TEQs (Tradable Energy Quotas): A policy framework for #PeakOil 7 #ClimateChange

8/2/2019 TEQs (Tradable Energy Quotas): A policy framework for #PeakOil 7 #ClimateChange

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TEQsTradable Energy Quotas

David Fleming and Shaun Chamberlin

House of CommonsAll Party Parliamentary Group on Peak Oil& The Lean Economy Connection

A Policy Framework

or Peak Oil and Climate Change


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TEQsTradable Energy Quotas:A Policy Frameworkor Peak Oil and Climate Change


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Published in association withThe All Party Parliamentary Group on Peak Oil (APPGOPO)by THE LEAN ECONOMY CONNECTIONP.O. Box 52449London NW3 [email protected]

TEQs (Tradable Energy Quotas): A Policy Framework orPeak Oil and Climate Change

January 2011

Copyright David Fleming and Shaun Chamberlin 2011

ISBN 978-0-9550849-4-2

Attributions: David Fleming and Shaun Chamberlin (2011),TEQs (Tradable Energy Quotas): A Policy Framework or Peak Oiland Climate Change, London: All-Party Parliamentary Group

on Peak Oil, and The Lean Economy Connection.

Edited by Beth Stratord.

Design by Nicholas Hallett.

Printed by Calverts, London.


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Foreword 5John Hemming, Chair o the All Party Parliamentary Group on Peak Oil

Executive Summary 6

Introduction 8

Part 1: A Plan or All Seasons 11Lead author: David Fleming

1. TEQs: Guaranteeing Emissions Reductions 12

2. TEQs: Assuring an Entitlement to Energy 19

3. Motivation: Climate Policys Missing Link 22

4. How do TEQs t with the EU ETS? 26

Part 2: Science and Policy Context 31Lead author: Shaun Chamberlin

5. The Two Sides o the Energy Problem 32

6. Policy Update, including A Brie History o TEQs 39

Conclusions 46

Endnotes 48

Contents


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The All Party Parliamentary Group on Peak Oil (APPGOPO)The All Party Parliamentary Group on Peak Oil was set up in July 2007 to reviewestimates o uture oil production and consider the consequences o declining worldoil production or the UK and world economy.

Current MembershipJohn Hemming MP, Chairman (Liberal Democrat)Caroline Lucas MP, Vice Chair (Green)Mark Williams MP, Vice Chair (Liberal Democrat)Stephen Williams MP, Treasurer (Liberal Democrat)Simon Wright (Liberal Democrat)Lorely Burt MP (Liberal Democrat)Tom Brake MP (Liberal Democrat)Andrew George MP (Liberal Democrat)Lord Teverson MP (Liberal Democrat)

Bill Wiggin MP (Conservative)David Amess MP (Conservative)Austin Mitchell MP (Labour)Michael Meacher MP (Labour)Kelvin Hopkins MP (Labour)Steve McCabe MP (Labour)George Mudie MP (Labour)Dr Alan Whitehead MP (Labour)Frank Doran MP (Labour)Gisela Stuart MP (Labour)

Iain Wright MP (Labour)

ContactsAPPGOPO, Oce o John Hemming MP, House o Commons, London, SW1A 0AAGroup Secretariat: Neil Endicott - [email protected]

The Lean Economy ConnectionThe Lean Economy Connection is an independent research centre ounded by Dr DavidFleming in 1994 to develop the application o lean thinking to environment policy. DrFleming rst described the model o TEQs (Tradable Energy Quotas) in 1996. His guide

to TEQs, Energy and the Common Purpose, was rst published in 2005 (third edition, 2007).His book, Lean Logic, is orthcoming in 2011.

Shaun Chamberlin joined The Lean Economy Connection as TEQs Development Directorin 2006. His book, The Transition Timeline, was published in March 2009 (Green Books).His wider work is detailed at: www.darkoptimism.org

AcknowledgementsThe preparation o this report has been made possible by the Polden Puckham CharitableTrust and the Organic Research Centre (Elm Farm), whose support is acknowledged

with thanks. It has also beneted rom discussions with many people who are deeplyconcerned about peak oil and climate change, and are working to develop solutions.Thank you to them, to the editor, Beth Stratord, and to the designer Nicholas Hallett.


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Since the rst APPGOPO report was published in July 2008, the number and urgency o

warnings about oil depletion has grown. In its eye-opening 2008 World Energy Outlook,the International Energy Agency (IEA) orecast that 64 million barrels a day o extra oilproduction will need to come on stream by 2030 i projected demand is to be met. Thatmeans that by 2030 we will need to be producing the equivalent o six new Saudi Arabiason top o existing production. This is almost certainly impossible.

The IEA eectively recognised this when it stated in the report that current globaltrends in energy supply and consumption are patently unsustainable environmentally,economically and socially.

While the UK Government ailed to take the initiative on peak oil, in October 2008 agroup o major companies in the UK including Virgin and Scottish and Southern Energyexpressed their concern that peak oil is imminent and that post-peak production declinerates could cause serious energy supply problems or Britain. In their report The OilCrunch, the Industry Taskorce on Peak Oil and Energy Security concluded that it is veryunlikely that global oil production will be able to continue to grow beyond 2013.

A year later, the UK Energy Research Centre concluded that more than two thirds ocurrent global crude oil production capacity may need to be replaced by 2030 and theenergy regulator OFGEM warned o the prospect o shortages and breaks in the supply o

gas and electricity beore 2020. In February 2010 the Industry Taskorces second reportannounced that we must plan or a world in which oil prices are likely to be higher andmore volatile and where price shocks have the potential to destabilise economic, politicaland social activity... Our message to government and businesses is clear. Act now.

And in June 2010 Lloyds o London and Chatham House produced their SustainableEnergy Security report, warning that businesses which ail to prepare could acecatastrophic consequences.

I share the concern o these groups, and have raised the issue with the government many

times. Regrettably, the government is still unable to grasp how serious the threat o peakoil is, and so the UK remains inadequately prepared to cope with this looming crisis.

We urgently need to have a system in place to mitigate the economic and socialconsequences o peak oil. I believe TEQs provide the airest and most productive way todeal with the oil crisis and to simultaneously guarantee reductions in ossil uel use tomeet climate change targets. The challenge is urgent and TEQs are among the best toolswe have at our disposal to meet it.

Foreword

John Hemming MPChairman o the All Party Parliamentary Group on Peak Oil (APPGOPO)


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Executive Summary

TEQs (Tradable EnergyQuotas) were designed romthe outset as a response tothe two sides o the energyproblem: climate change andthe depletion o ossil uels.

Any ramework designed toaddress either side o theproblem must deliver in twoways. It must achieve a steep,but managed reduction inthe use o ossil uels. And itmust orestall uel poverty byguaranteeing air entitlements

to the energy that is availableat the time. TEQs is designedor both these tasks.

No need to measure emissionsThe design o TEQs is basedon the insight that all

emissions rom energy-usewithin a national economycan be measured simply andeciently by assigning arating to uels and electricity,based on the quantity ocarbon dioxide and other

greenhouse gases generatedby their production and use.The emissions attributable to

them thus become implicitin the quantities listed asusual on invoices, utilitybills and till receipts. TheTEQs system simply usesthis inormation, makingit unnecessary to measurecarbon emissions directly.

Eective motivationIt is usually taken to be sel-evident in the eld o energy/climate policy that the key topersuading energy users totake action to reduce their

dependency on ossil uelsis to oer a set o nancialrewards and penalties. Butoutside this eld, that simplecarrot-and-stick assumption isnow recognised to be fawed.

What motivates people tocarry out a dicult task one requiring thought andinventiveness is, above all,condence that the task is aninteresting and worthwhileone. There must be a sense

that it is in their own directinterests to participate, abelie that they can rely on the


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cooperation o others, and anassurance that those managingthe scheme are accountableto the participants, andare themselves requiredto participate.

The TEQs model ullsthese criteria. It providesa ramework in which itis clearly in energy usersown interest to invent anddevelop ways o reducingtheir consumption oossil uels in line with the

agreed national Budget.

The Government studyIn 2008, prompted by the worko other research centres, theUK Government undertooka pre-easibility study into

TEQs, but this consideredonly emissions reductions,and not TEQs role as asystem guaranteeing energyentitlements. It also limitedits economic appraisal to avaguely-dened scheme or

individuals only; and it did notprovide the detailed systems-audit o TEQs which could

be the basis o a decision onwhether to take the schemeorward to implementation.

Common PurposeNations around the worldare experiencing deepeningenergy scarcity. There isno doubt that the neededsteep reduction in relianceon ossil uels will not beachieved unless there is asense o common purposewithin nations, withcitizens and communities

ully involved and stronglymotivated to invent theirown solutions. We need arevolution in the way we useenergy. TEQs provide theculture and ramework orthe common purpose and

inspiration which could drawus together to that end.


