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Environment Magazine September/October 2008

 

January-February 2011

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Personal Carbon Trading: A Radical Policy Option for Reducing Emissions from the Domestic Sector

Personal carbon trading (PCT) is an innovative, radical policy approach to climate mitigation. PCT is a general term for various policies that were proposed in the United Kingdom over the last decade and a half, and in which emission rights are allocated to individuals. Although there are variations, all of the proposed schemes share two basic components: They are mandatory schemes, with no option to opt out, and in all of them individuals receive an annual equal per-capita carbon emissions “budget” (the allowance) for free for their personal use.

Personal carbon allowances (PCA) is one PCT variant that was proposed by Mayer Hillman in 1998.1 A PCA scheme would cover emissions under direct personal control only, such as household energy use (electricity and gas), private transport (not including public transport), and personal air travel. It would not include carbon embedded in products and services purchased by the individual, as this would be expected to be covered, very broadly, by other policies and carbon cap and trade schemes such as the European Union (EU) Emissions Trading Scheme (EUETS) for EU countries or similar elsewhere.

Under a PCA scheme, for each purchase of carbon-based energy, allowances would be deducted from the individual's carbon budget. For example, every time people pay an energy bill, buy petrol, or book a flight they will also have to surrender carbon units. The amount of carbon units will be proportional to the amount of carbon embedded in the electricity and gas they used or petrol they purchased. Technically this could be done by swiping a carbon credit card or entering a PIN (personal identification number) at the time of payment. If people emitted more carbon than their allowance, they would need to buy additional carbon credits. On the other hand, those who emitted less carbon than their allowance could sell the excess into the personal carbon market. The price of carbon would be set by the market and would reflect the shortage or excess of allowances. The personal allowance would be reduced periodically in line with national emissions targets.

Caption: An example of a potential carbon allowance card.

Caption: PCA creates a framework within which people can compare carbon savings from different actions. Taking one less flight per year saves far more carbon than installing energy efficient light bulbs.

This paper introduces and discusses the rationale behind a downstream cap-and-trade policy approach and sets it in the context of climate mitigation policies. It gives a brief summary of the status of PCT in policy and research, points at the policy challenges this policy option raises, and discusses, in particular, some of the implications that a PCA scheme would have on individuals. Although PCT schemes could be implemented in many countries, they have been discussed and researched mostly in the United Kingdom. Most of the data presented below are about the United Kingdom.

PCT in the Climate Policy Context

Climate change caused by greenhouse gas (GHG) emissions has brought the global community to formulate an international mitigation course of action, the Kyoto Protocol. Under the terms of the Kyoto Protocol, developed nations agree to limit their GHG emissions. Some individual countries have set even more ambitious targets; for example, in the United Kingdom the 2008 Climate Change Act demands 80% reductions (based on 1990 emissions) in GHG emissions by 2050, with a 34% reduction by 2020. Ambitious reduction targets such as these could not be achieved only through improved energy efficiency measures. Rather, they require radical and systemic changes to the ways and contexts in which we produce, use, and perceive energy and energy services.

Caption: Ambitious emission reduction targets cannot be achieved simply via improving energy efficiency. Rather, they require radical and systemic changes to the ways and contexts in which we produce, use, and perceive energy and energy services.

Carbon emissions from homes and private transport in developed countries make up a significant proportion of total national emissions.2 For example, within the United Kingdom around 42% of total emissions come from the domestic sector. Of these, 30% arise from space heating, 10% from water heating, 9% from appliances, 4% from lighting, 3% from cooking, 29% from personal travel, 12% from holiday air travel, and 2% from other travelling.3 In other words, almost half of total emissions are generated directly by individuals and households rather than industry and governments. Although one can argue that personal carbon emissions are individually insignificant, collectively they are very large. Delivering emission reductions by altering millions of individuals' energy-use choices and behavior remains an unmet policy challenge.

Caption: In the UK, 30% of personal emissions arise from space heating. Comprehensive insulation measures would likely become more widespread under a systems of personal carbon allowances.

