Cities 28 (2011) 576–582

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Cities

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Encouraging low carbon policies through a Local Emissions Trading Scheme (LETS)

Miguel Torres, Paulo Pinho ⇑CITTA – Research Centre for Territory, Transports and Environment, Faculty of Engineering, University of Oporto, Portugal

a r t i c l e i n f o a b s t r a c t

Article history:Available online 6 August 2011

Keywords:Climate changeCap and tradeLocal authoritiesLand use planningTransportForestry

0264-2751/$ - see front matter � 2011 Elsevier Ltd. Adoi:10.1016/j.cities.2011.06.005

⇑ Corresponding author.E-mail address: pcpinho@fe.up.pt (P. Pinho).

Local authorities are important actors to mitigate climate change. They can implement policies which canreduce emissions of greenhouse gases in sectors like transport, waste, agriculture and land use, land usechange and forestry (LULUCF). They can also implement policies which can increase carbon dioxide rem-ovals. The European Union Emissions Trading Scheme (EU ETS) is one of the most important initiatives toreduce carbon dioxide emissions in the EU. It is a cap and trade scheme encompassing almost half of theEuropean-wide carbon dioxide emissions. However, carbon dioxide removals and sectors associated withlocal authorities’ responsibilities are not included in the EU ETS. The main objective of this paper is topropose an original cap and trade system, called LETS, designed to involve local authorities. The LETSwas then tested and applied to all the local authorities in the mainland of Portugal covering emissionsand removals of a single greenhouse gas (carbon dioxide) in the LULUCF and the transport sectors. Thesystem proved to have the necessary conditions to be implemented and adaptable to other countrycontexts.

� 2011 Elsevier Ltd. All rights reserved.

Introduction

Climate change is one of the most important threats to human-ity. Human activities contribute to the emissions of greenhousegases (GHG) and to the removal of these gases from the atmo-sphere. Therefore humanity has been singled out as responsiblefor a warming influence on the climate (IPCC, 2007). Accordingto the Stern Review on the Economics of Climate Change (Stern,2007), overall, mitigation measures are likely to cost less thanthe damage caused by the effects of climate change in a businessas usual scenario. The Kyoto Protocol defined commitments for2010 on the reduction of greenhouse gases emitted by the mostindustrialized countries. Several European Union (EU) countriesare facing difficulties to achieve their objectives. Under thoseobjectives, EU must reduce the overall emissions by 8%, but 5 yearsbefore 2010 (the commitment period) the overall reductions wereonly around 2% (Eurostat, 2008).

Climate change is a global threat but local and individual ac-tions are essential to mitigate it. In this article, we focus on thepotentials of local policies on climate change. In the first placewe discuss which local policies can mitigate climate change. Sec-ondly, we analyze the EU policies on climate change and how theyare linked to local approaches. Finally, we propose a cap and tradesystem to encourage local policies to reduce CO2 emissions and westudy its application in respect of mainland Portugal.

ll rights reserved.

Local policies on climate change

In this section, we analyze local policies which can reduce GHGemissions and boost their removal from the atmosphere. We ap-proach a number of policies, in particular those dealing with urbanplanning, land-use, transport, forest areas (carbon sinks), waste,housing and energy.

Urban and land use planning

In urban areas, different land uses generate different activities,and each one has different metabolic systems which transformenergy, water and other resources into energy, other materialsand waste (Pauleit & Duhme, 2000). The transformation of fossilfuels into energy and CO2 through various urban activities is animportant impact of cities on climate change (Rees, 1997). Citiesare CO2 producers and have low carbon storage capacities (Whit-ford, Ennos, & Handley, 2001). Climate change policies should cov-er all human activities, and urban policies are also important tomitigate climate change. In this respect, Baccini (1997) explainsthe importance of reducing the energy spent in house heatingand in transport of people and goods.

