Cap and Trade Rules
Brother, Can You Spare a Carbon Credit?

By Rebecca Tuhus-Dubrow
The Boston Globe
February 24, 2008

Global Warming is a planet-sized problem, so policy solutions tend to aim for
the grandest possible scale. The signatories of the Kyoto Protocol have pledged
to cut their greenhouse gas emissions at a national level, while laws in various
countries and states seek to reform entire industries.

For individuals, the picture is very different.

Environmentalism often boils down to small lifestyle choices, like turning down
the thermostat and screwing in the squiggly light bulbs - gestures that can feel
virtuous but futile. Some environmentalists even consider them counterproductive
if they substitute for activism.

But a new wave of thinking suggests it may be better in the long run to address
this global problem in a way that directly involves individuals. Several
proposals generating buzz chiefly in the United Kingdom and Ireland operate on
the notion that every individual has an equal stake in the atmosphere. The most
provocative idea, personal carbon trading, would grant all residents a "carbon
allowance," setting a limit on carbon dioxide emissions from their households
and transportation. In the model of the industrial "cap and trade" system,
guzzlers who exceeded their allowance would need to buy extra shares. People who
conserved energy, meanwhile, could sell their leftover shares and ride their
bikes all the way to the bank.

This is not just a fantasy floating around in the greenest reaches of the
blogosphere. In 2006, the UK's environment secretary, David Miliband, endorsed
the idea, and the British government has commissioned a study to explore the
policy's feasibility. An alternative proposal, known as "cap and share," is
under consideration by the Irish government, and Peter Barnes, an American
entrepreneur, promotes a kindred scheme in his new book, "Climate Solutions."

The collective impact of individual energy use is enormous, so any effective
approach to climate change will ultimately require major changes in individual
behavior. The most broadly accepted estimate is that direct emissions from
individuals - that is, residences and transportation - account for 30 to 40
percent of total greenhouse gas emissions in both the United States and the UK.
The Union of Concerned Scientists calculates that the average American is
responsible for the emission of about 20 tons of carbon dioxide per year.

"Climate change is a problem that's far too complex for existing economic models
to deal with," says Matt Prescott, project director of Carbon Limited, a program
in the UK that is researching the idea of personal carbon trading. Individuals,
whose emissions "have been skyrocketing," play a key role, says Prescott. "When
you put your foot on the accelerator, there's no blaming Ford."

Engaging individuals directly could have a groundbreaking impact, alerting them
to their contribution to the problem while enlisting them in solving it. There
are substantial differences among these policies, and practical and political
obstacles to implementing any of them, especially in the United States. Some
believe a tax, aptly applied, could accomplish the same goals more efficiently.

But advocates see these plans as a necessary shift in the way we think about
pumping carbon into the air - infusing the global energy debate with a deeply
personal sense of rights and responsibilities.

Carbon dioxide is an inevitable byproduct of most modern human activities.
Beginning with the industrial revolution, we have been spewing it into the
atmosphere at an ever-increasing rate, along with other gases that trap heat
from the sun. (Carbon dioxide makes up over 80 percent of greenhouse gas
emissions; "carbon" seems to have become shorthand for all of them.) A
solidifying consensus has it that in order to avert catastrophic climate change,
we must slash greenhouse gas emissions 80 percent by 2050.

Fledgling efforts to control carbon emissions have generally taken three forms.
One is to set simple limits, such as the 2004 California law that attempted to
regulate tailpipe emissions from vehicles. (The law has been blocked by the EPA
in a decision now under appeal.) Another approach is making them expensive by
taxing some or all fossil fuel sales. A few countries, such as Britain and
Finland, have passed carbon tax laws, as have Boulder, Colo., and the Canadian
provinces of Quebec and British Columbia.

The third category consists of cap-and-trade systems, a sort of cross between
the first two that uses market mechanisms to discourage emissions. A limit is
imposed, but players can exceed it for a price, and the energy-efficient can
benefit by selling their surplus. The Kyoto Protocol involves such a mechanism,
and the European Union has its own emissions trading scheme that allows
businesses in member countries to trade emissions rights. And the trend has
begun to catch on in the US Congress, where several current bills would
implement an industrial cap-and-trade system.

In 1996, British policy analyst David Fleming, director of the research center
the Lean Economy Connection, thought of a twist on this approach: What if, in
addition to nations and corporations, we applied these rules to people? Under
his plan, an independent committee would set a cap for total emissions for all
of Britain. Forty percent of this cap would be allocated to individuals, free,
with everyone receiving the same share. The rest would be allotted to businesses
and government, which would have to pay for their shares. To rein in emissions,
the total cap would be incrementally lowered each year.

Fleming and others imagine a system that reaches deeply into how people live -
and how they think about their lifestyles.

Under such a system, you would have a personal carbon account that used the
technology of credit and debit cards. When you bought gas or paid utility bills,
the units would be deducted.

When you had to run errands, before hopping in the car, you would pause to
consider taking the bus, or riding your bike, or calling up a friend to car
pool. Vacationers deciding between Vermont and Colorado would have to weigh the
relative carbon impact of driving and flying. To save up carbon units for the
trip, they might have to turn down the air conditioner for a couple of weeks.

Carbon costs would start to figure into such everyday decisions, until the
calculus became automatic.

If you had carbon savings, you could use them next year, when the cap would be
lower, or sell them on the carbon market.

