Selling carbon on the High Street?

James Graham on the pros and cons of carbon emissions trading systems

Earlier this year the BBC's Today programme reported that Tyndall North (the Tyndall Centre's arm based at UMIST, Manchester) had published an interim report on the viability of introducing Domestic Tradable Quotas. This caught my attention, so I thought I'd find out a little bit more.

DTQs are an extrapolation of the global emissions trading idea that forms the backbone of the Kyoto treaty. Emissions trading works by setting each country a carbon quota calculated on size of population. Companies would then buy and sell carbon on a global market. In theory, the least developed countries would profit from the wastefulness of the West, while being given a clear motivation not to develop in similarly wasteful ways.

First thought up by Dr David Fleming, DTQs essentially take the concept of emissions trading down to the individual level. Every country would divide its carbon quota up, putting a portion out to tender and distributing the remainder to every adult citizen on a per capita basis.

Individuals would then surrender these carbon units (each unit would represent 1kg of carbon, as opposed to the Kyoto "Assigned Amount Unit" which represents a tonne) each time they bought fuel or electricity, depending on the carbon rating of what they bought. If they could live on less than that allowance they would be able to sell on their surplus on the open market. This would be managed through a national database and a smart card system. People who did not have a smart card for any reason (oversees visitors or even people who simply left their card at home) would still be able to buy petrol, etc. simply by paying the monetary cost of buying carbon units on the market.

The main attraction of this system is that it would be more equitable than simply putting the cost of carbon into the monetary cost of each product. It accepts that everyone needs to use carbon to some extent and rewards the frugal - carbon taxes, in contrast, merely punish the wasteful. It is a common objection to environmental taxation that it penalises the poor, so any system that is concerned with equity is worthy of serious consideration.

One important factor would be how much of the country's carbon quota would be distributed on a per capita basis and how much would be sold directly to organisations and businesses. Obviously the scheme would have to be able to pay for itself, but any government would have to how to decide the quota is to be distributed and how much it wants to use carbon as a source of income.

However, there are difficulties. Undoubtedly, the system is feasible using modern technology, but the task of wiring up every petrol station and other trading point in the country would be substantial. I don't doubt that it could be done, but the technology would create one further barrier with many people (mainly the elderly) simply not feeling comfortable using it.

With Liberal Democrats up and down the country campaigning to "save the pension book" it is clear to us that technological solutions are not always welcomed, whatever the advantages - indeed much of our criticism of New Labour lies in its technocratic obsessions. If a vast number of people do not even have a bank account, how do we expect to get them on this trading quota system? We would underestimate the huge task of introducing such a system - and providing people with accessible information about it - at our peril.

Another concern is whether the system could inadvertently cause unnecessary confusion. For example, a petrol station in the future might sell two fuels: petrol and bio-ethanol. The petrol would be relatively cheap to produce but cost a lot in carbon units, while the bio-ethanol would be relatively expensive to produce while costing relatively little in carbon (for the sake of argument, let's assume that the product here would be pure bio-ethanol and not a mix. This would be carbon neutral and therefore 'free' in terms of carbon units).

Joe Punter would have to calculate what he could afford both in money and carbon terms - simply taxing the carbon and having a single price would be much easier for the consumer and hence would have a greater impact on consumer behaviour.

The question I am forced to ask myself is whether much the same could be achieved simply by putting the country's entire carbon allocation up for tender, with the government passing the income onto citizens on a per capita basis and businesses obviously passing their costs onto consumers. It would surely create the same financial incentive for both companies and private individuals to go green, while removing the need for such a complex system? And wouldn't people be able to see the benefits of a 'citizen's income' (for want of a better term) more readily than some abstract carbon allowance?

Nevertheless, we need to move away from imprecise and often arbitrary taxes and towards emissions trading schemes. Environmental taxation is too often used as a cynical revenue raising measure by governments - raising the price knowing that demand is inelastic. Emissions trading by contrast takes the task of setting the price out of the hands of Chancellors by fixing the supply and allowing market forces to step in. Emissions trading is very much on the cards in Europe, but its full potential will be missed while Kyoto remains unratified.

• For further information, see David Fleming's webpage on Domestic Tradable Quotas at www.dtqs.org; the Tyndall Centre's interim report is available at www.tyndall.ac.uk/media/press_releases/pr_30.pdf
• James Graham is Vice-Chair of the Green Liberal Democrats