27 Feb 2018

An individual right to pollute

Martijn writes:*

In 2012 I peaked, 2012 is the year that I won the Nobel peace prize. I’m one of the 510 million citizens of the European Union (EU) that passively won the prize. Possible one of the greatest awards one could earn in a lifetime, and I already have it. Still, it doesn’t mean anything to me. It doesn’t mean anything because I don’t get a personal sense of achievement from it. I didn’t take part in any of the meetings, I didn’t vote when the foundation was laid and I didn’t choose to be a part of it. I was merely born into it, but still I reap the benefits. Don’t get me wrong, I’m quite content with the system I was born in. The only grievance I have with it is the lack of inclusion. Inclusion that the European Emissions Trading System (ETS) doesn’t have.

 Quite similar to the Nobel peace prize, the ETS doesn’t actively include me as an individual citizen. In an attempt to reduce the environmental impact of the EU, the European Commission (EC) has implemented the ETS. This system is a form of Cap and Trade system which attempts to introduce market forces to emissions. This is done by limiting the total amount of CO2 that can be emitted by companies in the total EU zone. The emissions rights are traded between different (mainly governments and companies) parties, and the accounting of the emissions is done by the European Commission. As there is a limit on the amount of CO2 emitted, the expectation is that there will be an equilibrium between supply and demand. Companies that emit more will be driving the demand, and companies with low emissions will drive the supply.

Slowly the EC will decrease cap on the total amount of emissions. Coming with these reductions are the hopes of more innovation for sustainable technology. As the supply is incrementally limited, scarcity is created. This will in theory increase the CO2 prices. However, until now the results of this system have been underwhelming to say the least. Partly due to the economic crisis the CO2 price has been too low. The current price of CO2 (€9.70 / ton CO2 ) is far from an incentive to innovate towards lower emissions.

The EC tries to mimic the market, without accepting the need to give up some control. The distribution by auctioning by member states is prone to oversupply. As the EC is the regulator and the access to the market is dominated by private companies, the invisible hand has lost its invisibility. This could allow for a small group of elitists influencing the market. To counter this behaviour there is a need for private citizens entering the ETS. This means that every individual in the EU will have emissions rights of their own. The allowances should be distributed to each citizen. With the current cap of a bit more than two billion allowances (one allowances gives the right to emit one ton of CO2), it would mean that each citizen would receive around 4 allowances.

With the current price this would be worth €38. Not much of an incentive for most EU citizens to actively trade, but withholding from trading would decrease supply and thereby increase the price. Slowly creeping to a nice yearly bonus for each citizen. The carbon cap will reduce yearly, increasing the price. Having opened the eyes to citizens to a small form of income, my expectation is that with enough of an incentive people will also invest in carbon sinks. 510 million people planting trees and gardens, whilst claiming CO2 emissions rights for it can have a large impact. That would be a cool(ing) climate system. Or maybe just an utopian dream?

Bottom line: Involving citizens in the ETS not only incentivizes every individual to reduce carbon emissions. It also provides a small annual basic income for the poorest of the union, whilst stimulating innovation.

* Please help my environmental economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)