Is individual action on emissions really futile under the EU ETS?
My paper on the interactions between the European Union’s Emission Trading System (EU ETS) and the individuals’ ability to reduce total greenhouse gas (GHG) emissions sparked some attention in the Telegraph and Guardian. Much of the media response focused on my argument that under the ETS, it may be less worthwhile for individuals to curb their own emissions by avoiding activities like flying. But I would like to point out some of the wider implications of my research.
Cap-and-trade
The EU ETS is a cap-and-trade scheme. It imposes an upper bound on total GHG emissions from all sources the scheme covers – which now include aviation. It splits this total cap up in tiny parcels called emission permits, and allows firms to trade them.
Each source can emit as much or as little as it wants provided it holds enough permits. If the cap is lower than what all firms together would emit in its absence, then permits are a valuable commodity – and will trade at a positive price. So the fewer permits there are, the higher the price.
Once the cap the government sets is in place, trading among sources ensures this emission target is achieved in the cheapest way possible. The key difference to a carbon tax is that with the latter the government sets a predetermined price for emissions and total emissions by regulated sources depend on the market response. With a cap-and-trade scheme, it’s the other way round: the government fixes emissions and the market finds the price.
Individual efforts to reduce GHG emissions
The very fact that the EU ETS fixes total emissions by regulated sources implies that individual efforts like buying energy efficient appliances or reducing number of flights within the EU do not affect the cap.
So as long as there are participating firms that would like to emit more than their current permit holdings, total emissions are unaffected by consumption or lifestyle choices. Permits not used by one source will be traded and used by another.
Only if all regulated sources together want to emit less than the cap, even at a permit price of zero, then individual actions start to have an impact again. In this case, however, the cap-and-trade scheme is redundant and the price of permits zero. This is what happened at the end of Phase I of the EU ETS.
Government policies targeting EU ETS sectors
Exactly the same reasoning also holds for government policies within EU ETS sectors. Take the example of the ban of incandescent light bulbs. While the European Commission claims that this policy “will reduce emissions of carbon dioxide by 15 million tons each year” But this is not the case.
Electricity production is part of the EU ETS so any emissions avoided by installation of energy-efficient light bulbs are merely relocated to other sources. The same holds for schemes promoting renewable energy. They do not affect GHG emissions.
Cap-and-trade schemes like the EU ETS disempower both consumers and – to some extent – governments. Anything that does not directly affect the number of permits available within the EU ETS does not reduce total emissions by regulated sources.
This is not a problem if the cap is sufficiently strict and the permit price comparable to the damages emissions cause to human health and the environment. In this case there is no need for individual actions or supplementary policies.
Low permit prices
Things are different when the cap is too generous and the price for permits is very low. Additional reductions would have a clear benefit to society. But such efforts are futile unless the EU ETS completely collapses.
Today, the EU ETS is in exactly this position. The price for permits is extremely low but still positive. In contrast to the conclusion drawn by Leo Hickman in The Guardian, I strongly believe that the current crisis of the EU ETS makes my findings more, not less relevant.
Additional reductions are desirable but cannot be achieved within EU ETS sectors – neither by green consumers nor by supplementary policies.
So what can we do?
Individuals have several options. First, they can focus efforts to reduce GHGs on sectors the EU ETS doesn’t cover, such as agriculture (eating less meat), domestic heating and road transport.
The second is to buy and retire EU ETS permits which removes them from the system and reduces total emissions by regulated sources. Sandbag is a charity offering this service.
The third is to use the political process to lobby for EU ETS reform. One measure to improve the EU ETS is to substantially reduce the number of permits available. This could happen as a one-off intervention or in the form of a rule linking the number of permits to their price, reducing permits as the price drops and issuing new ones if it rises again.
Another option is to, at least temporarily, transform the EU ETS into a carbon tax. This would render individuals’ and governments’ reduction efforts effective. It can be achieved by imposing a minimum price on permits sold in EU ETS auctions that is above their current market price. The cap would no longer be binding, GHG emissions in EU ETS sectors would drop and efforts by consumers and governments would be able to reduce it further.
What about social change?
Individuals’ efforts ot reduce emissions in EU ETS sectors – including by avoiding flying – could still be important to bring about the social and behavioural changes needed to achieve long-term climate targets.
Nevertheless, the effects described above still have bearing. It is easier to induce changes in behaviour and norms on the scale needed if they have an immediate impact rather than relying only on the promise of potential effects in the distant future.
What’s more, trying to reduce emissions in EU ETS sectors can result in an increase in total GHG emissions if those inside the EU ETS are replaced by emissions outside the system. For some, that might be too high a price to pay.