Tradable quotas: using information technology to cap national carbon emissions

TRADABLE QUOTAS: USINGINFORMATION TECHNOLOGYTO CAP NATIONAL CARBONEMISSIONS

David Fleming*The Lean Economy Initiative, London, UK

This paper proposes an economicinstrument for shifting national economiesaway from their dependence on fossil fuels.Tradable quotas would specify thepermissible quantity of carbon emissionsfrom all sources within a national economy,allowing the price to adjust around it, andusing information technology to distributethe quota units through the market. Thepaper outlines the task of carbon reductionnow facing developed economies, explainshow tradable quotas could be used to ful®lit, and sets out the advantages of tradablequotas in relation to the more widelyadvocated instrument of carbon taxes.# 1997 John Wiley & Sons, Ltd and ERPEnvironment.

Eur. Env, Vol. 7, 139±148 (1997)

No. of Figures: 2. No. of Tables: 1.No. of References: 19.

INTRODUCTION

Although there is now some movement ininternational discussions on ways inwhich the burden of reducing carbon

emissions may be shared between nations, there hasbeen rather less progress with credible systems to

implement those agreements within nationaleconomies. It is usually proposed that some systemof carbon taxes should be employed; carbon taxeswould have the advantage of shifting the burden oftaxation from labour to environmental assets, andthere is without doubt an important role for them1.However, it does not follow that carbon taxeswould be suitable as the sole macroeconomic driverfor reducing carbon emissions on the scale requiredto prevent a rapid increase in the accumulation ofglobal warming gases in the atmosphere.

The concentration of carbon dioxide has risenfrom its preindustrial level of 280 parts per million(ppm) to a present-day level of around 360 ppm.According to the Intergovernmental Panel on Cli-mate Change (IPCC), 460 ppm is the best that can behoped for as an eventual loading, reached sometime during the next century. A more probable ®nallevel, however, is 560 ppm (the benchmark of adoubling of the preindustrial level), but there is asubstantial likelihood of reaching 660 or even 760ppm. The impact of such levels would be profound,possibly catastrophic; the higher the atmosphericload of carbon dioxide, the greater the possibilitythat the climate's reaction will be nonlinear ± inother words, that it will run amok (IPCC 1996a, p21;1996b, p29).

Let us stay for a moment with the best chancelevel of 460 ppm. According to the IPCC, this wouldrequire, globally, a 70% reduction in emissions of

*Correspondence to: David Fleming, The Lean EconomyInitiative, 104 South Hill Park, Hampstead, London NW3 2SN.

CCC 0961-0405/97/050139±10 $17.50# 1997 John Wiley & Sons, Ltd and ERP Environment.

1The distortion in the tax system of developed countries has beendescribed by the Internal Market Commissioner for the EuropeanCommission (Monti, 1996). It was shown that taxes associatedwith labour increased by 20% between 1980 and 1993, and thepaper urges the case for a shift in taxation away from labour andtowards VAT, capital and real property taxes, and environmentaltaxes. The case for carbon taxes is also set out by Jacobs (1996),and by the Commission of the European Community (1993).

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carbon dioxide. The reduction would, of course, bevery unevenly distributed, with the developedcountries reducing their emissions far more than thedeveloping countries (some of which could be pre-sumed to increase them). That means that the 70%reduction worldwide would translate, at a con-servative estimate, into a 90±95% per cent reductionby the industrialized countries. If we then takeaccount of the IPCC estimates for future economicgrowth over its time horizon of one century, therequired reduction in carbon emissions, per unit ofoutput, reaches approximately 99.5%. In otherwords, what is in prospect is a virtual abandonmentof dependence on fossil fuels.

There is no policy on the agenda at present whichwould be capable of reducing developed econo-mies' fossil fuel dependence on such a scale. Even atimid carbon tax in the form of an 8% rate of VAT ondomestic fuel ± well short of the nursery slopes incomparison with the carbon taxes that would berequired ± has been rejected in Britain by the LabourGovernment. Although that is a missed opportu-nity, there is some sympathy with the general con-cern about the social effects of indirect taxes.

