Personal Carbon Trading newsletter – Autumn 07

November 2007 © ippr 2007

The team at the Institute for Public Policy research is beginning a major year-long project looking at the pros and cons of ‘personal carbon trading’ (PCT), supported by generous grants from our Primary Sponsor Barclays Bank plc and the Esmee Fairbairn Foundation. While there are different versions of PCT around, the basic idea is common to all of them – each individual gets the same allocation of carbon dioxide that they are allowed to emit free. If you emit more than your ration, through home energy use, driving or flying, you have to buy more credits. If you emit less, you can sell your surplus. Over time, the allocation falls, to reflect the urgent need for us to reduce total carbon emissions. Our project will be looking at whether PCT is a good policy, from the point of view of fairness, fit with other policies, political acceptability and environmental effectiveness. Crucially, we will be looking at PCT not in isolation, but in relation to the alternatives – higher taxes or ‘upstream’ trading systems like the EU scheme. The overall aim of the project is to develop recommendations for policymakers about whether to proceed further with PCT, and if so, how.

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1. What is Personal Carbon Trading?

A variety of different schemes for tradable individual carbon allocations have been put forward. All of them share the common core concept of a ‘cap and trade’ system where individuals are allocated equal emissions rights (‘carbon units’) on a per capita basis. The units would be surrendered by individuals when they purchased fuel for cars and gas, electricity and other fuels at home. There would be a national ‘carbon market’ where people with surplus units could sell them, and those requiring extra could buy more. Over time, the allocation would shrink, reflecting the need to reduce overall emissions in line with national and international targets.

In the earliest version of PCT – David Flemming’s Domestic Tradable Quotas – only some of the total carbon emissions would be allocated to individuals, with the rest being auctioned off to companies by Government. Other versions allocate all emissions to individuals, with companies having to buy what they need on the market.

There are also variations in the way that different suggested schemes treat children (for instance, with half an adult allocation, or no allocation at all), and in whether air travel is included.

A good introduction to different approaches to the design of PCT schemes, and a discussion of the issues, can be found in the report Domestic Tradable Quotas: A policy instrument for reducing emissions from energy use by Richard Starkey and Kevin Anderson (http://www.tyndall.ac.uk/research/theme2/final_reports/t3_22.pdf )

Personal carbon trading is now on the political agenda. David Miliband, previously Secretary of State for the Environment, Food and Rural Affairs, floated PCT as a ‘compelling thought experiment’ in his speech to the Audit Commission in July 2006, and his successor Hilary Benn is also on record as supporting further work in the area. There is also interest from both the Conservative and Liberal Democrat parties.

2. ippr’s approach

On the face of it, PCT appears to have considerable appeal as a progressive approach to reducing carbon emissions. Equal allocations seem fair, and allocation to individuals, as opposed to companies, avoid the windfall profits associated with upstream trading systems like the EU emissions trading scheme. At the same time, involving individual citizens more directly in assessing and managing their own emissions, as opposed to indirect mechanisms such as tax or upstream trading, appears to be a more participatory and democratic approach.

However, these statements involve a number of assumptions that need to be tested properly, so that the relative effectiveness and equity of PCT can be assessed more systematically. There are also clearly issues of administrative cost.

Our approach will be to compare PCT with other policy options for tackling CO 2 emissions (specifically, carbon taxes and upstream emissions trading schemes) in a number of areas:

• environmental effectiveness and economic efficiency in changing behaviour and reducing emissions • equity • overall costs • political acceptability.

These elements will effectively assess the case for PCT, as against alternative instruments. If that case is strong, the project will aim to lay out a timescale and practical “route-map” for its introduction.

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3. Project Steering Group

The ippr project will get expert input and guidance from a steering group with membership drawn from a range of sectors:

• Dr Stephen Sorrell, Research Fellow, Sussex Energy Group, University of Sussex • Dr Nick Eyre, Leader, Low Carbon Futures group, Environmental Change Institute, University of Oxford • Phil Downing, Head of Environmental Research, Ipsos MORI • Teresa Perchard, Public Policy Director, Citizen’s Advice • David Halpern, Cabinet Office (on secondment) • Joe Perry, Public Policy Manager, Barclay’s Bank • Danyal Sattar, Environment Programme Director, Esmée Fairbairn Foundation

4. Assessing the effectiveness of PCT vs. carbon taxes

One important argument made in favour of PCT over other approaches is that it requires people to confront and manage their energy use and carbon emissions in a way that taxes do not. For some observers, this is the only potential advantage of PCT, as opposed to several disadvantages such as high cost.

On the other side, upstream trading schemes (which effectively raise prices for households) and taxes are relatively easy and cheap to administer, but will only be effective in containing and reducing emissions if there is an effective demand response.

Without more evidence, these debates are likely to remain inconclusive. An early element of the ippr project is therefore to commission expert reviews of what evidence there might be in these two areas.

One study will look at evidence from behavioural economics and social and economic psychology to assess whether a PCT scheme is likely to have a distinct behavioural effect, different from pure price effects.

A second study will review the econometric evidence on the elasticity of consumer demand for household energy (gas, electricity, other fuels), direct transport energy (petrol and diesel for cars) and aviation, to see how responsive households actually are to changes in prices and taxes.

5. Opinion poll

Another early activity will be commissioning an opinion poll, looking at views on PCT vs. taxes and upstream trading. We will be working with an established polling organisation to undertake a nationally representative survey.

6. Further information

For more information on any aspect of the ippr PCT project, please contact:

Jenny Bird Matthew Lockwood 020 7470 6118 020 7470 6116 [email protected] [email protected]