PROBLEMS WITH SCHEMES FOR REDUCING CARBON EMISSIONS

The European Union Greenhouse Gas Emissions Trading Scheme (EU ETS)

In 2003, the EU directive (2003/87/EC) established an EU-wide greenhouse gas emissions trading scheme - the European Union Greenhouse Gas Emissions Trading Scheme (EU ETS). From January 1st 2005, companies covered by the scheme, in all EU and accession countries, were to limit their greenhouse gas (GHG) emissions.
Over 12,000 installations are expected to be eventually covered. In the first phase of the scheme many of these companies were allocated free permits on the basis of their previous emissions (called grandfathering). The result has been windfall profits for these companies, higher prices for everyone else and no reduction in emissions. The original justification for grandfathering emissions permits was that if firms exposed to competition from outside the EU had to buy their permits while their non-EU ETS rivals did not, it would make them uncompetitive. Affected firms, it was feared, might either close or decide to move their operations overseas.
Even electricity companies, with no exposure to competition from imports, got all their permits free. There are plans for improvements in the second phase and two thirds of allowances are likely to be auctioned after 2013. In January 2008, a number of changes to the scheme, including centralized allocation and auctioning a greater share (60%+) of permits and inclusion of other greenhouse gases, such as nitrous oxide and perfluorocarbons, were proposed. These amendments are only likely to become effective from January 2013 onwards.
The European Commission has been investigating the possibility of levying 'border tax adjustments' as a way to remove the unfair advantage enjoyed by imports from countries which do not impose a CO2 cap on their industry. However, this will not overcome fundamental weaknesses. The first weakness in the first phase was that the companies and utilities involved were responsible for only 45% of EU emissions. It is not hard to imagine how an extension of the scheme covering all indirect emissions would prove to be an administrative nightmare. The value of permits will go up as the cap is tightened, but initially too many permits were issued and had little value. If under the second phase the carbon price were to rise to £72 per tonne, for example, the total value of the permits would be about £345 bil. Assuming an EU population of 456 million, this amounts to £757 per person per year.
In the first phase the EU ETS gave some 90% of permits to big polluters free. Also it should be noted that if a company has been allocated too many permits or is able to reduce energy consumption, it can sell its surplus permits to a company in the scheme that does not have enough to cover its emissions. In fact these companies have considered that all these permits have a market value and this has been passed on to the consumer in higher prices for their products.
After the peaks of fossil fuels and as extraction becomes more costly, the burden on the consumer will increase dramatically. The rich get richer and the average and poor consumers lose out.

The diagram below illustrates the paths by which the fossil fuels from the suppliers are translated into the energy required to produce the goods and services for individual consumers under the present EU ETS system of carbon trading.
The top line represents the link for indirect emissions which are capped partly downstream (the companies and utilities who receive permits under the EU ETS scheme).
The middle line represents the link for indirect emissions for all other users of fossil fuels whose emissions are not capped and who do not receive any permits.
The bottom line represents the link for direct emissions which are capped downstream.

Peter Barnes has assessed the serious implications of introducing a similar scheme in the United States. One important factor that has to be considered when proposing any scheme for the US is the amount of subsidies currently given to the fossil energy sector;

"In the US, an MIT study estimated that grandfathering permits to American utilities would give them hundreds of billions of dollars in extra profits every year for several decades - a staggering amount of money that would ultimately flow to their shareholders"………….
Even if permits are auctioned there is no guarantee that the government would invest the revenue in renewables or other projects intended to further reduce carbon emissions.
Under this EU ETS type scheme the poorest people would be hit the hardest. ….. "According to the Congressional Budget Office, the average household will pay $1,161 a year in higher energy prices when carbon emissions are reduced 15 per cent" (However, this can be no more than an estimate). Oil prices might be forced down in a global recession, but this may only be temporary. A return to rapidly increasing prices can be expected post peak fossil fuels.
The chart below shows how each fifth income sector would be affected. The amount as a percentage of their annual income would, for the poorest, be double that of the richest.
Also remember that as the cap is tightened, the cost to households will increase.

It is interesting to compare the effect on households of an EU ETS type scheme (which could be termed Cap and Giveaway) with an upstream schemes like Cap and Share/Cap and Dividend.
Although C&S can be operated in conjunction with the EU ETS, it would clearly be better if all direct and indirect emissions were covered by the simpler C&S scheme. This would also mean that individuals, rather than companies or governments, would be compensated directly for the rising costs of fuel. If the scheme were to be rolled out internationally, this would also help to alleviate the poverty of the world's poorest people who would be otherwise made even poorer by rising fuel prices. Unfortunately, the British government is considering the continued application of the EU ETS carbon trading scheme for large companies coupled with a similar scheme for companies and local authorities, etc which are too small to be included. These would be supplemented by 'green taxes. The Cap and Share or the similar Cap and Dividend (or the proposal put forward by the Global Commons Institute, Contraction and Convergence) may be the only fossil fuel reduction schemes acceptable to the rapidly developing nations of SE Asia and Russia.
In the USA, the Political Economy Research Institute indicates how Cap and Dividend and Cap and Giveaway would impact on people in the country's five income bands. The chart below shows that for a 15% GHG reduction target the annual income of the poorest fifth would decrease by 6.2% under the giveaway scheme, but would increase by 14.8 % under the dividend scheme. The income of the richest fifth under the giveaway scheme would increase by 5.1% and under the dividend scheme would reduce by a mere 2.4%.

However, at the end of 2009, the prospects for the introduction of Cap and Share, as far as the UK Government is concerned, do not look good. From a meeting Board members of Cap and Share had with Environment Minister, Joan Ruddock, on the 7th Dec 2009, it was clear that the government had a continued commitment to the existing provisions of the EU ETS and the Clean Development and Joint Implementation provisions of the Kyoto Protocol. A Ministry letter to a Swindon MP earlier in the year reflected the same opinion:

"The UK is a strong supporter of the EU ETS and the Government is committed to building on the EU ETS as its main means of pricing carbon in the economy, and of ensuring that emissions are reduced cost-effectively. The scheme already covers approximately half of the UK and EU's emissions, including emissions from electricity production. Its introduction in 2005 had led to the creation of a growing carbon market, valuing carbon by placing a limit on the overall quantity of CO2 which can be emitted. Links to credits from developing countries through the Clean Development Mechanism, or from developed countries though the Joint Implementation (JI), increase opportunities for emissions savings to be made at the point of least cost and drive financial flows and investment in low carbon technologies".

Nevertheless, the failure of the meeting of world leaders in Copenhagen at the end of Dec 2009, indicated that a new framework for international agreement is vital to the future survival of humanity.