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This report was commissioned by theAll Party Parliamentary Group on PeakOil, which invited The Lean EconomyConnection to write a review o TEQs(Tradable Energy Quotas), givingparticular attention to two questions:

1. What contribution could TEQs maketo ensuring air access to energy at atime o shortages o oil and gas?

2. How would TEQs work alongsidemodels o carbon reduction atthe international level?

The report summarises the key eatureso TEQs. It shows that they are a fexibleinstrument, suited to the task obothphasing-down carbon emissions andguaranteeing access to uel as scarcities

develop. And it shows that nationaland international instruments arecomplementary, provided there areclearly-dened boundaries betweenthem. While national schemes candeliver deep reductions in energy useand carbon emissions inside nationalboundaries, international agreementscommit governments to well-denedreduction targets in concert with all other

participating nations. The existenceo eective national schemes makes itpossible or governments negotiatingon the international stage to committheir nations to reduction targets onthe ambitious scale that is needed.

The structure o the report is as ollows:

Part 1: A Plan or All Seasons1. TEQs: Guaranteeing Emissions ReductionsThe dening eatures o TEQs aresummarised. The Rating System givesall uels and electricity a rating denedin terms o the carbon dioxide they willproduce. The Entitlement guaranteesindividuals access to ossil uels, measuredin carbon units. The Carbon Budget sets

the rate o reduction in carbon emissionsand in the use o ossil uels. A marketenables carbon units to be bought andsold within the limits set by the Budget.

2. TEQs: Assuring an Entitlement to EnergyI uel scarcity, rather than emissionsreduction, is the tighter constraint onthe economy, a rationing system will berequired to sustain a air entitlement

o the available uels. Without this, uelpoverty would quickly turn into actualuel deprivation. This use o TEQs asa rationing instrument requires onlya switchover to new settings in thesotware which governs the system.

3. Motivation: Climate Policys Missing LinkThis chapter argues that a steep reductionin the demand or energy will require

an eective and proven motivationstructure. It must be built around(1) an intrinsic incentive as distinctrom an extrinsic regime o nancialrewards and punishments; (2) pull the principle by which participantsrespond to local conditions rather thanmerely complying with instructionsrom the authorities; (3) a rameworkor the ull participation o all energy

users; and (4) a setting or cooperationbetween all actors in the common tasko achieving the energy descent.

Introduction


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4. How do TEQs t with the EU ETS?The scale on which an eective TEQsscheme would operate is examined.The two ormats in current debate are(1) the Layered Format, calling or thecreation o two (or more) schemes withina single economy, one or individualsand at least one other or all other users(e.g. the EU ETS); and (2) the IntegratedFormat, bringing all energy-users in a

national economy within a single rame oreerence (TEQs). This chapter examinesboth options and concludes that only theIntegrated Format would be capable o thedual purpose o ensuring air entitlementso uel and reducing emissions.

Part 2: The Scienceand Policy Context

5. The Two Sides o the Energy ProblemThis chapter summarises the latestevidence on peak oil and climate change,and argues that when the interactionsbetween them are properly understoodand combined with our UK energyoutlook, our only realistic option is a

steep reduction, leading to a phase-out, in the demand or ossil uels.

6. Policy UpdateAlthough the model o TEQs was rstdescribed in 1996, and rst presented atthe House o Commons in the ollowingyear, the rate o diusion into politicalthinking has been slow. This chapteroutlines the sequence o events, and

analyses the Governments research intothe scheme in the light o the work oother research centres, concluding thatthe Governments own criteria or a ulleasibility study have now clearly been met.

ConclusionsThe report concludes that we requirea policy ramework that guaranteesemissions reductions while sustaining

air entitlements to uel in conditionso scarcity. To do this, it must engagewith and motivate the whole osociety in the task o phasing-out ourdependence on ossil uels. TEQs is theonly instrument available to achievethis ambitious, but essential, aim.


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How TEQs WorkAt the heart o the TEQs model is thenational Carbon Budget (set, in the UK,by the Committee on Climate Change).The Budget states the volume o carbonemissions that will be permitted eachyear. The TEQs system then shares outthis quantity, by the Issue o units toindividuals and into the market. On the

rst day o the scheme, one years supplyis issued; it is then topped-up each week,so that there is always a rolling yearssupply o units in participants accounts.Accounts are maintained by the Registrar.

Part o the Issue is an unconditionaland equal Entitlement to all adults,issued directly into their TEQs accounts(around 40% o the units are issued in

this way, in line with the proportion oUK emissions that come rom individualsand households). The remainder is soldby Tender, as part o the weekly auction

that already takes place or the sale oTreasury Bills and Government debt.Banks and brokers obtain a supply ounits on instructions rom their clients,and distribute them to all non-householdenergy-users in the economy to industryand services o all kinds, and to theGovernment itsel. The Tender providesrevenue, which the Government uses to

acilitate, in every way it can, the processo reducing dependence on ossil uels.

When uel or electrical energy is purchased,buyers pay or it as usual using money, butmust also surrender units correspondingto the carbon content o their purchase.Individuals who use less than theirEntitlement o units can sell the surplus;those who need more can buy them on

the market. The units are electronic.

The number o occasions on whichindividuals actually purchase energy is

Figure 2: The Market for Tradable Energy Quotas

Registrar

Committee

on Climate

Change

Carbon

Budget

Issue

Entitlement

40%

Tender

60%

Government revenue

from Tender Units Flow Through the Energy CycleGovernment leads, assists and enables the Energy Descent

Retailers

Wholesalers

Producers

Primary Energy

Providers and

Importers

Surrender

The PeopleAll other

energy users.Firms,

Governments, etc

Primary dealers

The Market

trading between


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14 TEQs: A Policy Framework or Peak Oil and Climate Change

quite limited perhaps eight times a yearor utilities, although it could rise to somethirty times a year or individuals withcars and most TEQs transactions aredone by card and direct debit. Moreover,

on each o these occasions, the surrendero TEQs units takes place along withthe money payment, as part o the sametransaction. This is a system with lowlevels o noise and administration,leaving people to concentrate on thechallenge o living within the steepdescent in the availability o ossil uels.

The Rating System evaluates uels

and electricity in terms o the carbonthey contain and release. One TEQsunit is equivalent to one carbon unit corresponding to the quantity ouel or electrical energy that producesone kilogram o carbon dioxide overits liecycle (not only rom its nalcombustion, but also rom the combustiono the other uels used in bringing that uelto market). The system ensures that all

electricity and uel carries a carbon rating,e.g. 0.2 units per kWh, or 2.3 units per litre.

The TEQs units received by the energyretailer or the sale o uel or electricity arethen surrendered when the retailer buysenergy rom the wholesaler who, in turn,surrenders them to the primary provider.Finally, the primary provider surrendersunits back to the Registrar when it pumps,

mines or imports the uel. This closes theloop (see Figure 2, The Market or TradableEnergy Quotas). The fow o units roundthe loop is routinely accounted-or incompanies existing stock-control systems,so the system is sel-monitoring, requiringno routine public sector intervention.

The act that the carbon content is knownwhen energy or uel is sold avoids the need

or direct measurement o emissions romexhaust pipes or houses. It also means thatthe carbon labelling o individual productswithin the economy becomes unnecessary.

Key Benets o TEQs

1. Guaranteed emissions reductions.TEQs are a guarantee that the trajectoryo reductions set by the Budget will

actually be achieved. The quantity ouel is determined by the Budget; theprice adjusts around it. Price in the TEQsmodel is the ree variable, the expansionjoint which adjusts to circumstances; it isthe degree o reedom which enables themarket to keep the Budgets promises.

It is in the interests o the market asa whole that the price o TEQs units

should be low as low as possible. Whatis more, price takes the temperatureo the scheme: the lower it is, the moresuccessully are energy users adjustingto the tough demands o the energydescent. As the scheme advances, withnext years average energy consumptionbelow this years average, the dicultyo coping without having to buyadditional units in the market will

increase, so the desire or unit pricesto be low will become ever stronger.

Success in keeping unit prices lowwill depend on the extent to whichenergy-users are able to reduce theirenergy demand. The eatures detailedbelow are designed to acilitatethis, and thereby mitigate the pricepressures imposed on us by energy

depletion. So long as the scheme is inoperation, the guarantee holds: carbonemissions / uel usage will descend atthe rate determined by the Budget.

TEQs are a guaranteethat the reduction set bythe Carbon Budget willactually be achieved.