One of the main attractions of this idea is its equity. The outsized carbon
footprints of the wealthy - those who fly by private jet and live in McMansions
- would come with an extra price tag, so the penalty would fall on the people
most able to afford it. The poor, who generate much lower emissions, could
actually turn a profit by selling their surplus.

As entrepreneurs and businesses adapted to this system, the development of
alternative energy and energy-efficient appliances would take off. As you used
more wind power and your car consumed less gasoline, you'd have a little more
leeway with your carbon account. At the same time, though, every year the cap
would tighten, cutting into your allowance, further spurring conservation and innovation.

"Getting Americans to find another way of living is going to be very difficult,"
says Fleming. His plan, he believes, would be a "guarantee to change their way
of life and have a future."

Depending on your perspective, the notion of a personal carbon allowance may
sound utopian or nightmarish. Meanwhile, there are other proposed schemes that
may be easier for Americans to swallow. They share certain elements with that
idea, but avoid the individual quota and place more emphasis on rights than responsibility.

In Ireland - a country that recently made headlines with its dramatic success in
reducing plastic bag use - the government is considering a proposal called "cap
and share." In the first stage, it would apply only to vehicle fuels, but the
scope would eventually expand.

Under the plan, which could be adopted as soon as next December, an independent
trust would set a cap for consumption of gasoline and diesel fuel, convert that
figure into tons of carbon dioxide, and divide that number by the adult
population of the country. Each adult would get a permit in the mail
representing one share. Each company that imports vehicle fuel into Ireland
would need to get its hands on those permits in order to sell its product.

"When you got your permit, you would have to decide what to do," says Richard
Douthwaite, an Irish economist and founder of the Foundation for the Economics
of Sustainability. "If you tore up the permit, you would be preventing that
amount of vehicle fuel from being released." But the more tempting, and no doubt
more popular, option would be to sell the permit to a company, via the local
bank or another broker.

By adding a cost to selling gas in Ireland, and by placing a limit on the total,
the scheme would immediately cause fuel prices to rise, providing an incentive
for people to drive less or to devise greener means of powering vehicles. But
consumers would also be partly compensated for the higher cost of fuel through
the sale of their permits.

A third proposal, which has support from some American environmentalists, is an
idea called the "sky trust," first floated in 1999 by Peter Barnes, the American
entrepreneur and a fellow at the Tomales Bay Institute in California. In several
books, including "Climate Solutions," Barnes conceives of the atmosphere as a
common asset. He proposes that an independent board set a cap for total
emissions and hold an auction for emissions rights. Companies would pay for the
permits, and the resulting pot of cash would be divided equally among citizens.
His scheme is based on an existing American system, the Alaska Permanent Fund,
founded in 1976 in response to a windfall from oil exports. Every year, a
semi-independent corporation distributes the oil revenue among Alaskan residents.

Barnes calls this a "very interesting precedent - this notion that if you have
revenue from selling a common resource, of giving it back to everybody equally."

Although different in structure from personal carbon trading, the sky trust
would similarly reward the carbon-thrifty. "If you have a Hummer and three
houses, you're going to be paying in a lot more than you get back," says Barnes.
"If you ride a bicycle and take the bus, you'll get back more than you pay in."

According to Richard Starkey, who studies all three schemes at the Tyndall
Center for Climate Change Research in the UK, the main advantage of personal
carbon trading over the second two ideas is that it might most effectively
foster "carbon literacy," as consumers would be made aware of the exact cost in
carbon for their decisions. It would also send a signal about acceptable levels
of personal emissions. The minuses, however, would be the need for the card
infrastructure, and, as Starkey puts it, the "Big Brother element."

David Fleming regards the second two schemes as "nonstarters" because they
guarantee money rather than energy. As a result, they are unequipped to grapple
with a second major concern of energy analysts, "peak oil" - the coming energy
scarcity caused by an expected drop in oil production. Fleming's plan would
promise everyone a minimum share of energy.

Partisans of all these schemes assert their superiority over a carbon tax on
gasoline and other fuels. They call such taxes regressive, since as a rule flat
taxes penalize the poor. But Dan Rosenblum, a lawyer and cofounder of the Carbon
Tax Center, doesn't see the ideas as fundamentally different from a tax. "They
avoid the word 'tax,' and there is a benefit to that," he says. "But we're all
saying that you ought to pay for dumping carbon into the atmosphere." Some
carbon tax plans address the "regressive" charge with provisions for returning
revenue through reduced income taxes or rebates.

In the UK, skeptics of personal carbon trading call it an administrative
nightmare and an infringement on civil liberties. In the United States, with a
much larger population, much greater aversion to government interference, and
less widespread appreciation of the threat of climate change, such a scheme may
seem unthinkable. That could change if it's successfully implemented in the UK,
and if the perceived threat of global warming intensifies. In the UK, Prescott
says that in their surveys of the public, "the idea of an allowance is very
popular. There seems to be a pretty high level of recognition that something has to happen."

Because of the relative administrative simplicity and the Alaska precedent,
Barnes believes the sky trust scheme, at least, should be politically palatable
in the United States, and there are indications that we could be headed in that
general direction. This year's remaining Democratic presidential candidates
support a cap-and-trade system that would auction permits to companies, thereby
generating revenue for the federal government. "The question is," says Barnes,
"to whom does that money belong?"


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