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What would the ideal climate agreement look like if we could assume international agreement on the necessary target of total CO2 emissions for a part-icular date in the future? What would the requirements be? Most importantly, we would want a guarantee that we could meet the target. We would also want a highly efficient global system that is also administratively simple. Finally, we would want a scheme that is considered equitable by all, not least the developing countries. Several approaches are currently under discussion in government circles, in think tanks, research institutes and in various places on the internet. Unfortunately, none of them seems able to fulfil all of the above conditions.
The most common failure is the guarantee of success. No voluntary quota system can give a guarantee. No system based only on taxation can give a guarantee. Nor can any approach based on developing new, unproven technologies. Even some ‘binding’ agreements like the Kyoto Protocol are insufficient because the penalty for not reaching the target is a tighter quota in the next period. But we may not have a second chance to hit the target if we enter a runaway positive feedback situation in the target year.
Others fail on the question of administrative costs and simplicity. In particular, many ‘downstream’ schemes (close to the individual citizen) are too cumbersome, and would never work in developing countries.
The ideal system has to include some form of rationing to meet the guarantee; it must be ‘upstream’ (close to the entry point of fossil fuels into the economy) to be administratively simple; it must be of global scope and it can achieve efficiency only by allowing global trading of emission permits. Finally, it must have an equity aspect that is considered fair by all. In the following, I will outline the basic components of such a scheme, which for the sake of reference I will call the Carbon Board, and which I believe meets all the above-mentioned specifications.
CO2 Target
Every rationing approach requires an international agreement on the total allowable human-dependent CO2 emissions globally each year during an agreed planning horizon. The current level, according to the Intergovernmental Panel on Climate Change (IPCC), was about 49 Gigatons of ‘CO2 equivalents’ in 2004.1 The emissions ceiling would have to decline year after year over the planning period. For example, according to the IPCC’s latest study, by 2050, global emissions would have to have declined by roughly 85% relative to 2004 levels to keep the long term temperature increase under the critical concentration of CO2 equivalents of 445 ppm, corresponding to a 2 degree Celsius increase in temperature relative to pre-industrial levels.2
The Carbon Board Scheme
Permits to purchase CO2 emitting fossil fuels (oil, natural gas, coal) would be sold competitively and globally by the Carbon Board and only by the Carbon Board to companies function-ing at the point of entry into the economic system (refineries, natural gas transport firms, coal processors, importers of fossil fuel directly from primary producers etc.).
In the USA alone, there are roughly 1,400 such firms3 thus a competitive price and sufficient liquidity is quite certain. These sales should take place well in advance of the year in question in order to facilitate company planning (starting minimum 18 months before).
Purchased permits could be sold again through the Carbon Board as long as they were valid. This trading guarantees maximum efficiency, so permits go to the firms that are most CO2 efficient in every branch of business.
The combination of an emissions cap and permit trading scheme like this is called a ‘cap and trade’ system. The Carbon Board proposal is thus consistent with the ‘Washington Declaration’ of February 2007, where the USA, Canada, France, Germany, Italy, Russia, Great Britain, China, India, Mexico and South Africa were all in principle agreement that the successor to the Kyoto Protocol in 2012 should be a ‘cap and trade’ system, which includes both industrialised and developing countries.4
In the Carbon Board scheme, the revenue received from permit sales is distributed equally to all world citizens in equal amounts, reflecting the principle that the atmosphere is a common good. This means in effect, a transfer from the wealthier to the poorer countries. In addition, in the richer countries, it means a relatively larger payment to the poorest citizens, who typically have larger energy costs in percentage terms. Some such redistribution is necessary to get broad backing for any proposal.
A general characteristic of this scheme is that there are many aspects which are subject to international and national negotiations, provided, of course, that the essential characteristics of the overall scheme remain intact.
Control Of The Carbon Board
It is vital that the Carbon Board is beyond the influence of individual countries or commercial interests, and is responsible in effect to the entire global population of some 6.5 billion people. I would suggest that the Carbon Board members be appointed by and responsible to the General Assembly of the United Nations (not the Security Council, which represents narrower special interests).
The Role Of Primary Producers
The relationship with the primary producers is open to negotiation. They have an interest in not producing more than the agreed yearly quota as there would be no customers for excess production. But by how much should each producer reduce production?
A reasonable solution would be for the primary producers to work closely with the Carbon Board, which would allocate quotas to the individual producers based on their production capacities and the total quota for the year. A reduction proport-ional to capacity would be a reasonable starting point. In any case, it is vital to monitor the primary producers to hinder development of a black market. There is room for some flexi-bility here, provided that total production is under control. A country that is a primary prod-ucer cannot demand priority on its domestic production. All should be treated equally. Nor should a vertically integrated oil producer be allowed to favour its own refineries and daughter import companies, which must purchase permits in open competition with others.