Land use planning is seen as an important instrument in themove to secure more sustainable urban development (e.g. Haugh-ton, 1997; Mindali, Raveh, & Salomon, 2004). Despite this claimedimportance, national and international perspectives have domi-nated climate change modeling and analysis (Grazi & van denBergh, 2008). In a similar way, two recent FP7 projects, SUME

M. Torres, P. Pinho / Cities 28 (2011) 576–582 577

(Sustainable Urban Metabolism for Europe)1 and BRIDGE (sustain-aBle uRban plannIng Decision support accountinG for urban mEtab-olism),2 emphasize the need to integrate the spatial dimension in theoverall debate related to urban metabolism and climate change.Land use planning defines urban form, urban form influences energyconsumption and, therefore, GHG emissions. A significant part of theenergy consumed in the future is pre-determined when urban formand land uses are defined (Sadownik & Jaccard, 2001). The built envi-ronment plays a major role in sustainable development and studieson this issue can be important to control the environmental conse-quences of different urban forms (Crane & Scweitzer, 2003). As wehave seen, land use planning is an important tool to influence GHGemissions, but there is a need to find out what are the ideal urbanforms able to mitigate human impacts on climate change.

Banister (2008) argues that a sustainable city requires more than25,000 inhabitants, medium densities, with mixed land use devel-opments around the main public transport corridors and nearbytransport interfaces. This urban form should keep trip distancesshort and accessible to walking or cycling. The discussion aboutdensity is one of the most important considerations. According tothose promoting higher densities, the concentration of population,housing and employment would lead to shorter trip distances thandiffuse developments. Short trip distances enable walking and cy-cling, leading to reduced fuel consumption (Newman & Kenworthy,1989) and, therefore, GHG emissions in the transport sector. How-ever, densities should not be raised to such a level that they bringabout a negative impact on local environmental quality (Sadownik& Jaccard, 2001). Nevertheless, the main criticism in respect of den-sity is related to its feasibility. Energy savings due to urban compac-tion should be low and can only be achieved through draconianpolicies (Breheny, 1995). According to the literature review carriedout by van der Waals (2000) no drastic reduction of car trips can beexpected over the next 20 years through the pursuit of compacturbanism, not only because cities are rather slow entities to changetheir own physical nature but also because many families prefer tolive in low density areas (Breheny, 1997). Thus, we can see twoopposite and contradictory tendencies: local governments, on onehand, tend to encourage urban intensification processes, and resi-dents, on the other, tend to prefer larger private areas and low den-sity neighborhoods (Mindali et al., 2004; Tapio, Banister,Luukkanen, Vehmas, & Willamo, 2007).

Sprawl is commonly viewed as an unsustainable optionalthough there is no consensus among academics and plannersabout the notion of ‘a right density’. Diffuse developments increasedistances between trip origins and destinations and, as a conse-quence, traveled distances. Such developments not only increaseair pollution and energy consumption but also increase infrastruc-tural and public service costs. They have negative impacts on his-torical city centres and as well as other physical and social costs(Ewing, 1997). The effectiveness of environmental policies in dif-fuse areas is also criticized by Ewing (1997), emissions and conges-tion taxes (defended by dispersion enthusiasts) are instrumentswhich local authorities usually do not implement due to politicalpressures.

Land use diversity can be associated with density. Compact ur-ban environments are more able to promote land use diversificationthan low density areas (Kenworthy & Laube, 1996). For many typesof services and specialized commerce, low density areas are notable to provide sufficient consumers to make viable these economicactivities, and that is why highly specialized activities tend to lookfor central locations. Tapio et al. (2007) argue that urbanisation pro-cesses should promote functional density instead of population

1 http://www.sume.at.2 http://www.bridge-fp7.eu.

density. Ewing (1997) considers that an urban pattern with land usediversity, good connectivity to the main road network, sidewalksand bicycle lanes is an appropriate approach to suburban areasplanning. Decreasing energy consumption is a major benefit, ob-tained through linked trips and shorter trip lengths.