Energy taxes are regressive, bearing heavily onlow-income households. In the early years of acarbon-tax regime, high energy prices can beallowed for by an array of rebates which compen-sate households with (for instance) lower incometaxes and larger social security payments, andwhich reduce payroll taxes to enable ®rms to holddown their output costs ± and there is undoubtedlya case for such a shift in the burden of taxation.However, at the ever-higher levels that will in duecourse be needed to achieve large reductions incarbon emissions, the problems of depending ontaxation to drive the process of withdrawal fromfossil fuels become signi®cant. Even with rebatesystems in place, small businesses, emerging localeconomies and poor households could becomeparalysed by high energy prices. A correct balancebetween very high energy prices and matchingrebate systems would become increasingly elusive,and the need to commit the tax structure over thelong term would be an increasing handicap for ®s-cal policy.

There are signs that the insuf®ciency of carbontaxes is implicitly recognized, and that the currentlack of a model for implementing carbon-cappingcommitments at a national level has become a sig-ni®cant handicap to progress in internationalnegotiations. The solution proposed in this article istradable quotas.

WHAT ARE TRADABLE QUOTAS?

A tradable quotas system ± not to be confused withthe tradable permits used in international allocation± would be designed for the domestic economy, andcan be de®ned as `a national market for a progres-sively reduced quantity of carbon units'. Instead ofsetting high fuel prices with carbon taxes and lettingthe quantity adjust, tradable quotas would set thequantity and do everything possible to keep theprice low. The formula would be: low emissions,minimum prices.

Rating system

The starting point would be to rate all fuels for theirglobal warming potential (GWP), measuring thecarbon dioxide and other global warming gasesreleased per kilowatt hour (kWh) of energy. GWP isexpressed in grams of carbon dioxide, and otherglobal warming gases are converted to that stan-dard so that (for example), a gram of methane israted equivalent to 21 grams of carbon dioxide, anda gram of nitrous oxide is equivalent to 310 gramsof carbon dioxide2. Using this standard, globalwarming potential of fuels can be set out (Table 1).

Building on that, it is possible to develop a mea-sure that could be used as a practical everydaystandard in the consumer market. The `carbon unit',de®ned as 1000 grams of carbon dioxide (and othergases adjusted to that standard), can be calculatedfor a range of fuels in everyday measures (Table 1).

The rating system is calculated on the basis of theamount of energy actually embodied in a fuel. Theenergy provider must buy quota to cover the energyhe uses or releases as waste in the processes ofre®ning and distribution. In the distribution chain,

2These ratings are for global warming potential over a 100 yearperiod. Other periods could be chosen (IPCC, 1996b, p 26, Table4).

Table 1. Estimates of global warming potential (GWP) offuels delivered to the household, i.e. grams of CO2, plusmethane and nitrous oxide, measured in CO2 equivalents(COEs)

Fuel GWP per kWh Carbon units

Petrola 237.9 2.3 per litreDiesela 244.9 2.6 per litreNatural gasb 217.6 0.2 per kWhCoalc 357.5 2.9 per kgGrid electricity (day)d 700.6 0.7 per kWhGrid electricity (night)d 637.4 0.6 per kWh

Sources: a Energy Technology Support Unit (ETSU; 1996, Table3.10) and Commission of the European Community (1993).b ETSU (1995, Table B2). c ETSU (1995, Table B1). d ETSU (1995,Table 5.3).

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each company buys quota to cover its own energycosts; this means that the carbon units embodied inthe petrol itself do not change in the distributionprocess, but the costs of quota used in distributionhave to be included in the actual sales price chargedto the ®nal buyer.

Issuing quota

Quota, measured in carbon units, is issued to themarket in two ways. At present, around 45% ofcarbon emissions in the UK economy come from thehousehold sector ± chie¯y from domestic heating,lighting and power, and from use of cars. Thisproportion of the total issue of carbon units is dis-tributed free and in equal quantity to all adults asthe allocation (Figure 1). The remaining 55%, used by®rms, government, public transport and all othersectors of the economy is issued through the tender,which is bid for by banks and other institutions onthe present model of the market for Treasury Bills;this is distributed into the economy through elec-tronic direct-credit systems, and traded in the mar-ket. A year's supply of quota is in circulation at alltimes, and the supply is topped up daily3.

Use of carbon units to back fuel purchases

Fuel purchases are backed by the transfer of carbonunits from buyers to sellers. In most cases, thetransaction is carried out electronically, with norequirement for administration and paperwork. For

Figure 1. The market for tradable quotas.

