UEA Bus v Plane Carbon Calc shows Misunderstanding of ETS
A discussion paper issued by the University of East Anglia Centre for Behavioural and Experimental Social Science,claiming flying rather than taking the bus can reduce your carbon footprint has been seized upon by the Telegraph.
The claim is that since the emissions from flying within the EU are covered by the emissions trading scheme (ETS) it is ‘carbon neutral’, along with using energy that has been produced by power stations that are within the scheme.
A candidate for Chair of UEA’s Social Science School made his hustings speech
The analysis shows a deep misunderstanding of cap-and-trade. Worse still the terminology used is extremely misleading.
There is an offset embedded in emissions that are covered by cap-and-trade, but it is nowhere near 100%, and claims of ‘carbon neutrality’ are completely unfounded.
The principal confusion of the story is between a cap-and-trade scheme and offsetting. Offsetting forms part of the cap-and-trade but the scheme itself is not an offset mechanism.
I will attempt to explain.
1. Cap-and-Trade
Cap-and-trade schemes like the EU ETS are designed to help sectors bring down their emissions. Emissions from sectors within the EU ETS (eg. aviation) are capped. Companies within a capped sector are issued with, or buy from the EU, permits to pollute up to the cap. These are not offsets – they are permits issued by the EU.
The cap in each sector is split between each company and reduced every year to help each sector and the scheme collectively bring down emissions across the sectors.
If a company’s (let’s call it Smog Airways) cap is (eg) 1m tonnes of CO2, the EU will issue (and Smog Airways will buy from the EU) a total of 1m permits. There is no offset here, Smog Airways has simply been permitted to emit 1m tonnes of CO2.
The fact that Smog Airways has been permitted to emit 1m tonnes of CO2 and it does in fact emit 1m tonnes of CO2 does not mean it is ‘carbon neutral’. There is no offset here since the permits were created by the EU.
If the scheme works correctly, next year Smog Airways should have its cap reduced to (eg) 900,000 tonnes, and in 2015 it may be 800,000 tonnes….and so on, until it (theoretically) reaches 0 tonnes. At that point the decision to fly Smog Airways is ‘carbon neutral’
2. Offsets within Cap-and-Trade
Offsetting is embedded within cap-and-trade in two ways:
i) Smog Airways goes above the Cap
If a company within a covered sector has emitted more than its cap, it needs to buy permits from another company within the same sector or another sector to avoid a fine.
Therefore if Smog Airways emits 1.1m tonnes of CO2 in a year, it will buy 100,000 additional permits from another polluter who has done better. In a sense this 100,000 tonnes has been offset.
In a properly functioning ETS permits should be scarce, making the cost of such an offset high meaning Smog Airways would want to avoid such a scenario to keep costs and therefore prices down and remain competitive.
Regardless of the cost however, the proportion of the annual emissions of the airline that will need to be offset in this way should be small compared to the number of permits issued by the EU. This makes the amount of offset embedded within any individual’s flight through this mechanism negligible.
ii) Smog Airways uses International Credits
Companies within the EU ETS are allowed to use international credits (sometimes called ‘offsets’) to meet compliance up to certain limits (eg. 15% for aviation). Therefore 15% of the Smog Airways’ compliance obligation for 2012 may be met through ‘offsets’. These offsets come about as a result of emissions reductions in the developing world.
International Offsets help deliver clean energy to the developing world
It is therefore an option open to Smog Airways to use international credits so that for every 1m tonnes of CO2 Smog Airways produces, 150,000 tonnes will have been offset by 150,000 of CO2 reduced by (eg) the building of a wind farm instead of a coal power station in India. In most sectors the offset limit is less than 15%, more like 8-11%.
It’s important to emphasise, the 15% number is optional. It is up to individual companies within a sector to decide whether they want to offset up to this maximum.
Back to our friends at the UEA…..
The claim made by the UEA is that a consumer’s decision to consume from a cap-and-trade covered sector is ‘carbon neutral’. Based on the above this is clearly not necessarily the case.
Using their example, if a flight from Glasgow emits 170kgs of CO2:
(i) if it is not a new route since 2010 (when benchmarks were set) compliance obligations for the majority of the emissions from the flight will be met by permits issued or bought from the EU – not offsets, just permits issued by the EU.
(ii) if, across the whole compliance year, taking all flights in the EU into account, the relevant airline has gone above its cap, a proportion the emissions may be offset by the airline buying from a different sector.
(iii) if the airline has decided to buy its full allowance of international credits for that year, it is possible that 15% of that 170kgs will be offset by the airline through international credits.
The bottom line is that there might be a small offset embedded in a consumer choice to fly, but it is by no means 100%, and is probably closer to 0-20% depending on the emissions profile of the particular airline.
To suggest that the offset is always 100% (such to make the flight ‘carbon neutral’) is extremely misleading.
