Carbon Trading - no comments

This post was partly inspired by Polly's piece (via S&M) on carbon allowances/trading, as well as the one on Labour's front page (now disappeared, though this covers an earlier draft of the Government's plans). I did start it about a fortnight ago, which is why everyone's moved on to other topics. Anyway, key quote (from Polly's):

Miliband's electric radicalism comes in his plan for personal carbon allowances. Here is where social justice meets green politics for the first time. Give every citizen the same quota of energy and let them buy and sell it on the open market. The half of the population who don't fly will make money from selling their quota to the half who do. Drive a gas-guzzling 4x4 and you will have to buy a quota from the third of the population with no access to a car. Who could complain about such transparent fairness?

I can't deny that the liberal side of me would be interested by the establishment of a free market in carbon units. Labour supporters are both accustomed, and quite correct, to attend to those who lose from market outcomes, when so often the result of systematic injustice, but what would 'exploitation' look like in a market like this - with equal allocations of resources for all, and that leaves people free to buy/sell in a rational manner? Having provided equality of opportunity, there must be less of a moral imperative to compensate those who made themselves worse off by buying or selling unwisely, or by missing opportunities that were open to all. If that sounds too cold, compare that scenario with one of a society that seeks to promote equality of opportunity (rather than outcome) without a prior equalisation of assets/resources (as radical as that would be), even though every aspect of it is imbued with the results of past inequalities. If ours is to be an "opportunity society", then surely it must be judged on the basis of the results of - and our attitudes to the results of - just such a carbon market.

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How could such a market work, and what might be the consequences?

I'm assuming, for this, that the Government sets a "fixed exchange rate" between a "carbon unit", which I'll call CU, and, say, a kg of produced CO2; that it establishes the market by calculating the total CU entitlement from the year's emissions target, then distributes those CUs equally among all CU account holders (all of us), either in one go, or - ideally - monthly portions. Presumably all (carbon-using) energy bills would require a payment in CUs, in addition to the monetary cost.

The next assumption that the carbon market has sufficient public support/Governmental commitment that people can assume it's unlikely to disappear any time soon (what would be the point, otherwise?) I'm further assuming that, because the Government's overall aim is to reduce carbon emissions (albeit in a roundabout way), annual/monthly CU distributions will fall over time. Both premises introduce an element of risk - in the sense that people who continue to produce/contribute to high emissions may find it harder and more expensive over time to obtain the CUs they need to fuel their lifestyle, as the supply of CUs decreases. One more assumption: that CUs "live" longer than a year (or a month, as discussed), and therefore that a CU issued in Year 1 can be 'sold' in Years 2 or 3, for example. If so, an opportunity arises within the CU market for those on low incomes to use their relative numerical superiority and (given equal allocations) high proportion of CU ownership, to produce a redistribution of income. Fund managers, working on behalf of the poor, could sell CU options to affluent, high-emission individuals. By purchasing options - the right to buy, months or years in the future, CUs from the poor at a particular price, decided today - the high-emission rich would be able to reduce the risk that they are unable to afford to maintain existing fuel usage in the future, at the cost of paying the poor an 'option premium'. This would redistribute a small amount of income (minus a fund-management fee) to the poor very quickly. The downside, however, is that the bulk of the redistribution will be moved into the future, for that is when the options expire and the high-emission rich finally buy their CUs.

'Congestion charging' and tax changes could happily coexist with the CU market provided the aim was to ensure that what motorists paid reflected the full environmental/social cost of their motoring. Road tolls and fixed-rate congestion charges would go further to reduce vehicle usage and emissions, and would almost certainly have more of an effect on emissions than the CU market. However, the burden would hit the poor hardest. Even with CUs offered equally to all, individuals would still hold different levels of capital, with differing capacities to liquidate that capital: for example, compare a rich individual's ability to sell a high-spec, gas-guzzling vehicle, with a poor person's inability to replace an inefficient heating system with a more modern one that would allow them to make better use of their CUs. While the affluent would be able to switch to public transport out of choice, perhaps claiming to have done so 'for environmental reasons', the poor would be more likely to do so out of compulsion, because they are in much less of a position to replace a polluting lifestyle with a less polluting one. If the Government did go further down the road of legislation in order to make the greatest impact on emissions, it would only be fair if the poor were compensated. It would be fraudulent - not to mention counterproductive - to claim to be establishing a "free" market, where economic decisions can legitimately attributed to a free choice, and not to do so.

For more on this, here's an article from the US Congressional Budget Office on "Who Gains and Who Pays Under Carbon-Allowance Trading?".

As an aside, it would be nice in theory to have a system in place whereby CUs could be traded for free. The Government could fill this role, allowing the poor to sell CUs without transaction costs. As to whether the Government could legitimately involve itself in the option trading mentioned above, that seems unlikely. Well, let's face it, the whole carbon allowance scheme sounds pretty unlikely, but if it did exist, I don't see any reason why the poor couldn't be organised, and the above trading scheme operated for nothing - by trade unionists? - or by a firm that charged an overall fee, rather than many individual ones.