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15TEQs: Guaranteeing Emissions Reductions2. Equity.Although the per capita entitlement isequal, that does not necessarily make itadequate or the individuals needs, butit brings into each individuals own lie

a direct encounter with the reality odiminishing access to energy. Where thereare households and individuals whoseenergy needs are very high (because, orinstance, their house is poorly insulatedor because they have to drive a long way towork), the equal entitlement draws ocusto the problem and provides a powerulincentive to deal with it. The TEQsentitlement engages with the inherently

unjust consequences o climate changeand uel depletion, prompting urgentaction where it is most intensely needed,in advance o the undiscriminatingreductions in energy rations whichwill soon be imposed by nature.

3.Time to plan ahead.The guaranteed TEQs Budget gives aclear long-term warning o the scale

o reduction in energy use which hasto be achieved over a rolling 20-yeartime horizon: the trajectory o energydescent set by the Budget is heldconstant; that constancy is made possiblebecause prices can adjust round it.

The long-term perspective is essential.Decisions will have to be made now, andaction taken now, which will take twenty

years or more to get the intended results.The long-term view must be presentas a dening property o any schemedesigned to reduce and, ultimately, toend our dependency on ossil uels.

4.Leaves the money with the consumer.The cost o achieving the energy descentwill be high, requiring proound changesin lives and expectations, in the use o

land and technology, and in the patterno industry and transport. Moreover, theeconomy may be in deep recession due tothe combined eects o peak oil and climate

change. Individuals and households willthereore need as much money as they canget in order to pay or the transormation.The ree distribution o TEQs units toindividuals ensures that the money stays

where it is most needed. The revenuereceived by the Government rom theTender will also be used to create a und tosupport the communication and training,expert guidance and capital costs requiredby a decisive and steep energy descent.

Consumers budgeting is also assisted bythe price-balancing eect o TEQs. TEQswill tend to stabilise the price o energyin two ways. First, they prevent uel (e.g.oil) being, in eect, distributed on thebasis o an auction, with access beinglimited to the highest bidders (or theastest movers). Secondly, the price oenergy and the price o units will tend tomove in opposite directions. I, or when,

world oil prices reach very high levels, thiswill reduce the demand or oil, thereorereducing the demand or units and thustheir price, so that the net price paid byconsumers (oil+units) is more stable thanthe price o either oil or units alone.

5. Government there to help.The Governments role is to enableeveryone (including the Government

itsel, because it too is bound by thescheme) to achieve the reduction set bythe Carbon Budget. It is a priority oGovernment policy to do everything in its

I the energy descentwere seen by consumersas, in essence, a moneyproblem, it would be justone more charge on thehousehold budget.


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power to enable the economy to achievethe energy descent with the least possibledisruption. It will do so on the basis ocall-and-response, providing servicessuch as training, inrastructures, loans,

and changes or relaxations in regulationwhich open the way to comprehensivetransormation in the energy andmaterial structures o the economy.

The Government, in a TEQs scheme, isin the same boat as everyone else. It isintegral to the success o the scheme.It is not spending its time issuinginstructions and regulations; it is working

out how to cope intelligently with thetransormation that is acing us all.

6.Specied in terms o energy.The problem is an energy problem, andit will call or imaginative and highly-motivated energy solutions. I the energydescent were seen by consumers as, inessence, a money problem, it would bejust one more charge on the household

budget. Although the most successulenergy-savers will be able to sell excessunits, nancial incentives are peripheralto the scheme, and TEQs avoid thedemotivating eect o a system basedon extrinsic rewards (see Chapter 3).

7. Ownership.The scheme belongs to the people whouse it that is, to all energy-users.

The price o units is a signal o theprogress being made by energy-users inreducing their reliance on ossil-uelsas required by the Carbon Budget.

8.An assured entitlement.At times o scarcity, consumers will needto be sure that they can obtain theirentitlement o uel and energy. Withoutsuch an entitlement, or ration, those

who are unsuccessul in bidding orthe energy they need, or who are notquick enough to get hold o whateveruel is available, will be let with none.

This absolute requirement or a ration/entitlement applies whether the aimis to reduce carbon emissions, or tocope with uel shortages, or both.

TEQs guarantee to individuals theright to buy uel in at least the quantityspecied by the entitlement. That is notquite the same as a straight rationingscheme which stops people buyingmore than a given amount since inthe case o TEQs, you can buy moreunits on the market (just as long asothers are willing to sell them). TEQsrationing does not set an upper limit

or individual energy users, but it doesprotect essential and air access to energy.

9.Both or uel scarcity and the climate.Even in the unlikely event that the schemewere being used exclusively to reducecarbon emissions, without there being any

need to ration uel itsel, there would stillbe a scarcity problem which would makean entitlement scheme essential. As theCarbon Budget declines, units will becomescarcer, and i the distribution were letentirely to an auction, it would excludeall but the highest bidders. That is, theimposed scarcity o carbon units and theactual scarcity o uel would have the sameeect, requiring the same guarantees.

Since both climate change and uel scarcityare upon us, any uel-related schememust be equipped to deal with either orboth. TEQs are designed to do this.

TEQs rationing doesnot set an upper limitor individuals energyuse, but it does protect

essential and air accessto energy or all.


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17TEQs: Guaranteeing Emissions Reductions

10.International advantage.The rst-mover nation will quicklydevelop the advantage o reduced energy-costs and ahead-o-the-eld technology.A nation with a TEQs scheme will beable to commit itsel with condence to

deep reductions, breaking the inertia ininternational negotiations by showing theway or other nations to do the same.

11.Pull.TEQs are based on pull (Chapter 3).Pull sets up a clear commitment to, andramework or, the energy descent, bywhatever means energy users can devise.Rather than dictating changes rom the

top down, TEQs are a ramework orchange to be pulled along by energy-usersthemselves. Households, neighbourhoods,communities, local authorities andindustry will have a common rame oreerence in which to cooperate in theambitious reductions which are beyondthe reach o individual consumers. Thesignicance o pull is central: TEQs bringa sharp, intense ocus to the aspects o

energy-use where action can be mosteective; they provide the incentive tocall on Government and other sources orassistance on a call-and-response basis;they motivate action; they encouragepeople to work out what action to takei it is not immediately clear. Theystimulate creative intelligence.

12.Common Purpose.

I the energy descent becomes a sharedgoal, then action taken by the individualin his or her own interest is the same asthe action needed in the collective interest.

The TEQs ramework helps to achievethis common purpose. Conronting allparticipants will be major tasks suchas developing the proximity principle(shorter travel and transport distances

goods and services being produced inproximity to the people who will be usingthem) and building local competenceto meet local needs. The only way inwhich an individual can achieve majorchanges such as these is by cooperatingwith others at the level o households,streets, towns, the nation; TEQs clearlyspeciy the task as one o cooperatingto achieve an energy revolution.

Why a Carbon Tax Would BeLess Eective Than TEQsNone o these desirable characteristicsapply to a carbon tax. In act, theunsuitability o taxation or thetask o reducing carbon emissionsneeds to be rankly recognised:

1.I taxation were high enough to

infuence the behaviour o the better-o,it would price the poor out o the market.2.The ocus o the scheme must be onthe long-term energy-descent, sustainedover many years. There needs to bea ramework to guide this, but this isnot a job which taxation can do. It isimpossible or tax to give a long-termsteady signal: i it remains constant, it

will be inappropriate at certain periodso the economic cycle; i it fuctuates,it does not provide the steady signal.

3. Taxation would take money rompeople just at the time they need it most:to achieve the needed reductions, they

TEQs bring an intenseocus to the aspects oenergy-use where action

can be most eective.

None o these desirablecharacteristics apply to acarbon tax.


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will need to spend substantially on awhole range o structural changes andtechnologies, and it is essential that theyshould have as much discretionary incomeas possible to enable them to do this.

4. Taxation is based on the assumptionsthat the authorities know what peopleneed to do, and that they wont do itunless pushed in eect ned or notgetting on with it. The energy descent,by contrast, requires a clearly-denedramework whose diculties can onlybe solved by the application o localingenuity. Tax may, at best, establish an

extrinsic incentive to achieve compliancewith a stated goal; eective motivation canestablish a ar stronger intrinsic incentiveto achieve well beyond such a goal, andto cooperate with others to do the same.

5. Tax has no role in the distributiono air entitlements to energy at atime o scarcity. I a tax regime didexist to phase down carbon emissions,

it would still be necessary to have inplace a rationing scheme specied interms o entitlements to energy.

In short, taxation ought naturally to bealigned with recognised values beingset at higher rates or bad things thanor good things but its useulness as amotivator is limited. It should concentrateon what it is good at raising money.