Over a wide range, policy interventions are being used to greater and lesser extents by governments to tackle different aspects of individuals' energy use. In the United Kingdom these include, for example, taxation, information schemes, appliances labeling, energy use feedback, grants for installing low-carbon technologies, tax reductions and rebates for efficient homes, and changes to building regulation. These and other policies and programs tackle different aspects of individuals' energy use, and thus contribute to an overall national emission reductions. While the United Kingdom's GHG emissions have been reduced from 1990 levels—partly thanks to these policies—CO2 emissions have stabilized in recent years with a slight reduction coupled to the increase in energy prices.4 It is acknowledged, however, that additional policy interventions will be needed to deliver the 2020 targets.3

We argue that a major weakness of the preceding policies (in terms of reducing emissions from individuals) is the lack of an overarching approach for personal emissions reduction. An overarching approach would create a perceptual and cognitive framework enabling individuals to integrate understanding across emissions from different activities, and in the context of energy use as it occurs.5 For example, such an approach would put into proportion the savings gained by installing energy-efficient light bulbs and those that are saved by flying less. Arguably, a carbon cap–and-trade at the individual level provides such an approach and has as yet not been widely investigated in any empirical sense.

The concept of capping personal emissions was first proposed in the United Kingdom by David Fleming6 in 1996 under the name of Domestic Tradable Quotas (DTQ), which later changed to Tradable Energy Quotas (TEQ).6 Several variants of personal carbon trading (PCT) have been proposed in which carbon is capped in different parts of the economy and with different allocations. These proposals include Cap and Share in Ireland7 and TEQ,6 which cover the whole economy; household carbon trading in California,8 which covers household electricity and gas; and tradable transport carbon permits in France9 and the United Kingdom,10 which cover private road transport only. All versions of the schemes are similar in approach, but vary in terms of the participants, scope, and allocation (a brief summary of the key likes and differences can be found in Fawcett and Parag 2010;11 Roberts and Thumim 200612). From these schemes, the most developed in term of research and design are TEQ and PCA.

PCA Mechanisms

Significant emissions could be saved by reducing the carbon content of energy (the energy carbon intensity). However, this would require fundamental, expensive, and time-consuming infrastructural changes to the current energy system. Therefore, until low carbon energy is widely available, emission reductions will need to come also from reducing energy demand, which entails behavioral change. PCT has the potential to deliver these, as, arguably, it empowers individuals and increases their agency over their own personal emissions. In addition, PCT could serve as enabling policy, i.e., a policy that boosts the uptake of new low carbon technologies and increases the implementation rates and the effectiveness of other relevant, already existing, policies (e.g., Hickman and Banister 200613).

In particular, a PCA scheme provides various motivations to behavioral change that operate through three basic interacting mechanisms, which broadly conform to different methodological approaches to behavior change—economic, psychological, and social (see Figure 1).

Caption: Figure 1. The routes by which PCA can deliver emissions reduction

The economic motivation is driven by the price of carbon that arises in the market of traded allowances. The price is set by the following: the extent of the “shortage”; the value of the services carbon-based energy can deliver; and the extent to which there is a well-behaved market. The price provides the economic incentive for reducing emissions and this is independent of the initial distribution of allowances. Linda Steg14 argues that one of the obstacles for behavioural change is the economic cost related to improving energy efficiency and conservation. In that instance, the economic mechanism of PCA tackles this obstacle by increasing the financial benefit of using less energy and investing in energy efficiency measurements.

Caption: While carbon taxes are designed primarily to target economic behavior—through changing prices within existing markets and social frameworks—PCA is more likely to have impact via the other mechanisms because of the use of a new carbon market, budgets, and the potential for social and institutional change.

The intrinsic psychological mechanism is driven through a combination of the carbon price, the scale of the individual allowance, and the visibility of the carbon emissions related to the individuals' actions. The economic paradigm within which carbon is interchangeable with other resources may not reflect the way that people actually manage their affairs. It is known that price effects are not always symmetrical: The willingness to pay for additional allowances may be different from willingness to accept payment for allowance sales.15 In this case, the distribution of allowances between individuals, as well as the personal cap, may affect behavior, rather than merely the allowance's total value. Experimental work carried by Stuart Capstick and Alan Lewis16 provides some indication that people may be inclined to respond to PCA partly based on the absolute size of the allowance and whether they are in credit or debit, rather than responding with pure economic rationality.

The intrinsic route builds on carbon awareness and the relationship between emissions and activities, which will be enhanced by the carbon price and the process of carbon budgeting. Lorenzoni et al.17 describe different barriers to engagement in respect to climate change by members of the UK public. These include, among others, the feeling of helplessness (“drop in the ocean”), concerns about free riders, and lack of enabling initiatives. While other schemes—such as information campaigns, personal advice program, and more informative billing and metering—can help with reducing these barriers (see for review Abrahames et al.18), it is reasonable to suppose that a cost penalty/bonus linked to other policies will increase the effectiveness of personal engagement. Additionally, increasing people's knowledge of their carbon emissions will help correct any wrong perceptions of actual energy consumed.14,19 Carbon visibility, awareness, and correct information are crucial for promoting behavioural change. Their impact also has implications for political acceptability, which increases when people are aware of the problems resulting from their energy use, feel responsible for it, and feel morally obliged to do their bit to help solve these problems.20,21

