Proposal for a Global Emission Permit Scheme

Michael Robertson. Urban Ecology Australia. 2007.3

UEA submission to the Prime Ministerial Task Group on Emissions Trading.

Introduction

The rate of global warming, and consequent climate change, is unacceptably high, and likely to increase if global greenhouse emissions are not reduced.

We need a globally coordinated, adequate response to global warming, that puts a price on greenhouse emissions, uses the money raised to fund technology development and other projects that will accelerate the transition from a carbon-intensive to a low-carbon economy, and to fund projects that will help human communities and natural ecosystems adapt to climate change.

We need a global scheme for the release of emission permits according to a schedule of gradual emission reduction consistent with the need to slow global warming. A scheme to put these permits up for sale at a predictable price to organisations that can pass on the costs in an efficient and fair manner to all parts of the economy according to their contribution to overall emissions.

We need a scheme to distribute funds raised from sale of emission permits, to support projects that look likely to be effective in facilitating emissions reduction and climate adaptation, according to rules that are fair and agreeable to all countries, thus avoiding widespread opposition and non-cooperation.

Proposed scheme

Proposal: Establishment of an international authority, charged with responding to global warming through controlled release of greenhouse emission permits.

The Authority would release emission permits on a regular basis following a largely predetermined (and therefore predicable) schedule.

The Schedule would be periodically adjusted according to updated knowledge concerning the causal links between emissions and global warming. For example, if the rate of natural removal of greenhouse gases from the atmosphere were to increase, this would allow the Schedule could be made less severe, without postponing needed slowing of atmospheric greenhouse gas accumulation. On the other hand, if it turned out that greenhouse gas accumulation needed be slowed, perhaps reversed, much more quickly than previously thought, in order to slow warming within an acceptable time frame (or indeed avoid more rapid warming), then the Schedule could be tightened.

The actual number of permits released during a given period would have to compensate for greenhouse emissions not covered by the scheme. If, for example, the Schedule had a target of 35 Gt CO2e per year by 2020, but the emissions not covered by the scheme amounted to 10 Gt per year at that time, then the Authority would only release permits to the value of 25 Gt that year.

How would the permits be distributed?

The permits released would go into a stockpile and then sold on a global market at a price that the Authority would regularly adjust. Fluctuating demand for permits would be accommodated by varying the permit price and by allowing the permit stockpile to be depleted or replenished within an appropriate range. The aim would be make variation in the permit price as gradual as possible, and therefore more predictable to buyers, while keeping permit sales within the limit imposed by release schedule (that is, not running the stockpile down to nothing).

Unused permits could be returned later for resale at the prevailing price. This might help stabilise both price and stockpile, if permit holders responded to higher prices by returning unused permits, or to lower prices by buying up extra permits for future use.

The proposed method for permit sales would therefore combine the main advantage of an emissions permit trading scheme - explicit adherence to a predetermined release schedule - with the main advantage of a carbon tax - predictable permit prices.

Adherence to a predetermined schedule helps bolster political will, and provides greater medium term certainty for business. Predictable permit prices provide greater short term certainty, and help firms avoid the need to employ analysts to second guess the permit price when they could be employed to develop ways to reduce emissions and thus reduce the need to buy permits.

How to spend the revenues

The Authority would distribute funds raised from the sale of permits to support various development projects with the following aims:

What projects should be eligible for funding?

Projects that have benefits, whether social, environmental or economic, in addition to facilitating emission reduction or adaptation to climate change, should receive receive preference to projects that do not.

Projects that have significant disbenefits should not be funded. For example nuclear power facilities, which generate hazardous waste for which no viable long-term storage method has yet been developed. (On the other hand, projects to prototype new and promising methods of long-term storage might warrant funding, although not creating hazardous materials in the first place is generally a more effective management strategy than trying to contain them once created.)

Who should pay?

The Authority would set consistent rules as to who should be required to purchase permits.

Such rules should aim to minimise transaction costs, avoid arguments where emissions are uncertain, and exempt emitters least able to pay. Thus they should focus in the first instance on large, obvious emitters with significant cash flows. (Which in the case of emissions from energy production would take care of most of it.)

For example, permits for transport fuel would best be paid by (a few) wholesalers rather than (many) retailers. Meanwhile, it would not be worth pestering subsistence farmers to pay for emissions caused by their agricultural practices, because they have little ability to pay, are scattered in remote locations, their emissions hard to quantify, and probably not much anyway. Any concern about such emissions (eg from rice paddies) would be better addressed by assisting such farmers modify their farming methods or crop/livestock varieties where appropriate.