However, sceptics about diversity argue that while behaviouralchanges may be sought, they cannot be assured. Major land usechanges may not lead to decreasing trip lengths. For instance, inan empirical study in the San Francisco Bay Area, residents’ atti-tudes seemed far more associated with travel patterns than withland use characteristics (Kitamura, Mokhtarian, & Daidet, 1997).Moreover, if the promotion of full compatibility between uses isnot well planned, diversity can give rise to an increase of energyconsumption (Mindali et al., 2004).

The integration of different policies, adapted to the differentcharacteristics of different cities, should require a more balancedapproach. There are varying perspectives and no consensus aboutthe best policies. The main conclusion is that, even though we donot have a doctrine (or path) of urban and land use planning poli-cies for the mitigation of GHG emissions, the planning literaturerecognises that land use planning itself is an instrument whichcan have a significant influence on climate change.

Transport

As we have referred to before, urban and land use planning canaffect the transport sector emissions. For this reason, local author-ities play an important role in the control of air pollution associ-ated with transport (Monni & Raes, 2008). However, over the lastdecades, the low density, car dependent model has become domi-nant (Banister, 2007). All forms of transport are bound to consumeenergy, we use calories to walk, fuel to move cars, electricity topower the metro and aircraft fuel to fly (Zegras, 2007). Carbondioxide emissions in this sector depend on the distance traveledby each passenger, on the vehicle occupation, on the fuel used toproduce energy and on a CO2 emission factor (Monni & Raes,2008). According to these authors, economic growth induces high-er trip lengths, more frequent trips and a lowering of vehicles occu-pancy rates. The main challenge is to change these tendencies. Andthe idea is not to prohibit the use of cars but rather to design citieswith quality and with an acceptable scale so that residents do nothave the need to use the car so often (Banister, 2008). Thus, landuse and transport are complementary issues. But land use planningis not the only instrument which local authorities have to mitigateGHG emissions in transport. Local authorities influence emissionsthrough infrastructural policies, regulatory measures, changing cit-izen’s behaviour and developing public transport options.

Infrastructure is a major factor in determining modal choice. Forinstance, European cities which have the highest road lengths perperson also have the highest energy expenditure (Mindali et al.,2004). By creating bus and bicycle infrastructure, local authoritiescan influence more people to use public transport and the bicycle,therefore reducing transport emissions (Grazi & van den Bergh,2008) The attractiveness of a bicycle network will be higher if itprovides direct links to destinations without conflicting with otherforms of traffic (Huwer, 2000).

Circulation taxes are a particular kind of regulatory measure.They are seen as strategic policies which can decrease car depen-dence (Sadownik & Jaccard, 2001). Urban toll ring charging canbe associated with CO2 emissions, and parking taxes can also bean instrument to decrease car use (Grazi & van den Bergh, 2008).In several world cities studied by Kenworthy and Laube (1996),public transport use is higher when there are fewer central parkingplaces as compared to the number of jobs. Integrated policies arerequired to secure behavioural change. In Freiburg, Germany, forinstance, a policy to promote cycling is pursued alongside car

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restricting measures, a light rail network and the control of newurban areas (Hass-Klau, Crampton, & Benjari, 2004).

Sadownik and Jaccard (2001) consider that a greater emphasison public transport developments along with urban planningshould contribute to the reduction of CO2, SO2, NOx and particulateemissions in Chinese cities. However, other authors (Gordon &Richardson, 1997), are against large investments on public trans-port and argue that, for instance, in the USA, the revenues fromhighways covered 81% of the corresponding expenditure whilethose from public transport covered only 42%. Another importantpublic transport policy is the application and dissemination ofnew technologies. The economic benefits of changing bus technol-ogy are significant (Hickman & Banister, 2007). Alternative fuelslike ethanol and biogas can decrease the overall emissions in thetransport sector (Schmidt Dubeux & Rovere, 2007). Natural gas isanother option, but not as sustainable as renewable energy.