I am no mathematician, but the suggestion that there is enough of an embedded offset in a flight to bring the ‘net carbon’ impact down to compare with the 17kgs quoted for the equivalent coach journey seems extremely unlikely.
My view is that UEA’s analysis is wrong. When it comes to low carbon transport, coach is still king.
Dear Dragon,
I am sorry if the terminology has caused confusion. You are careful in distinguishing between offsetts and permit trading which is a good thing. However, your critique, in my opinion, does not affect the validity of my results – but I should make sure that the terminology I use is clearer.
The point I am trying to make in my paper is that any marginal demand in the demand for flights – or electricity or any other product produced by sectors within the EU ETS – has no net effect on total GHG emissions of EU ETS sources. The trading mechanism makes sure that emissions are reallocated to another source. In this sense there is perfect offsetting of marginal emissions. This is the case as long as the total cap on emissions is binding (and hence the price for permits strictly positive). You are absolutely right in pointing out that the total emissions of EU ETS sectors are not offset – they still occur an cause considerable damage. All I’m saying is that this cap is unaffected by our consumption choices – sad but true.
Thanks for taking the time and effort for writing about my paper.
Best wishes,
Grischa Perino
Hi Grischa, no problem, it is an interesting paper and thanks for the response.
In practice the EU ETS does not work as simply as you describe.
To see the whole EU ETS as one cap that is internally forcing companies within it to offset to meet the cap is inaccurate. It is a whole range of caps for different companies who will make individual decisions on how to manage their permits and offsets to meet compliance. Generally for a company coming in below the cap it is a positive result – there is no penalty for doing so.
In that environment consumer decisions can have an impact since a reduction in demand will lead to sectors emitting below the cap, without other sectors necessarily making up the difference. There is no set rule that emissions will always meet the cap – they can always come in below.
The reporting of your paper has given the impression that total emissions in covered sectors are offset against each other and that the general cap keeps all emissions artificially high regardless of choices. This, as you say, is not the case.
There is a lot of confusion and misinformation about cap-and-trade. It is not a perfect tool, but in different (more effective forms) it is being adopted as the policy of choice for emissions reductions across the globe. However because it is set at a corporate level it is not easy for consumers to understand the impact. Unfortunately the main consequence for consumers has been the passing on of opportunity costs in relation to free allowances so that consumers pay the carbon price regardless of the cost to the corporate. This design fault should be fixed by tougher regulation.
Also a tighter and more dynamic cap would make the EU ETS work more efficiently and help drive down emissions more quickly.
Either way I don’t feel that your characterisation of consumer choices within the capped sectors as ‘carbon neutral’ is accurate. In the current climate of disdain for cap-and-trade in Europe I think it is very unhelpful. Even more depressingly, for some members of the press and the fossil fuels lobby trying to destroy the argument for emission reduction policies it is manna from heaven.
Thanks again for the response – it shows a highly professional approach that you are willing to seek out and engage with the feedback on your work.
Best regards,
Alex
I agree that telegraph article misses the point of cap and trade, it’s a really lazy argument to say that once you start emissions trading then there’s no point reducing emissions because savings are traded elsewhere. It’s a long term macroeconomic policy. It’s not aimed at individual actions but instead societal change and targeting entire sectors.
People aren’t being asked to do the “right thing” in choosing transport- that doesn’t work. Cap and trade shifts the motivation to change to the service providers, they can improve their bottom line by using less carbon.
Ignorance is to be expected by the telegraph I suppose.
Hi Charlie – sorry this comment was caught in my spam filter for some reason.
I think there is an important point in Grischa’s paper – that consumers should be aware of the way in which cap-and-trade works and the net carbon impact of consumption in regulated sectors. However the reporting of the paper and the misleading terminology presents it in a way that is intended to undermine cap-and-trade altogether. To me he is making a strong point about transparency and consumer protection (which is welcome).
Cap-and-trade is a policy that asks industries to lead cost-efficient green innovation by creating price signals that (eventually) consumers should follow. Cap-and-trade should make low-emissions products cheaper than their more polluting alternatives.
One interesting aspect is that in transport, that benefit may be lost as on some routes you can switch between regulated and unregulated sectors (which you can’t do for power for example).
As I see it, the problem here is that a consumer is probably willing to pay more for the other benefits from air travel (speed, convenience) and therefore even in a properly functioning cap-and-trade system the price signal of cap-and-trade in aviation is probably lost on the consumer (other than making the whole sector marginally more expensive). This is an important reason why all flights coming into and out of the EU should be within the EU ETS so that there is a level playing field allowing the most efficient airlines (rather than the non-EU airlines) to take whatever small competitive advantage is available. (we also need a decent carbon price!)
Dear Alex,
I’m afraid, I have to disagree.
Yes, companies (or sectors) are free to emit less than the number of permits they hold. But because they have a positive price (as other firms would like to emit more than their current permit holdings) they will sell it. Hence the emissions saved by one firm will be emitted by another. This is the entire point of a cap-and-trade scheme – both in theory and practice!