3The estimate of 45 : 55% is based on:

(i) Domestic use is 28% of all ®nal demand for energy(Department of Trade and Industry (DTI; 1996, p 192).

(ii) Transport accounts for 34% of all ®nal demand for energy(DTI, 1996, p 192).

(iii) Road passenger transport accounts for 56% of all transportenergy use (DTI, 1996, p 203).

(iv) Cars account for 81% of road passenger miles (Departmentof the Environment, 1996, p 32); this factor has been roundedup to 90% to allow for the fuel inef®ciency of cars relative tobuses.

(v) The proportion of private car use (i.e. with fuel purchased bythe consumer, rather than by the ®rm) is estimated veryapproximately at 90%. A guideline for this estimate isDepartment of Transport (1995, p 24); this has been roundeddown by the author from 93% to 90% to allow for a longeraverage length of journeys in the case of business use.However, it does not allow for the very low (1%) proportionof car-passenger journeys which are business related.

The calculation is therefore:

28% + (34%6 56%6 90%6 90%) = 43.4%� 45%

This estimate is, of course, by no means accurate but it will do forthe present purposes, which is to outline the tradable quotassystem in principle.

TRADABLE QUOTAS FOR NATIONAL CARBON EMISSIONS

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example, there is no change in the way in which acustomer pays a gas bill: quota is automaticallydeducted from the customer's quota account on themodel of a direct debit; alternatively, the gas sup-plier buys quota on the customer's behalf, andcharges the cost onto their bill. The technology is thesame as that which is now used for switch andcredit cards; consumers who wish to buy quota cando so through automatic teller machines (ATMs);cards can be used at petrol ®lling stations to transferthe money required to cover the quota cost, or tosurrender quota, or both. From the practical point ofview, the transaction is virtually indistinguishablefrom fuel purchases at present. Consumers who donot want to participate actively, or who are un®t todo so, will still be able to back their fuel purchaseswith quota by paying for the supplier to buy quotaon their behalf, or by making direct-debit arrange-ments to surrender quota from their allocations.

Registration

A complete register of the ownership of quota isstored electronically by a central agency, for whichthe working title is QuotaCo4. Every quota-holder'saccount is held in this system, and all transfers ofquota are registered there. Banks do not have to setup and maintain accounts for quota; although theybuy and sell quota on customers' behalf, the loca-tion of the quota remains at all times within thecentral QuotaCo computer, just as the location ofconsumers' debt remains within the computers of acredit-card company.

Figure 1 shows the complete cycle for carbonunits from issue, to households and industrial users,to retailers, to wholesalers and ®nally to energyproviders, who surrender quota back to QuotaCowhen they sell the fuel which they have mined orpumped.

Market for quota

Carbon units are identical, and can be bought andsold by anyone. Low users, who do not use theirwhole allocation, can sell the excess, earning a rev-enue from their quota sales, whereas high users willneed to buy additional quota. Although poorerhouseholds, in many cases, use energy less ef®-ciently than better-off households, the absolutequantity of energy they use is in general lower ±with fewer rooms to heat, smaller cars, less use ofcars or no car at all. The system is therefore pro-

gressive, providing a positive incentive for poorerhouseholds, and a negative incentive for richerhouseholds, to achieve reductions in their use offuel. At the same time, government will earn arevenue from the tender; this could either be used aspart of general government revenue, or reinvestedin energy ef®ciency.

CARBON BUDGET

The 10 year `carbon budget' is set and published bythe Government (Figure 2). A long planning hor-izon is essential, since it is only over the long termthat substantial reductions in carbon emissions canbe achieved. Short-term opportunities for energysaving are relatively trivial; households can switchto energy ef®cient lighting, turn down their heating,use more public transport and make fewer leisurecar trips; they may also switch to smaller cars. In theshort term, the fundamentals of consumer life, suchas the location of jobs, schools, and shopping cen-tres, remain unchanged. Industry also inherits aninfrastructure of distribution systems, energy gen-eration technologies and energy-intensive agri-cultural systems which are resistant to change in theshort term.

However, over the longer term, all these eco-nomic structures and technologies are capable ofbeing reformed. A rolling 10 year time-horizon,with the added implication of continued reductionsin carbon emissions beyond the 10 years, providesthe framework in which fundamental changes canbe achieved.