As in other sectors, the importance of transport technologydevelopment for the mitigation of climate change is generally ac-cepted. But how relatively important is it? Are technological mea-sures the only ones that can secure material emission reductions inthe transport sector? Hickman and Banister (2007) outline two dif-ferent scenarios for the assessment of the importance of technol-ogy in the future. In the first scenario, there is a high level ofeconomic development which contributes to an increase of tripnumbers and trip lengths but also to higher investment in technol-ogies to control pollution. In the second scenario, there is slowereconomic development, with less investment in new technologyand a greater emphasis on changing trip patterns. Following theglobal economic crisis of 2008 and 2009, the second scenarioseems more reasonable than the first one. Technological improve-ments alone should not provide the solution and it is necessary torethink existing spatial organization models and urban develop-ment patterns (Borrego et al., 2006).

Carbon sinks

In the previous sections, we have analyzed local policies to mit-igate GHG emissions. Local authorities can also play an importantrole in the development of carbon sinks by foresting open areasand increasing the number of trees in urban regions (Schmidt Du-beux & Rovere, 2007). Land use planning is an important instru-ment to create green areas and ecological performance dependson quality of green structure, specially trees (Whitford et al.,2001). The latter paper suggests measures to increase vegetationcover in dense areas, like the development of turf roofs or the cre-ation of communal gardens with extensive tree planting. Localauthorities should efficiently manage green areas to secure a betterproductivity than natural areas. Despite urban green areas beinglimited in their extent, their importance to the global carbon bal-ance can be disproportionately higher. Plants in gardens and urbanspaces have higher photosynthesis rates due to factors like betterlighting conditions, higher CO2 and nitrogen concentrations andbetter water supply (Niinemets & Peñuelas, 2008). Trees can alsoinfluence positively the energy balance of houses. They can provideshelter in winter, reducing heating costs and can refresh them insummer through their shade and through the evapotranspirationprocess (Mcpherson, David, & Rowntree, 1994).

Other sectors

Land use planning is an instrument that influences emissions inother sectors, as well. In the energy sector, planning can influencethe amount of energy used through decisions on building density,orientation and detailed design, including the provision of land-scaping. However, beyond a certain level, high urban densitiescan reduce the availability of spaces for photovoltaic and solar

panels (van der Waals, 2000). Moreover, the urban form influencesheat fluxes and humidity, causing differences in temperature(Taha, 1997) which also affect the energy use and, consequently,GHG emissions; in urban centres, the ‘urban heat island’ is one ex-treme manifestation of the way that urban concentrations can af-fect temperatures (Alves, Cortesão, Patterson, & Góis, 2009). Localauthorities are also responsible for the energy use in many publicbuildings and in the road network, including street lighting, andcan choose green energy systems to reduce GHG emissions (Monni& Raes, 2008; Schmidt Dubeux & Rovere, 2007).

Recycling waste avoids emissions caused by the manufacture ofnew products. In dispersed areas people are far from recyclingpoints and those distances affect recycling rates (González-Torre& Adenso-Díaz, 2005). Local authorities are generally responsiblefor waste management and this enables them to influence their sit-ing and scale and the technologies used. In many countries, one oftheir priorities is to secure a reduced dependence on the landfillroute, whether through the composting of organic waste, incinera-tion or other routes (Mohareb, Warith, & Diaz, 2008).

Organic waste management is considered an important tool toreduce GHG related to this sector (Marmo, 2008; Mondini, Sán-chez-Monedero, Cayuela, & Stentiford, 2008). Using organic wasteto improve the soil can decrease emissions associated with treat-ment and landfill disposal, which also improves soil fertility. Fur-thermore, increasing soil organic matter content can helpincrease CO2 removals (Mondini et al., 2008). Examples of localpolicies on the waste sector that decreased GHG emissions canbe seen in several countries. The Helsinki waste management sys-tem (Monni & Raes, 2008), and the Canadian waste policies (Mo-hareb, Warith, & Diaz, 2008) are among the most interestingexamples.

Existing policies and future needs

In this section, we briefly overview the main policies onaddressing climate change in Europe and the need for more appro-priate local instruments to encourage low carbon policies.