The social mechanism moves away from individualism and recognizes that decisions, even about individually allocated resources, are subject to social forces (e.g., Schultz et al.22). Energy conservation arising from normative concern—as opposed to hedonistic or cost reasons—is more robust against changes and therefore more durable.23 The equal carbon “budget” allocated to individuals suggests, to some extent, an acceptable and fair personal carbon footprint. The existence of PCA and consequent allowance trading will create new institutions, businesses, and discourses that may alter social relations and practices and the individual actions that flow from them. The acceptability of certain behaviors among different social fractions may change, for example, through the existence of groups that promote alternative approaches to living within carbon budgets. PCA may increase awareness to climate change and its relation to carbon emissions, which could contribute toward social support in cutting emissions.

None of these mechanisms alone provides an adequate approach to understanding the impacts of PCA. The interaction between them and the overall impact of the policy will be contingent upon a range of other factors. One could argue that the same broad assessment might be made of carbon taxes as a policy instrument. However, while carbon taxes are designed primarily to target economic behavior, through changing prices within existing markets and social frameworks, PCA is more likely to have impact via the other mechanisms because of the use of a new carbon market, budgets, and the potential for social and institutional change.

Theoretically, the PCA scheme avoids some of the taxation pitfalls. First, it increases the visibility of carbon, and delivers a message that is broader than pure supply and demand economics. Second, it meets a basic standard of fairness, as all individuals receive an equal allowance. In addition, a PCA scheme is broadly progressive, as the high emitters who will pay more have a propensity to be on higher incomes24. Fairness is important because policies that are perceived as fair are more likely to be politically acceptable.25,26,27

But PCA has its own weaknesses. The simple conception that it meets equity and fairness requirements is not unproblematic, because an equal per-capita allocation does not necessarily imply “fair” fulfillment of basic needs, which can vary significantly between individuals.28,29,30 Furthermore, a minority of the lower income deciles might find themselves worse off under PCA.24 This would vary significantly in different national contexts, different climates, and variations in the grid's carbon intensity (e.g., Fawcett31). Hence PCA has the potential, if designed without compensation mechanisms, to increase fuel poverty in those countries where it is a problem. Niemeyer at al.8 looked at equity and distributional issues in the California context, and suggested that allocation of emission rights to households, rather than individuals, is fairer. Further weakness of PCA is that policies that restrict choices (rather than increase them), target absolute reduction (rather than efficiency), and aim to reduce energy from transport (i.e., restrict mobility, rather than focusing solely on energy use at home) are less acceptable32. In these senses PCA could prove to be unpopular, because although it promotes efficiency, the emphasis is on demand reduction. Moreover, PCA not only puts current constraints on individuals but guarantees further restrictions into the future, as inherent to the scheme, the budget will shrink over time. Yet one could argue that favorably, PCA does not audit individuals' preferences and within a given cap it allows for personal choice.

Several acceptability studies into different PCT schemes have been carried out in the United Kingdom. They show that it is the least opposed option when compared against taxation and upstream cap and trade instruments.33,34,35 and that there is a degree of willingness for people to accept some level of responsibility over their actions. In particular, the UK Government's Department of Food and Rural Affairs (DEFRA) study found that “resistance to behaviour change was less than expected.”36

PCT Status in Politics and Research

In the last three years, PCT has been raised onto the policy agenda and discussed by the UK Government. In 2006 the then Secretary of State for Environment, the Rt Hon David Miliband, decided to conduct a prefeasibility study into personal carbon trading. In May 2008 DEFRA completed this study, which looked at the following aspects: equity and distributional impacts, social acceptability, economic and technical feasibilities, and effectiveness in the context of the existing policy landscape (for summary and synthesis report see DEFRA36). The distributional analysis found PCT to be a progressive policy in which poor people are mostly “winners” as their levels of emissions are generally lower. The research on public acceptability showed that in comparison with carbon taxation and upstream cap and trade, PCT attracted strongly dividing opinion—both more “very negative” and “quite positive” ratings. Public concerns were raised around issues of fairness, administration, and the practicalities of the scheme. Technology was not found to be an obstacle for the scheme introduction: The technology to enable and support a personal carbon electronic card system already exists. The real issue around the technology, however, was the cost of setting up a PCT registration and banking system, and likely annual running costs. DEFRA estimated that the costs of the scheme would considerably outweigh the benefits—by 15 times in the central case assumptions—with a running cost per individual of around £30 per year. Based on this research, DEFRA concluded that “personal carbon trading has potential to engage individuals in taking action to combat climate change, but is essentially ahead of its time and expected costs for implementation are high.” Accordingly, DEFRA announced that “the Government remains interested in the concept of personal carbon trading and, although it will not be continuing its research programme at this stage, it will monitor the wealth of research focusing on this area and may introduce personal carbon trading if the value of carbon savings and cost implications change.”37