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have to change. When the system switchesrom a Carbon Budget to a Budget (orBudgets) covering specic uel(s), a newIssue o units will be made, with a newEntitlement and Tender and a switchover

to dierent settings in the sotware.

In the case where a second uel, such as gas,is in short supply, rations (e.g. Tradable GasUnits one unit per kWh) would be issuedin addition to the Tradable Oil Units andthe carbon units already in circulation.

The EntitlementThe distribution o Tradable Oil Units,

or Tradable Gas Units, to individualswill be the same in terms o design andimplementation as the distributiono tradable carbon units. They will beissued by weekly top-ups into individualsaccounts. A likely scenario is that oneuel (say, oil) is in short supply, whilethe consumption o other uels (say, gasand coal) has to be reduced as part o thecontinuing descent in carbon emissions.

That is to say, concurrent budgets will beneeded or, respectively, uel and carbonemissions. The TEQs model is explicitlydesigned to sustain two (or more) budgetsin this way.

It is possible that, in the case o shortagesthat are expected to be volatile or short-lived, the rolling period o issue will beshorter than the one-years supply in the

case o carbon units. It could, or instance,be as short as two months, backed by goodinormation on the circumstances o theshortage and its expected duration.

The TenderWhen TEQs are used or rationing carbon,the distribution o units to organisations isbased on the auction o units at the Tender,where bidding organisations receive their

units in accordance with the settlementprice the price at which supply anddemand are in balance.

However, at a time o actual and perhapsproound uel shortage, the terms o theTender may need to be revised. In thissituation, the settlement price may proveto be so high that some participants donot succeed in obtaining any units or not

enough to enable them to continue serviceswhich are essential to the economy sothat some intervention may be needed toguarantee users minimum access to energy.For example, ood producers could make acase or such a guarantee.

In these circumstances, the terms o theTender will be modied to deliver rationsguaranteeing a minimum entitlement or

participants with a valid claim, while theremainder would be auctioned as usual.The hybrid Tender would have the benetso meeting unconditional needs insoar asthe total quantity o available energy allows and sustaining the market or units.The existence o the market is essential.Some rationed assets (e.g. ood) do notneed a market in entitlements, becausedierences between individual needs are

relatively minor or at least predictable.But in the case o the distribution o energyentitlements, the very wide diversity oenergy needs makes the market a centralasset as the only available means osustaining an ecient allocation.

The use o the hybrid Tender may alsobe required in the context o a marketdesigned purely or carbon emissions.

As noted in Chapter 1, a steeply-declining Carbon Budget would insome circumstances make carbon unitsunavailable to some service-providers in

I a TEQs system werein place, adaptationsto respond to energy

scarcities could be madewith great speed.


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21TEQs: Assuring an Entitlement to Energythe quantity needed to unction. The useo guaranteed minimum allocations shouldbe avoided wherever possible, because itimpairs the ecient distribution o units,which is contrary to the interests o all

participants in the economy, but it is ameans o ne-tuning the market, requiringno modication to the scheme beyondadjustments to programme settings inthe light o current circumstances. It maybe necessary as a means o sustainingsupplies o the energy needed by essentialservices.

Such adjustments to the unctioning oTEQs all easily within the range o thesettings available to any fexible system.The key condition or them to be easible ispreparation time, but once a TEQs systemis in place, the adaptations needed torespond to energy scarcities could be madepromptly.

I energy scarcity were to develop beore

tried and tested rationing systems werein place, proound hardship would ollow that is, actual energy amine or thelosers in the competition or uel. All tooclearly, this would be unjust. Indeed, thedistribution o scarce uel would involvesome orm o auction or contest which, inthe case o severe scarcity, could be violent.TEQs are designed to sustain orderlyaccess to energy in these conditions.

And the instrument is designed, too, toprevent an even greater injustice, in that itrepresents a realistic response to climatechange. Any system which alls short o

being an eective instrument to reducecarbon emissions on the required scalewould lead to populations being exposedto the ull impact o climate change, whoseconsequences would be unjust by any

standards.

In summary, it is reasonable to concludethat we are running into danger. Energyshortages will occur. We do not knowwhen, but the event is undoubted and itis not ar distant (Chapter 5). There isa real possibility that this will happenbeore a rationing system is in place. Thecombination o energy scarcity and the

absence o rationing provision has lethalpotential and it needs to be correctedwithout delay.

I energy scarcity were todevelop beore tried andtested rationing systemswere in place, prooundhardship would ollow.


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23

As a result, we have at present a policy-response shaped by a mixture osophisticated climate science, brillianttechnology and pop behaviourism, basedon simple assumptions about carrot-and-

stick incentives. And yet, as the socialpsychologist Ale Kohn emphasises,

Not a single controlled study has everound that the use o rewards produces along-term improvement in the quality owork. 3

Rewards usually improve perormanceonly at extremely simple indeed,

mindless tasks, and even then theyimprove only quantitative perormance. 4

In other words, people need to eelmotivated by the task itsel; pay-or-perormance is an inherently fawedconcept. There is an irony here, becausethe nancial incentives embodied intaxation are being increasingly taken up bythe public services and as a undamental

principle o environmental management,just at the time at which this simplisticbehaviourist ploy is being abandoned byindustry, which has gone through someorty years o pain and puzzlement indiscovering its faws.

Tradable Energy Quotas, then, are a systembased on intrinsic incentives. They providereasons to want to reduce dependency on

ossil uels, to plan ahead, to cooperatewith others, to apply ingenuity, to takethe risk o inventive solutions which willachieve the rate o energy descent denedby the Budget.

The Budget is set in terms o the scarcegoods themselves carbon, energy, andspecic, named, uels. Those assets havemoney values, o course all assets do

but TEQs units are not dened in terms omoney: they are energy units, not moneyunits. The Budget provides a clearlydened incentive or all energy-users,

collectively and individually, to get by on adiminishing supply o energy. Motivationsare aligned. The people all energy-users are involved. And they are not there orthe money, but because they know that even

less energy will be available in the uture,that we all have to live with this, and thatwe must work out together how to buildsolutions with the stunning speed that bothclimate change and peak oil demand.

PullThe concept o pull is based on principleso lean thinking developed in Japan inthe post-war period. It is now applied by

companies around the world, but it is notwidely recognised in public policy. Pullrecognises that the people best placed tounderstand and cope with a complex localtask are those who are doing it who knowthe practical detail. In the case o TEQs,since the common purpose is dened,participants do not need orever to rely oninstructions; they can respond to actuallocal circumstance. The Government is

reed rom having to micromanage theenergy transition with regulations; insteadit can call on the greatest intellectualenergy source available to our society: thecreative intelligence o the people.

Where there is an alignment o aims, sothat people know what they are collectivelytrying to do, actions can be pulled alongby the actual detail o the time and place,rather thanpushed by a regulatory agency

that cannot know the detail. Pull meansthat people can respond to a challenge onits own terms, building on local knowledge being allowed to switch on their brains.

The Government isreed rom having to

micromanage the energytransition.


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25Motivation: Climate Policys Missing LinkParticipation in these senses has, to a largedegree, drained away rom citizenshipduring the years o energy-led afuence.TEQs bring the indispensable asset o aparticipative citizenship back to lie.

CooperationAction to reduce demand or ossil uels toachieve the energy transition will requiresubstantial and sustained cooperationbetween energy users. From this distance,it is hard to describe its nature in anydetail, but opportunities or cooperationin general terms are sketched in Figure 3below.

Households

Communities

Companies

Loc/NatGov

Households Communities Companies Local/National Gov

Households cooperatein conservation,renewables systems,repairs and local food.

Communities andhouseholds cooperatein skills, cultivation,schools, services,materials recoveryand jobs.

Households andcompanies cooperate

in closed-systems(zero waste) andhousehold production.

Government assistshouseholds withtraining, funds andregulatory support forthe energy descent.

Government providesassistance of all kindson a call-and-response basis.Communities developself-regulation.

Communities andcompanies cooperate

in local sourcing, andthe supply of specialistskills in the building oflocal energy systems.

There is cooperationbetween communitiesin developing thepotential for localself-reliance andresilience.

Companies cooperatewith Government intechnical innovation,building localinfrastructures andreducing transport

needs.

Companies cooperateto sustain a flow of

goods and services andpromote beststandards even if at thecost of competitiveadvantage.

Local Governmentssustain joint trainingcourses, energy descentsolutions and sharedinformation.