Existing policies

The European Union Emissions Trading Scheme (EU ETS) is oneof the key EU policies on climate change and consists of a cap andtrade programme which covers several industrial sectors as well asenergy plants. Under the EU ETS, member states’ governments setemission limits for the installations involved and allocate them anumber of credits/ allowances equivalent to those limits. Thosecompanies/utilities are then required to surrender their allowancesat a level which is based upon their emissions in each year. The EUETS covers just 39% of the EU’s GHG emissions and it does not in-clude important sectors as land use, land use change and forestry(LULUCF) and transport. The EU is not considering bringing thesesectors into the ETS in the foreseeable future.

Implementing measures to reduce emissions in the transportsector is difficult but it is also an essential question. In present cir-cumstances, the EU considers that the development of new tech-nologies provides the main possibility for reducing transportemissions. Thus, its strategy to reduce CO2 emissions from passen-ger cars and light-commercial vehicles is based on three pillars:voluntary commitments by the vehicle industry (with the objectiveof 90 g CO2/km in 2020), consumer information (displaying a labelon fuel consumption and CO2 emissions on all new cars) and thepromotion of fuel efficient cars via fiscal measures (Commissionof the European Communities, 2007). Nowhere in these three pil-lars or in relation to the EU strategy for the introduction of bio fuelscan we see any effective concern in respect of behavioural changes.

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Nevertheless, the EU does not disregard urban and land useplanning and mobility management. Thus it pursues policies onthe improvement of the urban environment through specific ac-tions which can also cut GHG emissions, and initiatives whichencourage cities to achieve more efficient and sustainable urbantransport systems. CIVITAS3 is one of them. This European initiativeseeks to implement and evaluate a set of technology and policybased measures in order to develop urban transport systems. Aswe have referred to above, a technological approach is importantbut it cannot be the only way of reducing transport emissions. Mean-while, CO2 removals within the land use and transport sectors arenot included in the EU ETS, although the EU supports more investi-gation in these areas.

Need for new policies

In the introductory section, we pointed out that Europe is facingdifficulties in meeting its overall carbon reduction target set underthe Kyoto Protocol. In that context, new policies need to be sought.We suggest that mechanisms like the EU ETS and American initia-tives such as the Acid Rain Programme and the NOx Budget TradingProgramme can constitute a basis to involve local authorities in cli-mate change mitigation, in a more effective and pro-active way.

Many authors consider these programmes, also termed cap andtrade schemes, as innovative policies that go well beyond the so-called conservative approaches in which the state assumes thecommand and control (e.g. Burtraw, Palmer, Cropper, Carlson, &DP, 1998; Napolitano, Lacount, & Chartier, 2007). Other authorsprefer carbon taxes (Berrittella, Certa, Enea, & Zito, 2008; Grazi &van den Bergh, 2008; Grubb, 2006; Zegras, 2007) but these taxeshave two main problems. The first relates to cost. In a cap and tradesystem, the emissions are reduced to the lowest cost. However,with a carbon tax the overall costs of reducing emissions are boundto be higher. The reason is that, in a cap and trade system, all pol-luters verify first if it is cheaper to reduce emissions or to buyallowances. The installations that can decrease emissions withcosts below the carbon price will certainly invest in emissionsreduction while those which need to invest more to reduce emis-sions will prefer to buy allowances. In a tax system all the installa-tions have to invest on emissions reduction even the ones thatneed to pay more.

The second problem relates to the feasibility of the system. Inrecent years, we have seen several unsuccessful attempts to imple-ment carbon taxes. Invariably, these seem to attract strong resis-tance from the stakeholders. Pragmatically, we should try to findother solutions.

To start with, a cap and trade system provides certainty. By theend of the commitment period, total emissions will certainly be be-low the limits proposed at the beginning. On the other hand, it isalso easier to create a global policy with a common market, whilein a tax based system national governments can apply differenttaxes to the same type of emissions. Following this line of thought,we propose a cap and trade system involving a number of sectorsthat are under the scope of local policies and have not been cov-ered by the EU ETS.