Permit Costs
Paying for permits is essential for two reasons. One is to provide the income to satisfy the equity requirement. The other is to create the economic incentive for research and development that will lead to technologically more energy-efficient products. The authors of one of the climate control schemes (The Earth Atmospheric Trust) estimate that the cost of a permit will probably be in the range of $20 to $80 per ton CO2 equivalent, corresponding to an income of $1,000 billion to $4,000 billion at current emission levels.5
Trading Permits
It is important that a global market for online trading in permits administered by the Carbon Board be established, somewhat similar to a Central Bank currency trading desk. The actors allowed to buy and sell permits to each other would be limited to a list of approved importers and others who introduce fossil fuels into the economy. To minimize corruption and/or leakage, all transactions would be booked through the Carbon Board, which would maintain a stable and liquid market just as a Central Bank would do.
It is a question for discussion as to whether permits should be valid for only one year or whether they could be kept for use in a later year. Auction expert Peter Cramton of the University of Maryland recommends the latter,6 but such a system could lead to substantial speculation and hoarding, which would be harmful to society, as prices for permits will probably increase from year to year. This issue requires further debate.
Once all permits have been sold, the Carbon Board should again be the middleman to link buyers with permits to specific primary producers of various categories of oil, natural gas and coal. In this way, risk of leakage or corruption can be kept to a minimum and control of the primary producers’ quotas is maintained. The Carbon Board will at all times know exactly where all used and unused permits are and what quotas remain available at each primary producer.
Individual companies will naturally pass on as much as possible of their added costs to their downstream customers in competition with others sellers. Those companies that are quickest and clever-est to innovate and save the most CO2 emissions will profit most.
National Variants
There is a possibility of national variations here. For example, if a country’s government wanted more control over the process within its borders, it could set up a single account with the Carbon Board instead of individual accounts with its domestic fossil fuel introducers. Then the government could use what-ever internal system it wished for distributing the permits that it purchased, provided the other components of the scheme were upheld.
For example, if a particular country wished to use a ‘down-stream’ model or a carbon tax, this could be done. Some may see this as a positive way to involve individual citizens directly in the process or to satisfy other political goals. But there would be extra administrative costs and some loss of efficiency globally.
Fairness Issues
Based on the estimated range mentioned above for sales of permits, this would currently amount to an income of $156-625 per person per year ($0.43-$1.71 per day). For the poorest citizens in many developing countries, this is very significant. The total amounts transferred to many poor countries will be far greater than their current foreign aid (ca $54 billion). This prospect will hopefully provide a sufficient incentive for all the countries to accept the scheme.
Is The Scheme Realistic?
Based on the current dialogue in the international media, it seems unlikely that any kind of rationing scheme will be adopted in Copenhagen in December 2009. This is understandable from a political point of view as rationing is normally under-taken only when dictated by supply constraints. It is more likely that some less painful combination of voluntary guidelines and new technology research and development will be attempted first. In this sense, the Carbon Board proposal, like all other rationing proposals, is probably not realistic in the short run.
However, the long run is a different story. If the above-mentioned scenario for a 2009 agreement is correct, then it is highly likely that we will see continued increases in CO2 emissions after 2012, or in the least, too slow a decline to stop a run-away global warming. The risk is that in a few years’ time, the world will find itself in an even deeper crisis, and the political leadership will be forced by events to take much harsher action. When that time comes, it may be useful to have the outline of an effective solution in the drawer. In the long run, if we truly want to deal with the problem effectively, The Carbon Board scheme, or something very similar, will probably be necessary.
What If Some Nations Will Not Participate?
But what if a substantial majority of nations are prepared to accept the scheme and others will not join, as was the case with the Kyoto Protocol? Nations that stay outside such a scheme are not only abdicating their moral responsibilities, but they are getting a competitive advantage in that they can produce goods cheaper without the cost of emission permits. Therefore, to level the playing field, the signatories could agree to place tariffs on any and all goods exported from those countries that do not join, thereby eliminating any competitive advantage. French president Nicolas Sarcozy raised this very possibility in the autumn of 2007 7
References
1 IPCC, Working Group III; Summary for Policymakers, p.3
See www.ipcc.ch
2 As above, p. 21.
3 Pete Cramton, ‘Tradeable Carbon Permit Auctions’,
University of Maryland. See www.cramton.umd.edu
4 http://en.wikipedia.org/wiki/Vienna_Climate_Change_Talks_2007
#February_2007_Washington_Declaration
5 Peter Barnes, et al, ‘Creating an Earth Atmospheric Trust .
See article on www.earthinc.org/earth_atmospheric_trust.php
6 See Peter Cramton article above.
7 ‘Climate Change: Sarkozy backs carbon tax, EU levy on non-Kyoto imports’, Agence France-Presse, (October 25, 2007).
Ross Jackson PhD is founder-chairman of Gaia Trust that helped set up GEN, Gaia Education and hundreds of other ecological sustainability projects worldwide. www.ross-jackson.com
The fully illustrated version of this article appears in PM58 and can be purchased as a back issue.
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