Figure 3: TEQs Cooperation


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26

TEQs are designed to include all energy-users in a national economy. Since themodel was published in 1996, severalvariants have been devised and debatedunder the general heading o personalcarbon trading (PCT). In some o thesevariants the scope o the scheme is

limited to individual consumers, leavingout other energy users such as businessand the public sector which would becovered by some other scheme, such asthe European Union Emissions TradingScheme (EU ETS). In support o thisormat, it is argued that the EU ETSalready exists and is immoveable, so thatan economy-wide scheme is out o thequestion:

The core economic instruments ormanaging emissions or the oreseeableuture are the EU Emissions TradingScheme (EU ETS) [and the domesticsupplier obligations]. Analysis o anyPCT system that does not operate intandem with these instruments willbe purely academic: this suggests thatTEQs and similar designs o personal

carbon trading schemes that assumeorganisations and individuals operatingtogether in an economy-wide scheme arenon-starters. 9

But there are two ways o seeing the scaleand ormat o a carbon/energy rationingscheme. First, there is the Layered Format,in which dierent participants in thesame national economy belong to dierentschemes, so that businesses would belongto one scheme, operating in its ownmarket and governed by its own CarbonBudget, and individuals would belong in

a dierent scheme, working to a dierentCarbon Budget, in a dierent market,and at dierent prices. The presumptionis that the Layered Format would crossnational boundaries, as does the EU ETS,which includes some thirty nations; othernational groupings, such as the NorthAmerican Free Trade Area (NAFTA), or aglobal scheme, would use the same ormat.

Secondly, there is the Integrated Format.It is integrated in that all participants inthe energy market companies, publicsector bodies and individuals operate in

How do TEQs t with theEU ETS?

In the integrated ormat,all participants in theenergy market operate inthe same scheme.

4.


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27

the same scheme. The scale o this marketis critical and it is suciently smalland sel-contained to enable a strongly-developed sense o common purpose andshared ownership. There is acceptance

o the Budget as a just representationo national circumstances, and o theauthorities responsible or it as qualiedto represent the collective interest. Eachnation designs and manages the schemein response to consultation, and to theparticular circumstances and energy usagethat exist within its national boundaries.

Under the Integrated Format, TEQs would

be the means by which nations implementthe targets they have agreed at theinternational level. Wider multinational(e.g. EU) targets would become realisticas each nation committed itsel to oneCarbon Budget and market correspondingto its own situation and endorsed byconsultation with its energy-using public.In the case o small nations, there would bethe option o joining orces in a national

group on a scale equivalent to the largernations.

It is useul to compare the merits o thesetwo models against three criteria:(1) The Carbon Budget(2) Fuel Pricing(3) Rationing

The Carbon Budget

The Carbon Budget, setting the quantityo permitted emissions and their rate odecline, is the dening property o thescheme. I the Budget were too steep, thenthe geographical area in which it belongedwould nd itsel plunged directly into anenergy problem: with too many buyers ounits and too ew sellers, the price wouldrise sharply, so that, or some participants,there would be no price at which they

could meet their needs or energy.Conversely, i the Budget were set too high,there would be no incentive to reduceenergy demand, the price o units would

decline towards zero, and the schemewould in eect cease to operate.

Even within a nation, o course, thereare wide divergences o energy use, so

that some users will nd it harder thanothers to stay within the Budget or to buythe additional units they need but itis or such adjustments that the marketexists. The problem would arise whereone whole nation within a multinationalTEQs scheme comprising a large groupo nations had energy needs substantiallyabove or below the average or the others.This would lead to large-scale transers

o units rom the nation with the lowerdemand to the nation with the higherdemand, together with a transer ounds the other way, which would reducethe scheme to simple money-politics, anunproductive mix o opportunism andresentments. The nation that receivedthe windall revenue would have littleincentive to reduce its energy demand yeturther, and the nation that bore the cost

would pay less attention to driving downits energy demand than to challenging thescheme. I the imbalance were severe, thescheme would be short-lived.

A central condition o success, thereore,

is that the Budget should be pitched at alevel which is seen to be just and realistic,and towards which the participants inthe scheme can eel a sense o ownership.

A central condition osuccess is that the CarbonBudget should be pitched

at a level which is seento be just, and towardswhich participants have asense o ownership.


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The implication is that the scheme shouldbe based on relatively small areas, withwhich participants eel they can identiy roughly on the scale o the nation asspecied in the Integrated Format.

Fuel PricingIn the case o the Integrated Format (the

TEQs model) a central principle is thatthe numraire the unit in which carbonemissions are measured and traded isexpressed in terms o energy, not in termso emissions themselves. As explained inChapter 1, carbon emissions are translatedinto energy units that is, the amounto any given uel needed to produce akilogram o carbon dioxide. All uels andelectricity supplies are thereore carbon

rated, and TEQs units measure quantitieso uel and electricity (litres, kilowatthours). This use o easily measured unitsis a necessary condition o a easiblecarbon-rationing scheme involvingindividuals. There is no need to measurethe carbon-emissions o your car or house:they are already accounted-or in the uelyou buy. The signicance o this is notmerely that it keeps things simple; it is the

only realistic design or a scheme: peoplebuy uel exactly as they did beore, exceptthat they automatically surrender units atthe time o purchase in accordance with itspublished carbon-rating.

But it ollows that any TEQs scheme mustinclude all energy-users. I it included onlysome energy-users, then uel would carrytwo (or more) dierent prices, depending

on who the buyer was: i you were to turnup at a garage in your car to buy petrol, youwould be paying a dierent price or it thansomeone who showed up in a commercial

vehicle, and whose energy-consumptionwas covered by another scheme. Dierentprices or the same uel would immediatelylead to black market brokerage, and thescheme would break down.

It would be possible, no doubt, to remainaloo rom such detail and to devise a veryhighly-regulated scheme in which peoplewere required at the time o purchaseto show the seller evidence o whetherthey were purchasing uel or business orprivate use; people who used their cars (orhomes) or both private and work-relatedpurposes could perhaps pay two dierent

prices or their energy (lling their tankswith, say, 13 litres at one price and 21 litresat another). Enorcement and anti-raudmeasures could be established to regulatethe application o the scheme at every level.The scheme would have to do without thesel-monitoring pull eature in whichunits were brought within the standardaccounting systems o companies and thenpulled through to the primary suppliers

and the Registrar; without this, costs wouldbe high: routine carbon-accounting romoil-well to petrol-pump would not work isome o the nal product (the petrol) wereexempt rom the process. 10

And yet, the theoretical possibility thata mis-specied scheme can be made towork i enough money and regulation isthrown at it invariably disappoints when

it is put into practice. The TEQs scheme issel-monitoring, requiring no enorcementcosts apart rom the routine auditingneeded or any signicant initiative,but this property depends on it being acoherent, economy-wide model.

It ollows that any TEQsscheme must include allenergy-users.

TEQs is sel-monitoring,requiring no enorcement

costs apart rom routineauditing.


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29How do TEQs t with the EU ETS?RationingThe use o the Layered Format as a meanso rationing uel is highly problematic.In the case where a TEQs scheme is usedto sustain entitlements to uel at a time

o scarcity, the existence o a separate multinational scheme, with businessesenergy-use being governed by the EU ETS,violates undamental principles o thedesign o a rationing scheme.

A rationing scheme has to be a airdistribution o a scarce resource, includingall the users o that resource, distributingthe limited quantity according to a single

set o criteria which is transparent andwidely understood, and or which theGovernment is accountable. To dealwith the distribution o uel rations tobusiness on dierent criteria, yieldingtwo availabilities and two sets oprices, covering dierently-dened andoverlapping geographical areas, andor which the national Government hasno accountability, would oreit any

condence in the equity and transparencyo the scheme. And it would sharplyreduce any prospects or the trust andalignment o interests that are requiredor joint, cooperative eort to fourish. 11

Furthermore, in the real world o rationingunder conditions o scarcity, it cannot bepredicted how nations will obtain theirsupplies o the scarce oil and/or gas. It

seems probable that nations that are well-placed which, or instance, own largereserves will eel justied in taking ulladvantage o this, rather than sharing outuel stocks equally to other nations whichlack that advantage. And governments willundoubtedly negotiate or supplies o uelin order to get the best deal they can ortheir populations. In these circumstances,an EU ETS which provided an EU-wide

budget without regard to the dierencesin energy stocks and sources available tothe participating nations would be hard toreconcile with a easible system o rationing.

There is at present intense concern todevelop a system:- With a global reach;- Capable o, and committed to, an

ambitious phase-down o carbon

emissions;- Able to guarantee air access to energyor all energy-users.

These three requirements can be providedby economy-wide national systemswithin an overarching coordinatingramework. That ramework derives itseectiveness rom the commitments madeby governments acting on behal o their

national economies. The actual deliveryo those commitments is achieved bynational systems on the model o TEQs.