The Commitment and the Intention

The carbon budget is divided into two periods: theone year Commitment (a rolling 365 day period),which is binding on the government, with the sameforce as the obligation underpinning governmentdebt; and the 9 year Intention, which is presumed tobe unrevised through the whole of the period. Thatpresumption will need to be strong, since theIntention will largely determine the price of quota;the credibility of the market and of the system itselfwould be weakened if the commitment were subjectto frequent change. How binding, then, is the pre-sumption of no change to the Intention?

Developments in climate change, such asdroughts and storms which would stiffen publicresolve to reduce carbon emissions, or changes inany international market for tradable permits thatmay develop, will require a degree of ¯exibility.Provision for this takes the form of a notionaldivision of the Intention period into two parts: in

4The name `QuotaCo' was suggested by Richard Regal, of theChartered Institute of Certi®ed Accountants in London.

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the short term (2±5 years), change would take placeonly as a last resort; in the longer term (6±10 years),there would be a scope for an annual review and, ifnecessary, revision.

In the opening two years of the scheme, the car-bon budget is held constant at the current level toallow the market to be established. After that, theplanned reductions begin, as shown in Figure 2.

Conservation programme

The tradable quotas system would be a driver, not asubstitute, for conservation ± the transformation intechnology, lifestyle and land use that will berequired. The conservation programme will be ableto call on the `factor four' technologies, which pro-mise to maintain the momentum of ecoef®ciencyimprovement (von WeizsaÈcker et al., 1997). Sincethe energy market as a whole, and present-dayenergy technologies in particular, are inef®cient,there is scope for reducing carbon emissions at nonet cost to the economy. The estimated size ofreduction in carbon emissions that could beachieved by 2030 at zero net cost ranges between45% and 82%, depending on the study (Krause,1995). In this context `zero net cost' would include

the costs of investment in energy ef®ciency, somesubstantial changes in lifestyles, and a great deal ofpolitical leadership. In spite of these uncertainties,there is evidently room for massive improvement inthe energy ef®ciency of developed economies,which would be desirable even if the threat of cli-mate change did not exist.

There is a limit, however, to how far the technical®x can take us (Fleming, 1996). For the 20- or even200-fold energy-ef®ciency improvements on thescale that is required, it will be necessary to achievea deep transformation in the structure andassumptions of the market economy. For instance,there will need to be a decisive change in land-usepatterns. Localities will need to develop a broadlybased competence, a greater ability not only toconserve but also to produce primary resources,maintaining the quality of life which future gen-erations will demand, with much reduced recourseto cheap transport. What is in prospect is nothingshort of a shift from `specialization-plus-transport'as the de®ning theme of the developed economy to`integration' as the de®ning theme of the postcarboneconomy.

That will require a combination of two types ofpolicy, namely (to use the terms which are estab-lished in the literature) top down ± the carbon taxes

Figure 2. The carbon budget: commitment and intention.




and/or tradable quotas which drive it along; andbottom-up ± the detailed changes which actuallyimplement it. The top-down policy will need tohave the muscle to drive the change, the light touchto avoid damaging the economy's ability torespond, and the ¯exibility to adapt to the profoundtransformation that is in prospect for developedeconomies in the next century. It is a demanding jobspeci®cation, and carbon taxes have the advantagethat they can start work immediately. But theargument of this paper is that for the longer term,for the deep transformation that is required, trad-able quotas have the better quali®cations.

ADVANTAGES OF TRADABLE QUOTAS

1. Fairness

The unconditional allocation of quota to every adultgives them free access to the baseline quantity offuel, and the option of selling part of their allocationopens up the possibility of earning revenue from thesystem. Tradable quotas therefore confer the criticalbene®t of equity, which is not just a value in its ownright ± it is an enabling condition. If the proposedmethod of capping carbon emissions is not con-sidered to be fair, it will not get the public supportthat will be required to enable it to happen; in thissense, equity and feasibility converge into the samething.

Fair does not mean comfortable. There will beinnumerable dif®culties and strains in the process oftransition to freedom from fossil-fuel dependence;there will be hard cases, unexpected consequences,and narrative of hardship, building up the pressureto weaken or abandon the attempt to face up toclimate change. What is required then, is fairness ±not to be confused with loss of nerve.