A new system: Local Emissions Trading Scheme (LETS)

Guidelines

Our proposal consists of a cap and trade system similar to theEU ETS but applied exclusively to local authorities. As we willsee, this embodies the main qualities of the EU ETS and tries to

3 http://www.civitas-initiative.org.

4 UNFCCC stands for United Nations Framework Convention on Climate Change(see http://www.unfccc.int/).

overcome what went wrong in the first phase of this Europeanwide scheme. We have called it the Local Emissions TradingScheme (LETS). The Portuguese mainland provides a test bed forthe implementation of such a scheme beyond the Kyoto Protocol’scommitment period (2013–2020).

Under this scheme, the Central Government starts by allocatingallowances to the different local authorities and, at the end of eachyear (in our case study between 2013 and 2020), local authoritiesreturn a number of allowances corresponding to the level of emis-sions observed in their municipality during that year. If, in a partic-ular case, that level is lower than the level allocated for, that localauthority can bank those surplus allowances for the following yearor sell them to other local authorities. If there are higher emissionsin one municipality than the quantity allowed for in the previousallocation, that authority must buy the necessary allocations inthe market.

LETS can only cover sectors significantly influenced by localauthorities and, at the same time, those that are outside the EUETS. This scheme cannot be linked to EU ETS because, despite theirapparent similarities, they target completely different entities.While the EU ETS installations have essentially commercial objec-tives, LETS includes public institutions. Also, under the EU ETS,those installations are primarily responsible for the GHG emissionsbut, under the LETS, local authorities are only indirectly responsi-ble (apart from the building stock and public infrastructure thatthey happen to own).

The way that the allowances were allocated underplayed themain criticism of the EU ETS. Many member states have allocationsunder the EU ETS that are beyond their needs (Egenhofer, Fujiwara,Åhman, & Zetterberg, 2006). This meant that many of the installa-tions covered did not need to cut their emissions or to buy allow-ances leading to prices falling, to the extent that by the end of theexperimental period they were near 0€. On the other hand, mem-ber states had to cut emissions in other sectors where the costsof reducing emissions were higher. For this reason we propose thatthe LETS allocations must be centralized in a unique body.

LETS must operate as a closed system within any given countryand it should only have two operational levels. Local authoritiesare the bodies which take part in the scheme and national govern-ment is the body which allocates the allowances. The overall sim-plicity of LETS is also an important factor. While EU ETS coversestablished installations, LETS covers institutions with other skills.The non-experts should understand the system easily. It must havefew and easy-comprehensible rules. As we have learned from theNO2 and SO2 American trading markets, LETS needs objective emis-sion caps, and a viable market where rigorous emissions monitor-ing and automatic enforcement ensure cost-effective results(Napolitano et al., 2007).

Moreover, LETS must be convincing and it depends crucially ona clear accounting of emissions and removals. The monitoringmethod should be similar to the methodology used in the nationalinventory reports submitted to UNFCCC.4 National inventory re-ports and LETS have different scopes (the first requires nationalaccounting and the second municipal accounting) and if it is not pos-sible to use the same methodology on LETS, it should be tailored tomatch the national accounting as closely as possible. Table 1 is acomparison between the EU ETS and the proposed LETS.

LETS application to mainland Portugal

In LETS, the allocation process is based on recorded historicalemissions. However, in the main, local authorities are not

Table 1Comparison between European Union Emissions Trading Scheme and the LocalEmissions Trading Scheme.

EU ETS LETS

Entities covered Installations Local authoritiesTraded objects Emissions allowances Indirect emissions allowancesAllocation entity EU Member States National GovernmentSystem type Cap and trade Cap and tradeCoverage Emissions Emissions and removalsObjective Lowest cost Encouraging local policies

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responsible for the emissions and so they should not have to payfor them in an auction. If we wish to encourage their participation,they should not pay any initial fee. The system must be a closedone and the funds should only be transferred between localauthorities. The commitment period is between 2013 and 2020.According to the EU targets, Portugal can only increase its emis-sions in the sectors not covered by the EU ETS by 1% between2005 and 2020, so the base year to calculate historical emissionsis 2005 and the target year is 2020. We have also created an incen-tive reserve to correct possible market mismatches. This reserve issubtracted from the total emissions allowed in 2020 and the resultis the total number of allowances to allocate.