International and national schemes arecomplementary i, and only i, there isa well-dened and explicit distinctionbetween their respective areas o activity.

Solutions to the energy problem will notbe delivered by up-stream systems, nor bydown-stream systems. It will be delivered byull-stream integration o all participants ina system explicitly designed or cooperative,complementary programmes. I suppliers,consumers and public bodies have reasonto trust each other and to talk to each other i they are all in the same scheme and

they realise they will not solve the problemwithout each others cooperation thenthere will be a chance o achieving a ast, airand eective energy transition.

In the real worldo rationing underconditions o scarcity, itcannot be predicted hownations will obtain theirsupplies o oil and/or gas.


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Part 2Science and Policy Context


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33

we have already seen a rise o 0.8C, with atleast an additional 0.6C rise still due justrom emissions to date. They and otherleading scientists including the Chair

o the IPCC now hold that we need toreturn atmospheric CO2 concentrations to300-350 ppm in order to avoid catastrophicimpacts. In other words, we must drawcarbon out o our atmosphere beoretemperatures increase too ar and triggereedback mechanisms drastically slowingthe rate at which we continue to emit carbon isentirely necessary, but no longer sucient.17

Maintaining a benign climate can probablystill be achieved, but to grasp this chanceit will be necessary to radically and rapidlyrestructure our society. The science isclear that the decisions made in the nextew years will determine the uture o ourplanets climate or millennia to come.Peak Oil Summary 18It is a act well-established by experience

that the rate o oil production (extraction)rom a typical oileld increases to amaximum point and then graduallydeclines. This point o maximum fow is

known as the production peak. Becausethe same is true o the total oil productionrom a collection o oilelds the peakingconcept is also applied to regions, to

countries and to the entire world. Thisglobal production peak is what is generallyreerred to by the term peak oil. 19

As shown in Figure 5 above (which includesconventional oil, unconventional oil andbiouels), global production has broadlylevelled o at around 85-88 million barrelsper day (m b/d) since mid-2005, despite theincentive to increase production caused

by the massive increase in oil prices inthat period (rom a $13/barrel average in1998, to a $55/barrel average in 2005, to apeak at over $140/barrel in July 2008 anda $70-90/barrel price throughout 2010).This means that the many new oil wellsand unconventional sources that cameon stream during this period have onlyjust managed to oset the acceleratingdepletion o existing elds. 20

Global recession led to a sharp all in boththe oil price and oil production in mid-2008, with a recovery since. However, with


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oileld depletion continuing inexorably,and global oil discoveries having peakedorty-ve years ago, it is questionablewhether production will ever signicantlyexceed ormer levels, even in the event o

an economic recovery.

Meanwhile, mainstream projectionso global demand or oil touch nearly104m b/d by 2030, and over 110m b/d by2035. Unless production ollows, againstall reasonable expectation, substantialscarcities are inevitable. 21

Here in the UK around three quarterso our primary energy consumption is

derived rom oil and gas, yet our domesticproduction o these uels peaked in 1999and has been in steep decline since,orcing the UK to become a net importero oil since 2005. Looking to the uture,Government orecasts see oil and gasproduction on the UK continental shelplummeting to around a tenth o 1999levels by 2030, and the May 2007 EnergyWhite Paper projects that with existing

policies, by 2020 we could be lookingto import around 80% o our naturalgas needs (and 75% o our coal). In aworld acing severe ossil uel depletionproblems, this dependency on reliablesupplies rom abroad leaves us extremelyvulnerable to energy shortages. 22

Experts also highlight that, with oil-exporting countries using more o their oil

domestically, global peak oil exports likelypassed some years ago, with one crediblereport concluding that the current top veoil exporters Saudi Arabia, Iran, Russia,

Norway and the United Arab Emirates are likely to providezero net oil exports byabout 2030. 23

It is clear that UK energy policy aces huge

challenges as it comes to terms with theenergy resource depletion we ace over thecoming decades (see Figure 6 opposite). 24

Climate Change and Peak Oil -Joined-Up ThinkingFigure 7 illustrates the overwhelmingurgency with which we need to act inresponse to climate change. In light othis, it might be tempting to call or an

immediate ban on ossil uel extraction,yet our society depends heavily onthese energy sources. Without them,our inrastructure or ood supply,transportation, heating, electricity and soorth would ail catastrophically.

So we can clearly see what is otenoverlooked within current politicalthinking, there is a tension between

addressing climate change and addressingthe challenges o peak oil. This has beenseen in the US Congress, where ClimateChange Bills (to limit emissions) vie orattention with Energy IndependenceBills (to subsidise emissions-heavy tarsands and coal-to-liquids plants). Inshort, slowing the decline in ossil uelsupply worsens the climate challenge,while speeding it worsens the peak oil

adaptation problems.

The ree market approach to the problemo peak oil is to rebalance declining supplyand burgeoning demand through an

The UKs domesticproduction o oil and gashas been in steep declinesince 1999.

It is now questionablewhether production willever signicantly exceedormer levels.


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35

Figure 7 shows the conclusions o Tyndall Centre research into the reduction in emissions rom energy use

and industrial processes that would be needed to stabilise global CO2e concentrations at 450ppm, according toIPCC gures (see endnote 26). The IPCCs Fourth Assessment Report estimated that stabilising concentrations

at 450ppm CO2e would give us a 50:50 chance o exceeding 2C warming above pre-industrial levels, although

other studies suggest that 450ppm would bring a higher risk o exceeding 2C. 27


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37The Two Sides o the Energy Problemplanned lietimes or are shut down tocomply with EU environmentallegislation. 30

In addition, it is becoming clear that

nuclear energy aces depletion issueso its own. As the worlds reserves ohigh-quality uranium ore dwindle, it hasbecome an open question whether newnuclear power stations would use upmore useul energy over their ull lie-cycle (in mining, transporting, millingand processing the uel, building anddecommissioning the power stations andmanaging the waste) than is generated

over the power stations lietime.

It may be that nuclear is actually becomingan energy sink, rather than an energysource, and thereby worsening our climateand energy challenge, in addition toproviding its own unique diculties therisk o nuclear accidents (or deliberatesabotage), the commitment to millenniao high-tech nuclear waste management,

and the increased risk o nuclear weaponsprolieration. 31

Naturally, we might wish to ll ourenergy gap with renewables, but in 2007they contributed only 3.3% o our energysupply (including 5% o our electricity).The UK Renewables Advisory Board incommon with other studies estimatesthat with current policies the proportiono energy rom renewables will reach only

6% by 2020, and that even with radicalpolicy changes and great eort they canonly oresee it providing 14% o projecteddemand by 2020. 32

Meanwhile, talk o clean coal is ratherirrelevant, as its development exists on avery dierent timescale to our immediatechallenges. Tony Blair and Jan PeterBalkenende, then UK and Dutch Prime

Ministers, declared in 2006 that,

The science o climate change hasnever been clearer. Without urtheraction, scientists now estimate we maybe heading or temperature rises o atleast three to our degrees above pre-industrial levels We have a windowo only 10 to 15 years to avoid crossingcatastrophic tipping points. 33

And Intergovernmental Panel on ClimateChange chairman Rajendra Pachauriannounced in 2007 that,

I theres no action beore 2012, thatstoo late. What we do in the next two tothree years will determine our uture.This is the dening moment. 34

With bodies as diverse as the WorldBusiness Council or SustainableDevelopment, Shell, the United Nations,the Massachusetts Institute o Technologyand the Intergovernmental Panel onClimate Change accepting that carboncapture and storage cant deliver on a bigcommercial scale until at least 2030, it isclear that so-called capture ready coalpower stations are not a sensible option.

We cannot solve todays energy problemswith tomorrows new technologies. 35

So i neither renewables nor nuclear canmake up the shortall in our energy supply,oil and gas are in steep decline, and ourclimate obligations rule out coal, what canwe do?

There is a simple answer cut our cloth

accordingly and learn to reduce our energydependency in line with the reducingsupply. When we talk o demand andsupply as two separate and unrelated

With current policies theproportion o UK energyrom renewables willreach only 6% by 2020.


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actors we are led back towards theinsoluble supply-side dilemma, but thereality is that the amount o energy weneed is governed in part by the amount oenergy we have, and how we choose to use

it. I we are to meet the climate challenge,managing energy demand is not just theonly sensible option, it is the only option.

It is this reality that is recognised by therapidly-increasing number o TransitionTowns, who are exploring practical,positive solutions or changing liestylesand local inrastructure in response tothese collective challenges. 36

Local initiatives like these are an essentialpart o creating a thriving society throughthis period o energy descent, and theirpotential would truly be unleashed isupported by a national policy rameworkdesigned to encourage and empower theirsmall-scale solutions. TEQs would achievethis, while simultaneously ensuring that

these solutions are collectively sucient tomeet our national carbon reduction targets.