The UK Parliament Environmental Audit Committee (2008), which gathered evidence and published its own report on PCT few weeks later, concluded that “personal carbon trading could be essential in helping to reduce our national carbon footprint. … Although we commend the Government for its intention to maintain engagement in academic work on the topic, we urge it to undertake a stronger role, leading and shaping debate and coordinating research.”38 Both reports agree that PCT remains an unexhausted field of research, and offers a promising prospect to aid the United Kingdom to meet its targets.

More recently, in 2009, PCA was chosen by the government's independent watchdog on sustainable development, the Sustainable Development Commission (SDC), as one of 19 breakthrough ideas for the 21st century.

To date, PCT is more of a policy concept than a policy that is ready to be implemented. It is innovative and radical and in many senses challenges the way policymakers think about the role individuals should play in the climate mitigation effort. Indeed, no PCT scheme has ever been implemented anywhere worldwide. Consequently, there is no comparable policy experience to learn from or to help predict the possible effects of any PCT scheme on emissions reduction from the domestic sector. PCT introduces unfamiliar policy elements such as a carbon price for personal emissions, cap-and-trade at the personal level, and carbon budgeting for individuals. The different PCT schemes also raise many policy design questions, such as: What would constitute effective and acceptable enforcement and monitoring mechanisms; how would the carbon allocation system work; what would the costs of the scheme be to the state and to individuals; how the public might react to it; and who would the governing institutions be? These issues and others, on top of the high implementation costs of the scheme, make all PCT schemes very risky for politicians and policymakers alike.

Caption: PCA is innovative and radical. It challenges the way policymakers think about the role individuals should play in the climate mitigation effort.

A number of UK studies—academic and nonacademic—have looked at some of those issues and investigated various aspects of PCT, with the aim of understanding whether there are fundamental barriers to its introduction and effectiveness. These include, for example, the examination of technology for implementation and costs of operation;34,39,40 the economics of personal carbon trading;41 the analysis of the interactions with existing policy landscape;42,43 possible enforcement challenges;44 the politics of PCT;45 social acceptability and public attitudes to PCT;46,33,35 the likely impact of the policy on individuals' decision making;46,16,5 its distributional impact;47,24 and optional compensation mechanisms.29 Together, these studies provide some insight into the opportunities and challenges posed by PCT.

Implications for Individuals and Policy Design

In effect, PCT schemes, but most notably the PCA one, introduce a new, unfamiliar, currency into our daily lives—carbon. The following section focuses on PCA to demonstrate what might be the implications of a PCT scheme for individuals and policy design (for more on this topic, see Parag and Strickland5). As described earlier, under a PCA scheme everyone receives a sum of carbon credits, or units, which they need to administer. In order to manage a personal carbon allowance, it is likely that people will need to start budgeting carbon emissions from household gas and electrical activities, personal transport, and flights. This will involve making rational trade-offs between competing demands that emit carbon. While budgeting is a familiar act to many individuals in their daily lives, some might find it a more conscious process than others. One challenge for policy designers is to understand how people would manage their carbon budget, what assistance they might need, and what schemes could advise them.

Caption: In order to manage a personal carbon allowance, it is likely that people will need to start budgeting carbon emissions from household gas and electrical activities, personal transport, and flights.

To illustrate: People would need to know what their budget limits are, as well as what their current carbon balance is and how much they use for any given purpose. To enable informed choices, activities and services need to be labeled not only with their monetary cost but also with the carbon units they consume, i.e., their carbon cost. In order to stay within their carbon limits, many people will need to have low-carbon alternatives to their current choices, such as public transport or energy-efficient appliances. For these alternatives to be valid and attractive they need to be easy, accessible, and cheap (or at least not excessively more expensive). People might need advice, such as how to reduce electricity consumption; options for optimal insulation material; availability of credible suppliers and installers; and knowledge about grant availability. Consumers will also need clear information explaining how to live with a personal carbon allowance and trade in the new carbon market. Inevitably, some people will need financial support to improve their home's energy efficiency in order to reduce their carbon emissions. Others might be both poor and high emitters and will need some sort of compensation; this could be done in the form of additional benefits or a lump sum to allow them to make some necessary energy efficiency improvements. There will also need to be some information on how to trade one's carbon allowance in order to maximize the trading potential for influencing the price of—and therefore demand for—carbon.