The main market mismatch detected is related to forest. Euca-lyptus is a tree very common in Portugal which is capable ofremoving high volumes of CO2 but it also has a negative impacton biodiversity, soil and water resources, where it has become animportant environmental issue. By contrast, oak trees have rela-tively low carbon removing rates but a positive environmental im-pact in other respects. A free market would induce local authoritiesto promote forestation with eucalyptus instead of oak. Under LETS,new oak areas should have the same benefits in terms of allow-ances as eucalyptus areas despite the difference in terms of carbonremoval. The reserve should be used to correct this mismatch andit was calculated accordingly.

We have two kinds of allowances: positive and negative. Positiveallowances correspond to GHG emissions and negative allowancescorrespond to GHG removals. These positive and negative allow-ances are distributed to municipalities according to their share oftotal emissions and removals in 2005. If a municipality receives po-sitive allowances, it can have more emissions than removals in thetarget year. If a municipality receives negative allowances, it musthave more removals than emissions in the target year.

We have included two sectors affected by local policies and notcovered by the EU ETS, both with a significant scale: transport andLULUCF. The first is only responsible for emissions; the second isresponsible for both emissions and removals. In the transport sec-tor, we have estimated all CO2 emissions. Although in Portugal(and perhaps in many other EU countries), local authority policiesinfluence passenger transport far more than they do freight trans-port, fuel consumption statistics are not split between these twocategories, so it is impossible to consider passenger transport emis-sions separately.

For the LULUCF sector we have estimated CO2 emissions in for-ests (e.g. wildfires), CO2 removals and land use changes. Emissionsand removals by the forestry sector are considered in the same wayas emissions in the transport sector. Emissions and removals in thebase year determine the allowances allocation. Land use changesare considered in a slightly different way. When a non-urban landuse is abandoned, there are CO2 emissions equivalent to the carbonlost, and when a new forest is planted there are CO2 removals.These emissions and removals are converted in allowances whichcan be given to or returned from the municipalities.

The costs of such a scheme would be residual for the nationalfinances. Furthermore, the institutional framework of LETS can bethe same of the EU ETS. This is a factor which can also reduce

the overall costs. In addition, in the next commitment period, EUETS’ allowances will be auctioned and the revenues will benefitmember states. Part of these funds should be invested in the mit-igation of climate change and LETS is an instrument which couldreceive those funds. We propose that part of the revenue fromthe auctions should constitute the LETS’ main funding source.

Allowances allocation

The main purpose of this section is to present and critically re-view the main challenges in applying LETS to the Portuguese case.A brief, and simplified explanation will be made of the methodol-ogy to define the allowances allocated to each municipality.

Emissions in the transport sector on the base year

CO2 emissions in road transport are calculated on the basis offuel consumption and should be upgraded, applying an analysisof driving types, speeds, vehicle fleet age and travel distances.Our figures were limited to the official data of the fuel retailingactivity (Direcção-Geral de Energia e Geologia, 2008). In theabsence of more rigorous information, on the detail cited above,we have calculated emissions based only on fuel sales, and we haveassumed that the fuel sold in a municipality will be emitted there.We used the emission factors (which convert quantity of fuel usedinto CO2 emissions) for LPG, gasoline and diesel included in theNational Inventory Report to calculate those emissions. We consid-ered the average values over a 3 year period (2004–2006) to reduceannual distortions. The results for all the municipalities in main-land Portugal are shown in Fig. 1.

