Achieving additional emission reductions under a cap-and-trade scheme

Abstract

Over the last decade, cap-and-trade emissions schemes have emerged as one of the favoured policy instruments for reducing GHG emissions. An inherent design feature of cap-and-trade schemes is that, once the cap on emissions has been set, no additional reductions beyond this level can be provided by the actions of those individuals, organizations and governments within the covered sectors. Thus, the emissions cap constitutes an emissions floor. This feature has been claimed by some to have undesirable implications, in that it discourages ethically motivated mitigation actions and preempts the possibility that local, state and national governments can take additional mitigation action in the context of weak national or regional targets. These criticisms have become prominent in Australia and the US within the public debate regarding the adoption of an emissions trading scheme (ETS). These criticisms and their potential solutions are reviewed. A set-aside reserve is proposed to automatically retire ETS permits, which would correspond to verified and additional emissions reductions. This minimizes the possibility that ethically motivated mitigation actions are discouraged, allows for additional action by other levels of government, while providing transparency to other market participants on the level of permit retirements.

Au cours de la dernière décennie, les systèmes de plafonnement et d'échange se sont révélés en tant qu'un des instruments privilégiés des politiques de réduction des émissions de GES. Une caractéristique inhérente au concept de plafonnement et échange, est qu'une fois établi le plafond sur les émissions, des réductions supplémentaires dues aux actions des individus, organisations et gouvernements des secteurs couverts, ne sont pas permises au-delà de ce niveau. Ainsi, le plafonnement des émissions constitue un plancher des émissions. Cette caractéristique est jugée par certains comme ayant des conséquences indésirables, décourageant les actions d'atténuation motivées par un sentiment moral, et diminuant la possibilité de création mesures d'atténuation supplémentaires de la part des gouvernements locaux, d'Etats et nationaux ayant de faibles objectifs nationaux ou régionaux. Ces critiques sont devenues importantes en Australie et aux États-Unis dans le débat public concernant l'adoption d'un système d’échange de quotas (SEQE). Ces critiques et leurs solutions potentielles sont examinées. La mise de côté d'une réserve est proposée pour le retrait automatique de permis du SEQE, correspondant à des réductions d'émissions additionnelles et vérifiées. Cette mesure diminuerait la possibilité que les mesures d'atténuation éthiquement motivés soient découragées, tout en apportant un processus transparent pour rassurer les participants que de telles actions auraient un effet sur la réduction des émissions nationales.

Keywords:

• cap-and-trade
• climate change
• emissions caps
• moral responsibility
• policy interactions
• public perception
• public policies
• voluntary action

Keywords:

• Mots clés : plafonnement et échange
• changement climatique
• plafonds d'émissions
• responsabilité morale
• interaction des politiques
• perception du public
• politiques publiques
• action bénévole

Notes

Note that this may not be the case if the carbon price reaches zero or a price floor. However, in this latter case, withdrawn permits may be released later into the market (e.g. for maintaining a price cap). Similarly, the existence of permit banking allows the possibility that reductions may occur in the short term but might be cancelled by the later use of the banked permits. An interesting exception to this might occur if a trading scheme is replaced by a new version that does not allow (or restricts) the transfer of banked permits into the new scheme. This has recently occurred with SO₂ emissions trading in the US, where the EPA has replaced the Clean Air Interstate Rule (CAIR) with the Transport Rule. Although banked permits are likely to be dumped beforehand, there may still be an excess of unused permits at the time of transition between schemes. See Fras and Richardson (2010) for a discussion of the options for transitioning between revised versions of emissions trading schemes that have been used or proposed in the US, and the implications for the efficiency, price volatility and credibility of regulators.

The CPRS was an emissions trading scheme proposed by the Australian Government in 2008 (Commonwealth of Australia, 2008). The scheme was put to, and eventually withdrawn from, Parliament in 2009 and 2010. In July 2011, a new policy package was announced, incorporating an ETS with a fixed price for the first three years (Commonwealth of Australia, 2011a, 2011b). The bill was passed by Parliament in November 2011.

Whether the carbon price is sufficiently stringent may be a further complicating factor. If the cap is understood by the public to be a ‘stretch goal’, then there may be a general acceptance that everyone has to contribute to the target in as many ways as they can (even beyond that driven by the carbon price signal) and there may be less of a concern for accounting for additional action (‘We all have to work towards our ambitious national target’). Nevertheless, no matter how strong the cap or trajectory is, due to heterogeneity of preferences, there will always be people, organizations or governments who may want to make further efforts to offset the impacts of others or to be seen as socially responsible (VCMA, 2009a). Also note that the likelihood that some mechanisms for accounting for additional action have impacts on the ETS permit price is likely to increase as the trading scheme cap becomes more stringent.

See Goulder and Stavins (2011) for a discussion of other state/Federal interactions in climate policy. Their analysis includes looking at additional action problems with other types of quantity-based policy instruments, particularly the co-existence of Federal and state renewable energy certificates schemes.

A number of justifications were offered. First, under the Australian Constitution, external affairs powers are vested in the Federal Government. It is the Federal Government that has the power to bind the nation to emissions reductions under current and future international agreements on climate change. This would seem to suggest that the Federal Government is the natural centre of responsibility for mitigation policy. Second, there was recognition of the need to minimize the compliance burden on business resulting from differing regulations across states. Third, the consolidation of mitigation policy to one level of government would reduce the level of regulatory uncertainty for participants in the ETS. Finally, there was a concern for potential waste and distortions arising from too many overlapping policies.

This has been described as an institution aimed at supporting households and businesses engage on issues related to climate change, along the lines of the Carbon Trust in the UK.

These were excluded from the CPRS during the negotiation of the bill and from the Clean Energy Future policy package in 2011.

Also see the CPRS Bill Explanatory Memorandum for further discussion on the treatment of voluntary action (Commonwealth of Australia, 2009b).

Twomey et al. (2010) have proposed adopting this approach to modify the CPRS and calling the set-aside reserve an ‘Additional Action Reserve’.