As with any new policy, the preceding discussion raises questions, such as: Who should supply the information, how should the information be presented, who should bear the costs, and what is the most appropriate level to manage such scheme? There is clearly scope for involvement at all levels, from households, communities, local authorities, and ultimately central government (see also Parag and Strickland5). However, it is largely unknown what the required interplay and responsibilities between the relevant bodies should be in order to maximise the impact of PCA, let alone the impact that the new distribution of power resulting from the new policy (e.g., between institutions, citizens, utilities) will have on public acceptability.

The successful administration, implementation, and management of a PCA scheme are not something that will happen overnight and will rely on a host of awareness raising, incentives, and other mechanisms to enable the public to make the choices necessary for living in a carbon-constrained world. More research is needed to better understand how to reduce some of the risks and uncertainties surrounding PCA and how to design a clever, implementable, and enforceable scheme.

It is clear, however, that PCT could not work as a stand-alone approach to mitigation policy. Targeting the individual's behavior should inevitably be accompanied by a systemic change in the societal and economic environments within which individuals make choices, as well as to the practices of energy provision and consumption. Hence, thought should be dedicated also to altering social norms and challenging existing economic beliefs.

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12. Roberts, S. and Thumim, J. (2006) A Rough Guide to Individual Carbon Trading, DEFRA., London. http://www.carbonequity.info/PDFs/Defranov06.pdf2006

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30. Starkey, R. (2007) Allocating Emissions Rights: Are Equal Shares, Fair Shares?, Tyndall Centre for Climate Change Research, University of Manchester., Manchester, UK. Working paper

31. Fawcett, T. (2010) Personal carbon trading in different national contexts. Climate Policy 10:4, pp. 339-52.

32. Poortinga, W., Steg, L., Vlek, C. and Wiersma, G. (2003) Household preferences for energy-saving measures. A conjoint analysis. Journal of Economic Psychology 24:1, pp. 49-64.

33. Owen, L., Edgar, L., Prince, S. and Doble, C. (2008) Personal Carbon Trading: Public Acceptability. A report to the Department for Environment, Food and Rural Affairs. Opinion leader and Enviros Consulting, DEFRA., London.

34. Bird, J., Lockwood, M. and Lockwood, M. (2009) Plan B? The prospects for personal carbon trading, Institute for Public Policy Research., London.

35. Wallace, A., Irvine, K. N., Wright, A. J. and Fleming, P. D. (2010) Public attitudes to personal carbon allowances: Findings from a mixed-method study. Climate Policy 10:4, pp. 385-409.

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38. Environmental Audit Committee (2008) Personal Carbon Trading, http://www.publications.parliament.uk/pa/cm200708/cmselect/cmenvaud/565/565.pdfFifth Report of Session 2007–08. Report, together with formal minutes, oral and written evidence. 13 May

39. Lane, C., Harris, B. and Roberts, S. (2008) An Analysis of the Technical Feasibility and Potential Cost of a Personal Carbon Trading Scheme, Accenture, with the Centre for Sustainable Energy (CSE)., London. A report to the UK Department for Environment, Food and Rural Affairs

40. Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) (2007) Technical Requirements for Personal Carbon Trading, RSA., London.

41. Lockwood, M. (2010) The economics of personal carbon trading. Climate Policy 10:4, pp. 447-61.

42. Kerr, A. and Battye, W. (2008) Personal Carbon Trading: Economic Efficiency and Interaction With Other Policies, RSA., London.

43. Brohé, A. (2010) PCT in the context of the EU ETS. Climate Policy 10:4, pp. 462-76.

44. Eyre, N. (2010) Design and enforcement options for PCT. Climate Policy 10:4, pp. 432-46.

45. Parag, Y. and Eyre, N. (2010) Barriers to personal carbon trading in the policy arena. Climate Policy 10:4, pp. 353-68.

46. Bristow, A., Zanni, A., Wardman, M. and Chintakayaaa, P. (2008) PCA: Using Stated Preferences to Investigate Behavioural Response, RSA Carbon Limited Project., London.

47. Ekins, P. and Dresner, S. (2004) Green Taxes and Charges: Reducing Their Impact on Low-Income Households, Joseph Rowntree Foundation., York, UK.

Yael Parag is a senior researcher at the Environmental Change Institute in the Oxford University School of Geography and the Environment in Oxford, United Kingdom.

Deborah Strickland is also with the Environmental Change Institute at the Oxford University School of Geography and the Environment.

 

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