However, if all regulated industries together want to emit less, even if emissions are for free (zero price for permits), then my results cease to hold. This was the case at the end of Phase I of the EU ETS (i.e. in 2007).
By the way, as I show in my paper, an emissions tax equivalent to the permit price and with the same coverage would reinstate consumers influence on emissions in regulated sectors.
Thanks for the discussion.
Best wishes,
Grischa
Thanks for the response Grischa. It may not be that all regulated industries want to emit less, it may be that demand from consumers across all products within regulated sectors (through sensible reduction in carbon footprint) falls, thus resulting in reduced emissions across the board.
My point is that your analysis of consumer behaviour only works if a consumer decides not to fly, but instead goes out an buys an additional bag of cement. If he/she decides not to fly (but gets the bus) or buy the cement (uses wood instead), and other consumers do likewise, emissions will fall all round. The effect of the decision not to fly is not neutral in that scenario.
Best regards and thanks again for the discussion.
Alex
Alex, you would be absolutely right, if it wouldn’t be for those who are not prepared to voluntarily reduce their emissions (and my impression is there quite a few of them around). They will happily increase their demand for polluting goods or services.
Again, it all comes back to the very heart of the cap-and-trade mechanism. If the permit price is not zero, the cap is binding and individual efforts are ineffective – unless they manage to undercut the cap.
Best wishes,
Grischa
Thanks Grischa – thanks for the explanation, I think I get your point. Forgive me if I pursue this a little further to be sure.
The economic perspective is that if there is a price in the market for permits, there must be theoretically a demand to pollute. A polluter is willing to pay for the permits therefore we have to assume they will use it to cover increased emissions above their allocation – either now, or in future compliance years.
Only when the price is zero can we assume that all capped sectors are operating below the cap and the permits (and offsets) are valueless. At that point all sectors will be reducing emissions and consumer choices will be effective to drive further reductions. As happened in Phase 1 EU ETS.
This makes sense to me. However, I come at the question from seeing a huge over allocation in the EU ETS. The price of offsets has dropped to the marginal cost of producing them so theoretically we can assume there is no demand for offsets to cover excess pollution within the scheme. Yet we do still have a market price for permits so your proposition holds for the time being.
This leads me to a final query – caps are set over long periods of time (in this phase of EU ETS; 8 years). Trading in permits is intended to cover companies across the whole phase, therefore the carbon price translates into a view on permit scarcity from regulated entities across the best part of a decade.
Consumers may be making green choices now, but we will not know whether consumer action is effective until the end of the phase. If the carbon price falls to zero in (eg) 2016, would we be able to say that consumers making green decisions in covered sectors has been effective and not neutral as you suggest? If so, is the best critique of your proposition that (for the EU ETS) it is too early to tell whether it is correct? Either way, a zero carbon price suggests the policy is redundant by other measures so would be a disappointing outcome.
A follow-up thought that occurred to me in relation to scheme design – perhaps dynamic caps set on an annual basis would recognise consumer choices better and help consumers drive emissions reductions in covered sectors more effectively. Sadly I fear another option – personal carbon allowances – that bring the consumption and the cap to the same place would suffer from the same problem as the broader cap-and-trade scheme.
Thanks again for the engagement and best regards,
Alex
Alex, I’ll briefly comment on your statements:
“The economic perspective is that if there is a price in the market for permits, there must be theoretically a demand to pollute. A polluter is willing to pay for the permits therefore we have to assume they will use it to cover increased emissions above their allocation – either now, or in future compliance years.
Only when the price is zero can we assume that all capped sectors are operating below the cap and the permits (and offsets) are valueless. At that point all sectors will be reducing emissions and consumer choices will be effective to drive further reductions. As happened in Phase 1 EU ETS.”
Correct.
“However, I come at the question from seeing a huge over allocation in the EU ETS. The price of offsets has dropped to the marginal cost of producing them so theoretically we can assume there is no demand for offsets to cover excess pollution within the scheme. Yet we do still have a market price for permits so your proposition holds for the time being.”
In a competitive market equilibrium the price always equals the marginal cost of producing (the last unit) of the good (and the marginal willingness to pay for the last unit of the good).
“If so, is the best critique of your proposition that (for the EU ETS) it is too early to tell whether it is correct?”
Not sure whether it is the best one, but yes, you are right. All we can say is that in expected terms the cap is binding (because the permit price is still positive – but I am not so sure for how much longer…). By the way, permits can be ‘banked’, i.e. transferred from one Phase to the next. This was not possible in Phase I => collapsed. As far as I’m aware, the banking mechanism played an important role in preventing Phase II from collapsing. So the time horizons are even longer.
“Sadly I fear another option – personal carbon allowances – that bring the consumption and the cap to the same place would suffer from the same problem as the broader cap-and-trade scheme.”
Yes, I believe this is the case.
Thanks and have a nice weekend.
Grischa