Allocating emissions quotas to households that they can 'spend' or trade would unleash enormous amounts of Kiwi ingenuity in finding ways to move away from fossil fuels, without raising fuel prices, says Jack Santa Barbara
Any effective Emissions Trading Scheme (ETS) or Carbon Tax works by increasing prices to change our behaviours regarding greenhouse gas emissions. Both mechanisms are designed to influence our behaviour by ensuring prices increase over time for goods and services in proportion to their greenhouse gas emission intensity.
But it doesn’t have to be that way. It is critical we reduce emissions quickly, but we don’t have to increase fuel prices to do so.
There is an emissions reduction scheme whose focus is quantity rather than prices, and the result is the same in terms of emissions reduction.
In fact, because the scheme directly controls the fuels which cause emissions there is greater certainty that emission reduction targets are actually reached. We all appreciate the need for large and fast reductions posed by the existential threat of climate change. Certainty of reduction is perhaps the most important feature of any scheme we might adopt.
Tradable Energy Quotas (TEQs) is an example of such a scheme.
It is similar to an ETS in that both control quantities. ETS indirectly controls the quantity of emissions, TEQs more directly controls the fuels that produce the emissions.
How TEQs work
We know the amount of greenhouse gases released when we use oil, gas and coal, each emitting a different amount per unit of energy delivered.
If we have a carbon budget that we wish to live within, then it is a straightforward calculation to determine how many units of oil, gas or coal would reach that targeted budget. Converting the fossil fuel units into quotas, we then know how many quotas should be available to stay within our emissions’ budget.
The next step is to distribute the quotas to those that need them. This is done in two ways. We know the proportion of fossil fuel emissions from both households, and the rest of the economy. The equivalent proportion of quotas is determined and then issued free to household members to “spend” or trade as they wish when they purchase fuel. This can be done with the existing credit and debit card systems at the point of purchase.
All other fossil fuel users - businesses, governments, churches etc - would have to purchase quotas in a market established and regulated for the purpose. As with an ETS this scheme would involve businesses passing on costs to consumers. But it doesn’t directly require cost increases for fossil fuels for households. And businesses would have an interest in not bidding the price of quotas up; so any costs they pass on to consumers would be much less than with an ETS or carbon tax.
And because fossil fuel use is subject to a fixed cap, all parties will be motivated to reduce their reliance on them as soon as possible. The system starts with issuing a full year’s worth of quotas to households, with weekly top-ups as per a reduction schedule that will see the quotas decline to zero over time as the fixed budget is used up. The quota auction for other entities occurs weekly, so all parties always have a full year’s supply of quotas to use or sell.
Everyone involved has a very direct experience of contributing, or not, to emissions reduction each time they make a purchase requiring quotas to be surrendered.
Free quotas are issued to each adult in the household, supporting a fair distribution of the right to pollute (temporarily). Rich and poor individuals get the same number of quotas. Quotas can be sold, that is, traded, among individuals, businesses and other groups.
In addition to the certainty, simplicity, and fairness of the TEQ scheme there is another very important feature. TEQs would directly engage the 'team of five million' in creatively responding to the emission reduction task, not just the large industries (as with the ETS).
Harnessing the power of self-interest
In addition, the relationship between purchasing fuel and reducing emissions would be very direct and transparent (something neither an ETS nor carbon tax does). This makes TEQs harder to game or manipulate, but most importantly, it gets everyone involved in cooperating to reduce their reliance on fossil fuels because it is clearly in everyone’s interest to do so. Personal and collective interests are aligned.
Rather than allowing governments to micromanage purchases with an ETS or carbon tax, TEQs would unleash enormous amounts of Kiwi ingenuity in finding ways to move away from fossil fuels.
The potential of TEQs to rally us all around a common cause for the enormous challenge of rapid emissions reduction should not be underestimated.
Another consequence of TEQs is that the requirement to measure emissions would be greatly reduced and simplified. If the quantity of fossil fuels that can be used is capped, then it is relatively easy to calculate national emissions.
The TEQs approach has been well developed over the past two decades and was seriously considered by both the UK and the EU governments.
Of course, fossil fuels are only half our emissions problem in NZ. Our biogenic emissions are the other half. The beauty of the TEQs system is that it deals with the carbon sources contributing to long-term increase in atmospheric greenhouse gas concentration, without the need to track the emissions associated with every good and service traded in the economy. The system works so elegantly for fuels because we make relatively few such purchases per year.
Implementing a TEQs system would leave open the possibility of addressing other greenhouse gas emissions via parallel mechanisms.
Perhaps it could work at the processor level in the first instance, as our current ETS is designed to do. Or perhaps a further reformed ETS could apply only to biogenic emissions, and our fossil fuel emissions reduced with TEQs.
TEQs appear to have some real advantages over both an ETS and carbon tax approach to emissions reductions. Because of the certainty of emissions reduction TEQs would provide, in addition to its many other merits, it deserves serious consideration by the Climate Change Commission and our Government.