2. Effectiveness

Tradable quotas have the advantage of effective-ness, in that they bear directly on the matter inhand, which is the quantity of carbon emissions,rather than relying on the indirect effect of hightaxes acting as a signal to consumers. The high fuelprices imposed by carbon taxes would be a signalwhich some would be ready to ignore, with the richpaying the price and carrying on polluting, leavingthe poor paralysed by the impossible agenda ofhigh costs and low incomes (OECD, 1993, p 8).There is no doubt that carbon taxes would be high.In the early years, the `low hanging fruit' (Walleyand Whitehead, 1994)5 ± the relatively easy transi-tion to the accessible energy-ef®cient technologies ±

could be picked, but the paradigm shift that is inprospect would require a very clear signal indeed,requiring energy costs so high that governmentswould be all too likely to shy off the task of carryingout an effective programme6. Even if the net costadvantages of reducing carbon emissions and cor-recting the inef®ciencies of the energy market arerecognized, the volume of funds that would need tobe raised from energy taxes would be `so large as tosigni®cantly alter the tax structure in the economy;. . .very few other potential tax sources are availablefor raising comparably large revenues' (Krause,1995, p 21).

At the very least, there would be the strongtemptation for governments to indulge in enligh-tened opportunism ± to impose carbon taxes at arate designed to maximize the government's ownrevenue rather than maximize the reduction incarbon emissions. Divided government loyalties,torn between carbon reduction, revenue max-imization and compassion, would be a less thanideal recipe for a solution to the problem of carbonemissions.

3. Lower costs

In the equilibrium world of economic theory, theprice which delivers a given quantity is the same asthe price which results from that same quantity ± sothat, in theory, the energy price produced as a resultof the quantity set by a tradable quotas schemeshould be the same as the price that would have tobe set by carbon taxes to deliver that same quantity.In practice, however, there are reasons to believethat the prices of fuel resulting from the tradablequotas system discussed here would be sub-stantially lower than the prices that would developfrom an equivalent system of carbon taxes.

First, the price of the allocation to consumerswould be zero, and this would make a very largecontribution towards keeping to a minimum the risein prices developing as a result of the quota system.

Second, the tradable quotas scheme would beable to make full use of false expectations of price.

5They argue that, from the mid-1980s, when ®rms were promp-ted by environmental regulation, they were able to achieveenvironmental improvements relatively easily, and without fun-damental innovation. Now, managers are discovering that theeasy environmental problems have already been solved.

6As Scott Barrett summarises it, `the qualitative story is prettyclear. To lower CO2 emissions very substantially would require alarge carbon tax.' (Barrett, 1991). Similarly, the editors of aneconomic study of carbon taxes agree `. . .the rates of such a taxwill have to be of considerable magnitude.' Barker et al (1995).(Introduction, p. 1).

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Suppose that a price of (say) £20 were forecast forcarbon units in 10 years' time. The market wouldhave the incentive to respond to that forecast byaccelerating its energy-ef®ciency programme andreducing its demand, so that the price that devel-oped at the end of the 10 year period may turn outto be substantially less than expected (say, £10) ±rewarding the economy for its efforts, and provid-ing an incentive to achieve lower prices by intensi-fying efforts to reduce demand. In the case ofcarbon taxes, however, prices could not respond likethis: a policy-based energy price of £20 in 10 years'time would remain unchanged, however much theeconomy reduced its demand. The only solution tothis would be for the government to reward theeconomy by reducing the carbon tax to below itsforecast level, but that would weaken the credibilityof the carbon tax system, converting it to a messyhybrid between carbon taxes and quota. A gov-ernment that aimed at consistency in its carbon taxpolicy would need to choose between meddlingwith the price and leaving the economy to sweatunder the burden of unnecessarily high energycosts.7.

4. Flexibility

What is in prospect here is a long-term policy ± thetrajectory of reduction in carbon emissions couldwell span the whole of the next century. It istherefore necessary to have in place a policy thatwill be able to respond to profound change. Twochanges, in particular, could develop over thatperiod.