Who would pay?

The Authority would probably not have the ability to compel greenhouse gas emitters to buy permits, although national governments might. However, much of the incentive for organisations to acquire permits for their emissions would come from pressure by consumers wishing to "buy green", and from workers, shareholders, and suppliers wishing to "sell green".

The Authority could act as an accreditation agency. Emitters paying their way would receive "credits", which would distinguish their products from those of emitters refusing to buy permits. An appropriate accounting method could allow these credits to be passed up the value chain, so that, for example, cars manufactured from steel produced using coal for which permits had been paid (at point of purchase), could demonstrate that at least some of the emissions caused by the production chain had been covered.

What's in it for developing countries?

To the extent that funds were distributed to regions in proportion to their population, then developing countries whose economies were not carbon intensive (and not dependent on carbon-intensive imports) would gain a source of national income from participation in the scheme. They might also gain extra benefit from privileged access to intellectual property generated as a result of technology development funded by the scheme. In return they would facilitate monitoring of emissions within their borders, and ensure a transfer of funds across their economies, from high-emission sectors to low-emission sectors (although in many cases this would require a significant change in their economic development strategy).

What's in it for countries with energy intensive economies?

If the proportion of funds set aside for technology development were high (and to the extent that such funds went to expand established technology development sectors rather than building up such sectors from a low base in countries with poor education systems and few research facilities), then countries such as Australia and the United States, with energy-intensive economies but with well developed technology development sectors (and capacity to expand them), would do well out of the scheme.

The governments of such countries would have to be comfortable about shifting funds from their energy-intensive sectors into their knowledge-intensive sectors (although the two partly overlap). But they should know that the path to continuing economic growth for their countries will hinge on having a strong, knowledge-intensive export profile, not just relying on buoyant commodity prices.

Should Australia get behind such a scheme?

Australians citizens are more and more of the opinion that global warming is getting out of hand, and that something substantial must be done about it.

Many Australians want to make themselves "carbon neutral", and buy carbon neutral products, but have trouble doing so with certainty due to general lack of reliable product accreditation.

Many Australian firms would like to go carbon neutral, especially if they could easily demonstrate this to their clients, customers, employees and shareholders. However, they do not wish to compete with firms that sell similar products at lower prices because not paying their way on greenhouse emissions.

To the extent that funds raised from by scheme would go into technology development and biodiversity protection, areas in which Australia has a competitive advantage, then the scheme would be good for the Australian economy. But how the funds end up being distributed is liable to be hotly contested.

If Australia acts to pioneer a global permit scheme, and set an example with an equivalent, national scheme of its own, or in cooperation with other countries, then it may have a chance at writing the rules of an eventual global scheme in its favour. What rules would be in Australia's national interest? Funding rules that allowed Australia to respond in kind, according to the talents and advantages it possesses, and which it should be promoting anyway. What rules would not be in Australia's favour? Funding rules that directed most of the funds raised in Australia into projects in other countries that had little economic benefit to Australia, and perhaps little benefit in slowing global warming (also very much in Australia's national interest).

How a global emissions permit authority might emerge

Currently there is a proliferation of firms offering "carbon-offset" services. Such services, which include planting native forests, assisting communities reduce their energy use, and reducing the carbon-intensity of energy supplies, amount to greenhouse emission permits issued without regulation, coordination or oversight.

The next step would be for national governments to regulate this emerging industry, and coordinate the price offered, so that consumers would have more guarantee of getting value for money. And then to bring these national industries into line with globally consistent rules and prices.

The end result would of this process would be a global industry consisting of firms, agencies and groups which organised local projects and applied for funding from national or local funding bodies. Funding bodies which might well be accountable to a global funding authority, the very same authority given the task of issuing permits and setting a world permit price.

Conclusion

Global warming is a growing problem which national governments have been slow to address, although a number of governments have managed to set up a prototype, partially global, coordinated response featuring emission targets, permit trading and project funding, under the Kyoto Protocol.

The scheme proposed in this submission is meant as a worthy successor to the Kyoto prototype - as a way of coordinating an effective, global response. But the guts of any such response will be in the efforts by innovative and dedicated individuals and organisations to transform the world economy into a low-emissions one. The task of governments is to encourage and amplify these efforts.

The time for inaction is over. We need to try out a great variety of promising solutions, in order to discover those that will be effective on a larger scale. Because the need for effective, large scale solutions is growing ever more urgent.

2007.3.7