Zerofootprint: The Ins and Outs of Carbon Trading

The UK is looking at a personal carbon trading scheme that will give everyone a free equal allowance of carbon units, which can be exchanged for carbon use, say for petrol or electricity, or traded in a market that aims to drive carbon use down.

With carbon trading by governments and corporations proving successful, there could one day be schemes for individuals too. The idea is that citizens are allocated a number of carbon units for the purchase of energy and fuel, but which can also be traded on an open market. All citizens receive an equal allocation at the outset, and those that use less can sell their excess to those that want more. All this takes place in a framework where the total number of units is capped, with the aim of driving overall consumption downwards.

The idea of tradable personal carbon allowances, or domestic tradable quotas as they are also called, is not new. The concept was first proposed in the mid 1990s, when it was largely ignored as Utopian and unworkable. But it is now being taken seriously by the British Government among others. In a recent speech, the UK's environment secretary David Miliband said such a scheme would tackle the "vast majority of individual [carbon] emissions ... which in turn make up 44% of the [UK] economy's total emissions".A tradable personal carbon allowance scheme could work like this. The government calculates a target for the total emissions it will allow from personal electricity, gas and transport use — the factors which are responsible for most domestic carbon production. (The target could be derived from the Kyoto international emissions agreement, or some other sustainability measure.) This total is converted into 'carbon points', and every citizen receives an equal share.

The points are like a currency, to be used alongside the regular currency, although they only apply to carbon. When someone buys fuel, or an airline ticket, or pays an electricity bill, they use their carbon points as well as their money. In fact, the two currencies could be integrated so that both worked with the same debit or credit card.

Now someone who was frugal in their energy use — say, who had installed solar heating and a wind turbine for electricity generation and who cycled to work — could end up with surplus points. Meanwhile, someone else might drive a SUV, have a houseful of electronic gadgets and fly to distant holiday destinations, thereby exceeding their allocation. Under the personal tradable carbon allowance scheme, these two individuals could trade points, the carbon cutter selling to the carbon guzzler. The deal would take place on an open market, and the price of the points would be set by that market.

Such a scheme has a number of potential advantages over other mechanisms that have the same aim of reducing carbon consumption, says Miliband. First, it would be more equitable than putting a carbon tax on electricity, fuel, etc., because tax increases hit all consumers of products, whereas the carbon allowance scheme only creates financial penalties for those who go above their entitlement. "People on higher incomes tend to have higher carbon emissions due to higher car ownership and usage, air travel and tourism, and larger homes, [while] people on low incomes are likely to benefit as they will be able to sell their excess allowances," said Miliband.

The scheme could be more empowering than many forms of regulation, because instead of banning particular products, services or activities, or taxing them heavily, a personal carbon allowance would enable individuals to make their own trade-offs. The points system also provides a guide for those who want to do their bit for the environment, but at the moment have no way of measuring the effectiveness's of their actions.

And the scheme could be more effective than taxes or attempts to ban products because personal carbon allowances regulate the end result, not the means of achieving it. "Carbon trading fixes the outcome to be achieved, and leaves the price of carbon to adjust to the necessary level to change behavior," said Miliband. The scheme will provide financial incentives to conserve carbon, and put a price on excess use. Citizens wanting to conserve their points will choose low carbon products, thereby encouraging the market for such products — green electricity, hybrid cars, etc. Consumers changing their preferences will have a domino effect throughout the supply chain. This approach will also simplify the implementation of such as scheme.

"By focusing on just the energy a citizen buys — their electricity, gas, petrol and air travel — not the energy used already to make food, cars or domestic appliances — the complexity is reduced," said Miliband. Meanwhile, the vast majority of individual emissions are captured, which in turn make up almost half of the UK economy's total emissions.

The Tyndall Centre for Climate Change Research, a leading UK research organization based in Manchester, England, last year published a feasibility study on personal carbon allowances and concluded that it would be technically possible to introduce such a scheme based around existing credit and debit cards, and that it could prove cheaper than other proposals, such as road user charging. Furthermore, such a scheme would have "distributive justice" since every citizen would be given a free and equal share of the carbon entitlement.

But no one is pretending that such a scheme is likely to be introduced soon, or that it will solve climate change in one fell swoop. It is bound to be controversial, and will require big up-front investment. It is also likely to work best in conjunction with other methods, such as offsetting, which need further development too. But it offers some answers to questions that will have to be faced at some point in the future — such as just what is our individual carbon/environmental entitlement, how do we reward environmental responsibility, and how can we use market mechanisms to engage individuals in the battle against climate change?

[Ron Dembo and Clive Davidson, Zerofootprint]