First, the economy will move through periods ofgrowth and recession. Recession, and the unem-ployment that comes with it, could be more pro-found and enduring than any that has beenexperienced in this century. Tradable quotas wouldadapt automatically to such changes ± with fallingconsumer demand, there would be reduced

demand for energy, and probably a reduced equi-librium price for any given level of demand forenergy. In this situation, quota prices would act (ifonly weakly) as an automatic stabilizer; reducedenergy prices would be a stimulus for economicrecovery. Carbon taxes could also be adjusteddownwards under these conditions, but at a cost. Ascheme that allowed the government forever totinker with prices at the promptings of economicchange, eroding its credibility in the process, wouldalso destroy any sense of ownership in the schemeby the economy as a whole ± prices would operateat the behest of government, rather than in responseto the market.

The second type of change that would be likely todevelop during the lifetime of the programmewould be a shift in the intensity of concern on cli-mate change. If global warming were to intensify,there would be pressure to accelerate the reductionin carbon emissions; government in the tradablequota system could meet this by moving the carbonbudget into a steeper trajectory as each new 10thyear entered the intention period. The response of acarbon tax regime would be more ambiguous:higher taxes imposed immediately would be verydamaging, given the short-term inelasticity inenergy demand; and the setting of onerous taxesstretching ten years ahead, with the cost rigiditiesthat this would entail, would impose a ®scalin¯exibility on government which would be hard tojustify.

5. Low administration costs

There is a reasonable expectation that the costs ofadministering tradable quotas would be muchlower than those associated with carbon taxes. Theregressive effect of carbon taxes would requireextensive systems of compensation and supple-ments, much of which could be avoided by thetradable quotas system, which builds in an auto-matic transfer payment in the form of the saleableallocation. The exception to this would take theform of an extension of the existing system of childallowances to take account of the energy costs ofchild rearing (for which the adult-based allocationof quota would not speci®cally allow). The admin-istration costs of the system itself could be covered(many times over) by the revenue which the gov-ernment would earn from the tender.

For either taxes and quotas there would need tobe provision for some price adjustment (similar tothe current VAT exemptions for exports) for inter-national trading with countries using different sys-

7There are some recursive arguments here which need to beuntangled. The £20 would, (we might suppose), only be made onthe assumption of an honest expectation of the economy'senergy-saving response. However, it might also be made on theassumption that an effective response would not be achievedunless the economy were frightened by a very high forecast ± sothat the forecast might be deliberately in¯ated. If the economythen grew wise to this (developing rational expectations withrespect to the forecast), it would cease to be motivated by fear,with the result that the deliberately in¯ated tactical forecastwould turnout to be correct. However, this new experiencewould give credibility to the forecast while at the same timescaring the economy into renewing its determination to under-shoot it. The oscillation between wrong-but-useful and right-but-useless forecasts could, in theory, be resolved if all partiesdeveloped the experience and trust which enabled them both todo away with tactical forecasts and to respond to realistic ones.




tems, or the same system applied at different rates.Without this, there would be a competitive advan-tage in world trade for industries with the lowerstandards of carbon ef®ciency.

The core of the tradable quota system would lie inthe application of information technology, pro-grammed to effect transfers and purchases of quotaautomatically. Before this technology came intobeing, rationing systems were extremely inef®cient,with high transaction costs and no realistic market ±the ration books and coupons of the 1940s are themost recent experience of this ± and taxation was byfar the most practical option. However, with thenew information technology, rationing has becomefeasible, and it is indirect taxation, with its regres-sive dif®culties in discriminating between differentsections of the market, which is crude by compar-ison. The present proposal is, in essence, a recom-mendation that the true potential of well-established information technology should bebrought to bear on the issue of climate change.

TAKING THE SYSTEM FORWARD

There are heroic assumptions in this paper, and theyneed to be examined. Here is an initial researchagenda.

1. Rating system

How would the rating system work in practice?What is the best way of taking account of variabilityin ratings, such as the change in the global warmingpotential of electricity generation at different timesof day?

2. Market

How should the tender be handled? Could it bemodelled on the issue of Treasury Bills? In whatways would the market for short-term debt need tobe modi®ed for carbon units? How would themarket operate in practice? What instruments (suchas upper limits to holdings, or dated quota) wouldbe available to maintain price stability?

3. Allocation

How should the allocation be set? It is argued in theliterature that if tradable permits (in the interna-tional allocation of commitments to reduce carbonemissions) were to be based on population, thiswould be an incentive to have children (Cline,1992), so it is proposed that the allocation of trad-

able quotas should be based on adults aged 17 orolder, with children's energy needs being metthrough the existing child allowance system. Is thisan appropriate solution?

