quantity signals to allow time for major adjustments, >which achieves a fair distribution of access to fuel >while achieving a rapid reduction in the total >quantity, and which engages every individual with the >personal challenge to achieve the required deep >reductions in carbon dependency. > >The hypothesis is that DTQs offer these advantages. >The concept is now ready for the next stage: >development and evaluation. > > >References >Bentley, Roger (1999), Oil: The Next Ten Years. >Department of Cybernetics, University of Reading, (DP). >Campbell, Colin (1998), The Coming Oil Crisis. >Brentwood, UK: Multi Science. > >Campbell., C. J. (1999), 'Oil Reserves and Depletion'. >PESGB (Petroleum Exploration Society of Great Britain) >Newsletter, March, pp 87-90. > >Carling, Alan (1991) Social Division London: Verso) > >Carling, Alan (1997) 'Rational Vervet: Social >Evolution and the Origins of Human Norms and >Institutions', Imprints, 2:2, 157-73. > >Carling, Alan (1998) 'Social Selection and Design' >Proceedings of the Warwick/LSE Complexity Conference, >112-23. > >Commission of the European Communities, COM (98)353, >'Climate Change - Towards an EU Post-Kyoto Strategy'. > >di Fazio (1998), 'So you reckon that efficiency will >save us? Well, think again', Town & Country Planning, >67, 9, October, pp 293-295. > >Fleming, David (1996), 'Stopping the Traffic', Country >Life, vol 140, 19; 9 May, pp 62-65). > >Fleming, David (1997), 'Tradable Quotas: Using >Information Technology to Cap National Carbon >Emissions.' European Environment, 7, 5, Sept-Oct. pp >139-148. > >Fleming, David (1998a), 'Domestic Tradable Quotas as >an Instrument to Reduce Carbon Dioxide Emissions', >European Commission, Proceedings, Workshop 1-2 July, >EUR 18451. > >Fleming, David (1998b), 'Your Climate Needs You', Town >& Country Planning, 67, 9, October, pp 302-304). > >Fleming, David (1999), 'Decoding a Message about the >Market for Oil', European Environment, 9, 3, May-June. > >Hatfield, C. B. (1997), 'Oil back on the global >agenda', Nature, Vol. 387 8 May. > >International Energy Agency (1998), World Energy >Outlook, Paris: IEA/OECD. > >Pizer, William A. (1998) 'Prices vs Quantities >Revisited: The Case of Climate Change'. Washington: >Resources for the Future. Discussion paper 98-02. > >Skyrms, Brian (1996) Evolution of the Social Contract >Cambridge: CUP) > >Textor, Donald (1999), 'Oil: An Update on Recently >Announced Oil Production Cuts', Goldman Sachs US >Research, New York: Goldman Sachs. > >Weitzman, Martin L. (1974), 'Prices vs Quantities', >Review of Economic Studies, 41, 4, pp 477-491. > > >Contacts >Richard Starkey, CCEM, HUBS, University of >Huddersfield, Huddersfield HD1 3DH, UK (tel: 01484 >472946; fax: 01484 472633; e-mail: >R.STARKEY@hud.ac.uk). > >Dr David Fleming, The Lean Economy Initiative, 104 >South Hill Park, London NW3 2SN, UK (e-mail: >ellerdale@gn.apc.org or ellerdale@gn.apc.org). > >Aubrey Meyer, The Global Commons Institute, 42 Windsor >Road, London NW2 5DS, UK (tel 020 8451 0778; fax 020 >8830 2366; e-mail: aubrey@gci.org.uk: web: >www.gci.org.uk).
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