The reality is that theamount o energy we needis governed in part bythe amount o energy wehave.


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39

We will begin by looking briefy at thehistory o the TEQs model, beore movingon to examine where it would sit within thecurrent policy landscape, how the politicaldebate on the scheme is developing and whyit may be an idea whose time has come.

A Brie History o TEQsThe model or TEQs (Tradable EnergyQuotas) was rst published in June 1996in Stopping the Trac, an articleby David Fleming in Country Lie. Thiswas ollowed by a discussion paper,Tradable Energy Quotas: Setting Limits toCarbon Emissions, and then by a journalpublication, and a series o presentationsto Governmental organisations and NGOs.

These included the ollowing: 37

16 February 1998Presentation to the United NationsAssociation at the House o Commons.

14 May 1998Presentation to Globe International at theHouse o Commons.

11 June 1998Presentation at the Department o Tradeand Industry.

1-2 July 1998Workshop, Brussels, sponsored by theEuropean Commission, DG XII RTDProgramme, Environment and ClimateUnit on Human Dimensions o ClimateChange. Proceedings: David Fleming

(ed).

13 January 1999Presentation and publication o report

on Tradable Energy Quotas at House oCommons, sponsored by Tim Yeo, MP.

Two research unding applications tothe European Union (Fith Framework)

ollowed, in partnership with twelveresearch centres in Europe, whoseparticipation was secured by detailedpersonal briengs. The applications,which were prepared in collaboration withRichard Starkey, University o Hudderseld,were submitted on 13 June 1999 and 14February 2000. Both were rejected.

However, briengs on the model

continued, and it became more widelyrecognised. This was assisted whenStarkey joined the Tyndall Centre, and wasable to use the publicity resources availableto the University o Manchester. That, inturn, was ollowed by wider recognition,leading in due course to oral evidenceon Personal Carbon Trading being heardby the House o Lords Select Committeeon Science and Technology, and by a Ten

Minute Rule Bill on Personal CarbonTrading presented by Colin Challen MP, on7 July 2004.

Tradable Energy Quotas (aka PersonalCarbon Trading / Personal CarbonAllowances / Domestic Tradable Quotas)then became widely studied by researchcentres, extending internationally. Thisbrie survey o research activity is ar rom

exhaustive, but leading UK participantsincluded the Environmental ChangeInstitute (Oxord), the National EconomicResearch Council, the Royal Society o Arts,the Institute o Public Policy Research,and various university departments.Numerous papers ollowed, includingRichard Starkey and Kevin AndersonsDomestic Tradable Quotas: A policy instrumentor reducing greenhouse gas emissions rom

energy use. Mayer Hillmans popular bookon personal carbon allowances, How We CanSave the Planet, was published by PenguinBooks in 2004. 38

PolicyUpdate

6.


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41Policy Updatewe ail in this, the political pressureto loosen or abandon any cap willbecome irresistible: enough talk o uturegenerations, my children are hungry today.

Now that the cap or UK emissions is inplace, the ocus must be on two things continually checking to ensure that thiscap (within the context o the internationalresponse) is adequate to address the latestndings o climate science, and enablingand stimulating the necessary reductionsin energy demand to allow the UK tothrive under the cap. And as Lord Smith oFinsbury, Chairman o the Environment

Agency, argued in November 2009, theairest and most eective way o meetingthe UKs emissions targets is rationing. 41

It must also be recognised that around90% o the UKs energy needs are met romcarbon-intensive sources, so a decliningcarbon budget means a declining energybudget. In other words, even i we did notlive in a world o energy resource depletion

(as outlined in Chapter 5), the ClimateChange Act itsel means that a methodor ensuring entitlements to the availableenergy is essential. 42

The ree market (rationing by price) is notwell-suited to this task. We need a simple,coherent ramework which deals with bothsides o our energy dilemma, and helps tomake low-carbon living both easible and

air.

DEFRAs Pre-FeasibilityStudy into TEQsIn November 2006, the UK GovernmentsDepartment or Environment, Food andRural Aairs (DEFRA) published an initialscoping study which concluded that apersonal carbon allowance and tradingsystem has the potential to achieve

emissions savings in a airer way thancarbon taxes, and would reward people orleading low-carbon liestyles. Accordingly,DEFRA went on to und a number o

research projects as part o a pre-easibilitystudy into the implementation o TEQs,which concluded in May 2008. 43

The headline nding o DEFRAs second

study was that personal carbon tradinghas potential to engage individuals intaking action to combat climate change,but is essentially ahead o its time andexpected costs or implementation arehigh. DEFRA decided not to continue itsresearch programme at that time on thebasis o the studys cost-benet analysis,and in personal communication we havebeen told that DEFRA (or now DECC, which

has taken on the climate change brie)eels it has thrown down the gauntlet tothe research community to show that costswould be lower, or benets higher, thanound in the pre-easibility study.

As stated on the DEFRA website,

The Government remains interested inthe concept o personal carbon trading

and, although it will not be continuing itsresearch programme at this stage, it willmonitor the wealth o research ocusingon this area and may introduce personalcarbon trading i the value o carbonsavings and cost implications change. 44

We aim to show here that there is nowample evidence that this criterion has beenmet, and that the continuing absence o

a ull, grounded and careul evaluationo possible rameworks or reducingemissions and rationing uel leaves the UKunprepared and extremely vulnerable tothe consequences o both energy shortagesand climate change.

The DEFRA study consisted o our reports,each commissioned rom a dierent bodyand ocusing on a dierent area technical

easibility and potential cost, eectivenessand strategic t, public acceptability anddistributional impacts. All these reportshave now been moved to the DECC website,


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and can be accessed at:http://tinyurl.com/DeccPCT

This work represented a useul additionto the body o research in the eld, with

positive ndings on technical easibility,public acceptability and distributionalimpacts, but as the DEFRA decision wasbased on the cost-benet analysis, it ishere that we will ocus, looking at theadditional benets o TEQs which were notactored into the calculation, at the likelyoverstatement o the costs o the schemeand at the shortcomings o the cost-benetmethodology used.

Shortly ater the release o DEFRAs study,The Lean Economy Connection released adetailed response to all our reports, whichwill be reerred to below. This can beaccessed at: http://tinyurl.com/TLECDera

Additional Benets o TEQsIt must rst be made clear that theEectiveness and Strategic Fit report

(which contained the decisive cost-benetanalysis) did not actually examine theTEQs scheme. With regard to the ourreports that made up their pre-easibilitystudy, DEFRA stated that,

To ensure the research areas were ascompatible as possible and could bebrought togetherit was necessaryto provide a baseline description o a

personal carbon trading scheme, and setsome key assumptions around schemedesign... For the purposes o this project, aDomestic Tradable Quotas (AKA TradableEnergy Quotas) model was assumed. 45

Nonetheless, this one report explicitlyaddressed Mayer Hillmans substantiallydierent PCA scheme, which has a morelimited scope. The report states that,

In this report, an assessment is madeo the economic eciency o creating adownstream cap and trade scheme that

covers the ollowing sectors; domesticprimary uel, domestic electricityuse, leisure use o road transport ueland leisure aviation, as proposed byHillman (2004). Alternative designs

have been proposed, including moreambitious economy wide schemes,however considering the net benet ointroducing trading to the above sectorsprovides an insight into the added valueo personal carbon trading generally. 46

For reasons that should be clear rom PartOne o the present report, and as discussedin detail in our ull response to the DEFRA

study, we strongly challenge this assumptionthat the eect o a limited PCA schemeon the emissions o individuals would bethe same as the eect o an economy-widescheme on those same emissions.

This also leads to another notable oversight.DEFRAs work ocused purely on the beneto guaranteeing emissions reductions, andnot on TEQs additional role as a rationingsystem ready to ensure air access to energy.Means o guaranteeing entitlements willbe required in the case oany eectivescheme, whether its aim is to reducecarbon emissions or to sustain an orderlydistribution o energy at a time o scarcity.

The PCA scheme considered in DEFRAs cost-benet analysis would not have this dualunction, and this would make it necessaryto devise a separate electronic energy

We strongly challengethe assumption that the

eect o a limited PCAscheme on the emissionso individuals would beidentical to the eect oan economy-wide scheme.


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43Policy Updaterationing scheme to deal with uel scarcity.For a ull assessment o the benets o TEQs,an investigation would need to examine thelikely impacts o an energy shortage withoutan eective rationing system in place.