The 45%±55% split between the allocation and thetender is a very rough approximation to the splitbetween households' and ®rms' consumption ofenergy. An accurate estimate of the split is needed.

4. Prices

How would quota prices behave in the market? Towhat extent would prices be vulnerable to strategicaction, such as buying quota futures? Would it benecessary to counter this, and if so, how? To whatextent would prices of quota differ from the corre-sponding costs of carbon tax? What would theinteraction be between the expected (future) quotaprice which signalled the need for conservation, andthe actual price achieved at that future time, afterthe conservation had been implemented?

5. Government revenues and costs

How would government revenues from the tendercompare with revenues from carbon tax? Howwould the administrative costs compare, includingthe compensation required by low-income groupsunder the carbon-tax regime?

6. Scale

There would be some logic in European nationsoperating the scheme on a European Union-widescale. And yet there is also a natural case for oper-ating on a national scale, which would reduce theanomaly of maintaining a constant allocation forareas with widely differing energy needs. An evensmaller, regional, scale would have the advantagesof giving the population a sense of ownership of thescheme, and allowing the carbon budget and allo-cation to be closely adapted to regional conditions.One model would be an EU-coordinated schemewith regional or national implementation. What isthe best scale solution?

7. International trade

How should price adjustments be made for goodstraded between economies with signi®cantly dif-fering quota prices, or with trading partners thathad no quota system at all? How would a zero-rating system on the VAT model operate? Whatwould be the implications of Internet trading?

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8. Information technology

The information technology, it is assumed, wouldbe very similar to that which is already used forcredit cards. What are the technical implications?

9. QuotaCo

The new institution QuotaCo is described by thepaper. QuotaCo's job would be to act as the regis-trar of the quota system. What form should thisorganization take? How should it be set up andregulated?

10. Conservation policy

The paper urges that the tradable quota systemshould be backed up strongly with a programme toenable people to achieve a very high degree ofenergy ef®ciency, not least in the use of land-space.The detail of that conservation programme needs tobe developed.

11. International allocation and the carbon budget

Tradable quotas would require national quantitycommitments, whereas international tradable per-mits imply ¯exible national quantities. The interac-tion between the two schemes needs to bemodelled. The longer the period of Commitment,the greater the dif®culty of reconciling the nationalscheme with an international market. Is the 1 yearCommitment plus the year Intention the correctbalance?

12. Modelling

The whole scheme needs to be fully evaluated bycomputer simulation. This should include a study ofthe effects on national income and employment,comparisons with carbon taxes, and models of theway in which taxes could bear some of the burdenof carbon capping.

Conclusion

There is not only a research agenda here, but a casefor a signi®cant initiative to be taken in Europe. The®rst mover will have the advantage ± by enjoyingthe ef®ciencies and lower costs associated withreduced dependence on fossil fuels, and by openingup the possibility of technology and consultancysales. More fundamentally, however, global pro-gress will not be made without a ®rst mover tobreak through the hesitations, and Europe is well

placed to take on this role. World leadership on theissue is an opportunity, ready to be picked up.

ACKNOWLEDGEMENTS

The preparation of this paper was made possible bythe support of the Polden-Puckham Trust, and itforms part of the research programme of the LeanEconomy Initiative, established by Elm FarmResearch Centre, Hamstead Marshall, Newbury,RG20 0HR, UK. T:+44 (0)1488 658298. Discussionswith Simon Collings, Hugh Davies, Edmund Davis,Stephen Hall, Meyer Hillman, Tim Jackson, AubreyMeyer, Richard Regal, Hugh Raven, Edward Roth,Richard Starkey, Anders Wadeskog and LawrenceWoodward (Director of Elm Farm Research Centre)have been especially helpful.

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Cline, W. (1992) The Economics of Global Warming, Institutefor International Economics, Washington, DC.

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BIOGRAPHY

David Fleming is research director of The Lean EconomyInitiative, 104 South Hill Park, Hampstead, LondonNW3 2SN. Tel: +44 (0) 171-794 5644. Fax: +44 (0) 171-435 3818. Email: [email protected]

D. FLEMING



Documents

Tradable quotas: using information technology to cap national carbon emissions