Resurgence

CAP AND SHARE
A solution for climate change and poverty.

IT IS WIDELY accepted that it would be catastrophic if humanity’s greenhouse-gas emissions caused the Earth’s average temperature to rise more than 2°C above its preindustrial level. As about a third of that temperature rise has already happened and another third is inevitable because of the time lag between the emissions going into the air and the warming they cause taking place, most people agree that large emissions reductions need to start now. So the question for the world is how can we get national market economies, each of which is competing fiercely with all the others, to reduce their greenhouse-gas emissions drastically enough, and quickly enough, to avert disaster? The only way that I can see is for an international organisation to set an enforceable global emissions quota, and then distribute shares of that quota on an agreed, equitable basis. (A dog runs from a forest fire on the outskirts of Viana do Castelo city, in northern Portugal PHOTOGRAPH: MIGUEL VIDAL/REUTERS)

The emissions trading system (ETS), which began operating on an experimental basis among twenty-five European nations in January 2005, can be seen as a prototype for a world emissions reduction system on these lines. Announced as a “cornerstone” of the EU’s attempt to meet its target under the Kyoto Protocol, it uses the ‘cap and trade’ method. In other words, it has placed a ‘cap’ or limit on the overall emissions from the fossil fuels burned by all the EU’s electricity generators and its cement, glass, brick, lime, paper, steel and aluminium producers, plus some big heating plants, for the three-year period 2005–7. The allocations for its second phase, from 2008 to 2012, are still being worked out. It is hoped aviation emissions will be brought into the scheme from 2010 onwards.

The 4,500 companies currently affected by the EU system are each given permits for their share of the
overall emissions quota which they are allowed to buy and sell amongst themselves. The advantage of allowing this trading is that, if the quota is inadequate to cover all the emissions the firms would like to make – and it has to be inadequate if it is to be effective in getting their emissions down – some firms will find it easier and cheaper to cut their emissions than others. These firms will cut all the emissions they can and make money by selling their surplus quota to firms that find it more costly to cut back. It will therefore be the profit motive rather than compulsion that delivers the emissions cuts, and it will do so in what is theoretically the most economically efficient way.

Unfortunately, there are three major problems with the ETS design. One is that the companies that are given, or have to buy, enough permits to cover their emissions are in the midstream of the flow of energy through the EU economy.This means that their 11,500 installations all have to be assessed and audited. This takes a lot of legal, accounting and administrative resources, and yet the ETS covers only
45% of the EU’s emissions. It would have been much better and simpler to have imposed the system right upstream, at the point at which carbon fuels enter the EU economy. This would have meant that the only companies needing to be monitored would be coal, gas and oil producers within the EU and those importing these fuels, perhaps 200 firms in all. However, according to Peter Zapfel of the European Commission, this option was not taken up because the Commission did not want to risk messing up its entire energy market if a relatively untried control system broke down. It had only the US experience with sulphur dioxide trading to go on when its system was being planned and so it decided to limit the experiment to electricity, which is not Traded internationally, plus a few types of business that are.

The second problem with the design is that nobody thought to ask whose right it is to emit greenhouse gases. Does the right belong to the firms currently releasing them? To the member states in which those firms have operating units? Or do they belong on an equal per capita basis to every resident of the EU? Feasta, the international sustainability network through which I work, contends that the third answer is correct. We think that emissions permits should be distributed annually, free of cost, to individuals rather than to major polluting companies. Each year every EU resident should get an equal share of whatever is the total amount of greenhouse gases the EU has decided to limit itself to emitting in that year in line with its international obligations. When we received our permits we would take them to a bank or post office and sell them, just as if they were foreign exchange, getting the going rate on the day. The banks would then assemble the permits and sell them on to the 200 fossilfuel importers and producers who, of course, would need enough of them to cover the emissions from the fuels they were introducing to the EU economy. Such a system would be very simple to administer. It would also be very popular, thanks to the money we would all get when we sold our permits.

The third design flaw with the ETS is that although almost all the emissions permits are being given to the big polluting companies, the companies are increasing their product prices and charging their customers for them just as if they had bought them on the trading market. This is making the firms involved massive windfall profits. In 2006 electricity prices moved in step with changes in the price of emissions permits, as generators passed the ‘cost’ on. The ‘pass-through’ proportion in Britain (that is, the fraction of the current market cost of a permit that the generator is able to collect in the price) is 91%. The politicians who approved the design of the ETS had not realised that this would happen. Instead, they thought that by giving the permits free, the cost of electricity would not go up.

THESE DESIGN FLAWS threaten to cause the ETS to be scrapped.The present ETS design is not robust enough to be an effective way of making cutbacks sufficiently deep to cope with the climate crisis whether at a European or world level. There are two reasons for this lack of robustness. One is that the ETS doesn’t cover much beyond power production at present so there is a limited pool of other industries’ permits for the power companies to draw on if the electricity sector needs to increase
its coal usage. This makes high power prices much more likely. Introducing an ETS that covered all the EU’s emissions would spread the load and help solve that. The other reason for the lack of robustness is that there are no compensation arrangements built into the ETS for people living in fuel poverty. As a result, the public outcry over older people dying of hypothermia as a result of high energy prices at a time when power companies were making record profits from the sale of their free permits would be huge. It would certainly be many times greater than it would be if the Feasta proposal were adopted and everyone, older people included, were receiving money from the sale of their permits, especially as, under this arrangement, the higher the power price went, the greater an offset payment everyone would receive. Indeed, those consuming less energy than the EU average would get more money from the sale of their permits than the extra they would have to pay because the price of energy had gone up.

The scrapping of the ETS would be a calamity because it could mean that the emissions trading baby was thrown out with the bad design bathwater and could not be retrieved for at least a decade, thus denying the world the use of the most effective market mechanism available for controlling greenhouse-gas emissions. Accordingly, Feasta has launched a campaign, ARREST, for A Real Review of EmissionS Trading, which we hope will bring the whole issue into the public arena. We want to force the European Commission to admit that the present scheme is flawed and to extend a review process it has already announced to cover the re-examination of the whole basis on which permits are distributed and the point in the flow of energy through the economy at which they are applied. Feasta’s aim is to turn the ETS into a working model of a worldwide system in which everyone on the planet gets an annual allocation of their share of the amount of greenhouse gases to be emitted that year. If carbon emissions
are to be distributed fairly then every adult has to receive his or her ration personally. Such a system would not just provide a solution to climate change. It could also provide an income for the poorest people in the world.

Visit www.en.euemissions.com for the latest news and for NGOs and individuals to sign up.Two related pamphlets can be downloaded from the Feasta site: The Great Emissions Rights Give-Away www.feasta.org/documents/energy/emissions2006.pdf and Energy Rationing & the Oil Price Crisis www.feasta.org/documents/energy/November2005.pdf
Richard Douthwaite is an economist, writer and journalist. His most recent book is Short Circuit.

Article Courtesy of Resurgence Magazine

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