And within its limited scope oinvestigating only carbon reductions, theDEFRA report ocuses exclusively on thepotential impact o increased visibilityo individuals carbon emissions, thusignoring many o the key eatures o TEQsdesigned to acilitate the reduction oemissions. These are discussed in moredetail in Chapter 3, but they include the

shit in perceived norms in acceptablebehaviour, the sense o common purpose,the spur to innovation created by apredictable demand or low-carbonsolutions and the increased willingness tocooperate within a system in which all areclearly understood to be participating.

The report also proposes soteningthe hard cap on national emissions,

by allowing emissions permits to bepurchased rom overseas i this is deemedcheaper than reducing domestic emissions.This would remove the central guaranteethat the national Carbon budget is actuallyachieved, and it is undamentally inconfict with a core purpose o the TEQssystem. It also draws into question thereports underlying assumption thatthe Governments emissions targets will

be met, and that the only outstandingquestion is how to achieve this at thelowest cost. With a sot cap, the validity othis assumption becomes dependent on therobustness o international carbon tradingschemes, which is currently dubious atbest. 47

We would agree that implementing thescheme examined in DEFRAs cost-benet

analysis would be a mistake, as it ailsboth to address our climate challengeand to help with energy shortages. Yet toapply the conclusions rom that report

to the very dierent TEQs scheme isinappropriate and misleading.

Questionable CostsIt must rst be noted that while DEFRAs

cost-benet analysis was based onthe benets o a limited PCA schemewhich would apply to individuals only,its estimate ocosts was taken romAccentures report on the implementationo an economy-wide TEQs scheme. 48

This report estimated total set-up costso between 700 million and 2 billion,and running costs o 12 billion per year,

although stressing that these estimateswere not based on a detailed costingexercise. Our reasons or believingAccentures costings to be considerablyoverstated can be ound in our detailedresponse (and the Institute or PublicPolicy Research have since produced analternative estimate which halves thecost), but it must also be remembered thatthe costs o addressing climate change

and peak oil are non-negotiable. We cansearch or the same range o benets ora lower price, but action on these massivechallenges can no longer be postponed, lestthe payment be taken in consequences. 49

Annex C o the Eectiveness and StrategicFit report counts a ull 94 present orplanned policies that impact on the levelo personal carbon emissions, beore

even considering other emissions. As theTreasury heard in 2008,

PricewaterhouseCoopers considered thatin the context o a growing number oinitiatives, programmes and associationswhich have been set up in recent years:there is now perhaps a perception thatthe setting o Government policy needs tobe more ocused. 50

Because TEQs would bring this clarityand ocus to the area, it could also ree upmuch o the spending currently allocated


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The Infuence o Uncertainty

The DEFRA cost-beneft analysis assumes a Shadow Price o Carbon o 29/tonneo CO2 in 2013, a requirement or 50m individual accounts, an annual cost peraccount o 52.07 and an average reduction in individual emissions o 2.5%brought about by the scheme.

All o these variables are subject to signifcant uncertainties the number oaccounts required depends on the criteria applied (e.g. at what age accountsare provided), estimates or the cost o administering accounts vary rom 5-

50 per account per annum, and the Shadow Price o Carbon (SPC) is a deeplycontroversial fgure, with one Government study suggesting that under themethodology used it could range rom 0/tCO2 to more than 3,000/tCO2. 51

Most importantly, setting the beneft derived rom the implementation o aTEQs scheme at just 2.5% o individual emissions is highly questionable. Thisfgure is based on the assumption that the only way in which a scheme wouldaect emissions is through increased visibility o emissions. While this may ormay not apply to the scheme design considered in the cost-beneft analysis, it isclearly inapplicable to TEQs, as outlined in Chapter 3 above.

Nonetheless, using this assumption, the 2.5% fgure used in the cost-beneftanalysis was reached on the basis o a report which ound that improved meteringand energy displays caused a reduction in emissions o 0-10%, through increasedvisibility o emissions. An average o 5% was taken rom this range, and thenthis fgure was halved on the basis that not all o this visibility beneft would beattributable to the scheme under consideration, with other policies like smartmetering likely to be introduced alongside it. It is clear that this is ar rom adetailed audit o the likely benefts o a TEQs scheme. 52

Joshua Thumims work looks at the dierent variables used and points outthat, or example, even an assumed beneft o a 10% reduction just in personalemissions, coupled with a Shadow Price o Carbon o 35/tCO2, leads to theconclusion that the benefts o the scheme examined by DEFRA outweigh thecosts. 53

Considering that the Government has since revised its central Shadow Price oCarbon or the relevant sector to 60/tCO2 (double the fgure used in DEFRAscost-beneft analysis in 2008), it is clear that the Governments decision to delaya ull easibility study into TEQs rests on an analysis that is, at best, deeply

uncertain. 54


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46

Conclusions

Let us return to the two questions theAll-Party Parliamentary Group asked thisreport to address:

1. What contribution could TEQs make toensuring air access to energy at a time oshortages o oil and gas?

2. How would TEQs work alongside modelso carbon reduction at the international

level?

The reports answers to these questions canbe summarised as ollows:

1. TEQs are an instrument designed toensure the air distribution o entitlementsto uels and energy under conditions oscarcity, while simultaneously delivering asteep reduction in carbon emissions.

2. There is no incompatibility betweennational schemes such as TEQs andinternational schemes,provided there is aclear distinction between the respectivescope (national or international) o thetwo kinds o scheme, each with their owndefned tasks and spheres o activity.

As the survey by Shaun Chamberlin

(Chapter 5) shows, the physical realities oboth climate change and peak oil are nowar advanced, and substantial consequenceswill shortly be upon us. We cannot knowwhen oil and gas shortages will start, butwhen they do, we are unlikely to be givenmuch notice. I we are unprepared, we willbe in energy-shock within days.

Two kinds o preparation are possible. The

frst is psychological preparation, wherethe population is made aware o the natureo the energy problem, its reasons, and theways in which it can be expected to mature.

People will need to be inormed about thelong-term practical progress that can bemade in reducing dependency on ossiluels. It is reasonable to believe that long-term solutions are possible; the dangeris that the shortages that occur betweennow and then could reduce the chances ogetting there.

The second kind o preparation is practical.

A proven rationing system must be inplace beore shortages begin. The systemneeds to be installed, tested and amiliarto all and i in the meantime it is used asa means o reducing carbon emissions andstarting the phase-out o oil and/or gas,that is a clear advantage.

The rst essential or success is a promptdecision on the choice o system. Any

easible energy rationing system willrequire (amongst others) these eatures:

1. All energy users must be included in thesystem, which guarantees air access touel/energy supplies.

2. It must be capable at short notice,and in the light o current availability oadjusting rations or each orm o uel/

energy or which shortages are in prospect.

3. Rations must be tradable to allow thefexibility needed to accommodate widelydiering levels o energy dependency.

4. A national-level scheme is needed,owned by energy users, and with a ullyaccountable government.

Tradable Energy Quotas meet these criteria.

Once the principle o electronic rationinghas been understood, a range o options


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47

opens up. It could be designed or carbonemissions, or or oil and/or gas and/orelectricity. It could be adapted to theshort-term or long-term; the Tender couldbe issued by auction or by allocation, or by

a combination o the two. This is a genericinstrument, permitting a high degree ofexibility. But there is clarity, too: thereis no doubt that a orm o rationing, usingthe established electronic technology o theday, is needed, and that it should be o akind which can be tailored to the needs oplace and time.

This adaptability is vital, because

expectations o what will happen to theworlds economy and society in the mid-term (25 years) enjoy little consensus. Forinstance, the case has been strongly arguedthat a Green New Deal, led by investmentin renewable energy sources, could be anew engine o growth, providing millionso jobs, and that green technology could bethe biggest economic opportunity o the21st Century. 57

Other critics argue that growthexpectations are unrealistic, and that thepriority is to develop a dierent kind omacro-economic structure which deliversprosperity without growth. 58 Andthere is the darker critique which arguesthat the costs o growth will be paid interms o the multiple problems o ueldepletion, climate change, deorestation,

over-shing, extinctions, species lossand overpopulation, and that, as theseproblems converge, economic growth willgo into reverse, threatening our politicaleconomy in undamental ways. 59

The case or TEQs does not dependon decision or agreement on which othese utures is the closest to reality.Whatever prospects we ace, it is clear

that ossil uel consumption is going tobe quickly reduced, either voluntarily orinvoluntarily, and that a reduction overwhich we are able to maintain a degree

o voluntary control will require the ullengagement not just o governments but ocitizens. A determined, consensual descentin the demand or ossil uels is needed.

National schemes enable a sense oownership by all energy users withinthe nation; they clearly arm nationalgovernments responsibility or theiroperation and eectiveness; theyunderwrite a straightorward p

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