Emissions and removals in the LULUCF in the base year

All the emissions considered in the LULUCF sector come fromforestry. Portuguese national inventories consider two kinds ofemissions: emissions from wildfires and emissions from deforesta-tion. Currently, there is no data about annual fellings by municipal-ity. Without this information we could not estimate thecorresponding emissions. Instead they were taken into account inthe consideration of land use changes. Thus fellings are regardedas land use changes in areas where the forest was abandoned.Emissions from wildfires are calculated from sources like the inci-dence of burnt areas, reserves of biomass above ground and frac-tions of biomass left in the forest and not affected by wildfires.Other than the first, these are referred to in the National InventoryReport. The dimensions of the areas affected by wildfires in eachmunicipality were taken from the Portuguese Statistics Institute(INE, 2008); the related emissions are represented in Fig. 2. Theestimation of GHG removals in forest areas was rather more com-plex and involved the use of Geographic Information System (GIS)data; the removals estimated by municipality are shown in Fig. 3.

Allocating allowances

After calculating the emissions in the base year, we defined thetotal emissions allowed in 2020. According to the Kyoto Protocol,Portugal can increase its emissions by 1% between 2005 and2020 so we summed up the emissions from transport and forestryand projected them to 2020. After that, we calculated the reservevalue to correct possible negative market effects. When the Gov-ernment decides to encourage some kind of local policies it shouldprovide extra-allowances from this reserve. We subtracted it fromthe total projected emissions. The result is an emissions total to bedistributed to the different municipalities. Each municipality has aproportion of national emissions and a proportion of national

Fig. 1. Emissions in the transport sector by municipality.

Fig. 2. Emissions from wildfires by municipality.

Fig. 3. CO2 removals from forests by municipality.

Fig. 4. Allowances allocated in 2020.

M. Torres, P. Pinho / Cities 28 (2011) 576–582 581

removals in the base year. In 2020, it should keep those propor-tions and the allowances given are the product between the pro-portions and the total emissions and removals. If the allowedemissions in 2020 are lower than the removals, the allowancesare negative obviously. If they are higher than the allowances theyare positive. From 2013 to 2019 the allowances allocated shouldhave a linear evolution. Fig. 4 represents the allowances allocatedfor 2020.

Land use changes

As mentioned earlier, land use changes are considered in a dif-ferent manner. When a green area (responsible for CO2 removals)is abandoned there is a biomass loss and a resulting increase inemissions and the local authority involved should surrender part

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of its allowances. When, on the contrary, a new land use contrib-utes to an increase in carbon uptake, the National Governmentshould allocate extra allowances until the carbon stock reachesequilibrium.

Discussion and conclusions

The implementation of a cap and trade system among localauthorities can be an important opportunity to encourage low car-bon policies. The system is a clear alternative to conventional ap-proaches. When a local authority decides to adopt CO2 emissionscontrol policies in respect of the transport sector or wildfires, ordecides to increase the removal capacity of forest areas, it collectsthe corresponding economic benefits. On the other hand, if itencourages or allows land use changes which reduce the municipalcarbon removal capacity, it ends up being penalized.

This local cap and trade system – LETS – is not without its dif-ficulties, although the majority of these are likely to be satisfacto-rily overcome with perseverance and imagination. One suchdifficulty is the seeming complexity of the system for those not ac-quainted with cap and trade. With a responsive information andawareness campaign, we believe that the main and most influen-tial local agents will be able to fully understand and support theoperation of LETS. A second difficulty may be the lack of relevantstatistical information. However, our case study illustrates howone can overcome the lack of information in one area, here in re-spect of harvested wood, by considering tree fellings as land usechanges wherever a forest land use is abandoned. Finally, a thirddifficulty may rest on the argument that local authorities maynot be convinced of the benefits of LETS, or, worse, the systemmight distract them from their principal role of defending localpeople’s interests and improving the quality of life and the localenvironmental and social conditions. To these local authorities,we would argue that the LETS offers a new form of financing pro-jects or policies, with funds transferred from other local authoritieswhich cannot or choose not to use them. Indeed, it is an instrumentvery much in line with the think global act local paradigm. In otherwords, LETS can be another way of contributing to the mitigationof climate change. It will not solve all climate change problemsbut can be an instrument, among many others, that, together,should be able to redirect current worrying trends and prospects.

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