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Climate Change, Equity and Emissions Trading1
Introduction
Climate change poses a clear and ongoing threat to human well-being. As such, an
international climate architecture is urgently needed that will implement effective
policies of mitigation (to prevent dangerous climate changes that are still avoidable) and
adaptation (to modify human practices to accommodate dangerous climate changes that
are unavoidable). There is a growing consensus that to be both efficient and legitimate
the emerging architecture must be consistent with the fair and equitable distribution of
benefits and burdens across nations and generations. While the relationship between
climate equity and climate policy remains quite poorly understood, five principles of
equity have emerged (see eg Banuri et al, 1996; Athanasiou and Baer, 2002; Singer,
2002, pp.14-50; Page, 2007).
P1
global greenhouse emissions should be stabilised below the point where
dangerous climate changes emerge (effective mitigation);
P2
policies designed to limit the negative impacts of unpreventable climate change
should be efficient and fairly located (fair adaptation);
P3
the costs of climate policy should not be so high as to jeopardise existing global
poverty reduction goals or universal compliance (global equity);
P4
the interests of all countries and generations should be represented in the
construction of climate policies (universal participation);
P5
the costs of tackling climate change should be distributed equitably (fair burden
sharing).
The assumption of this paper is that the ethical status of instruments for achieving the
goals of global climate policy should focus on their fit with the above five principles.
The principles themselves represent a mixture of two basic forms of reasoning about
equity. Consequentialist reasoning (key to P1, P2 and P3) evaluates social policies
according to their outcomes, such as the extent to which they maximise social welfare,
benefit the worst off, or reduce inequality. Procedural reasoning (key to P4 and P5)
evaluates social policies in terms of the legitimacy of the way they were selected, for
example that the decision-making procedures involved respected the equal status of all
parties and that the duties defined reflect the capacities and historical responsibilities of
those they bind.
In what follows, I outline the key elements of each of the five principles and briefly
explore the extent to which emissions trading fits with each. The type of emissions
trading I have in mind are specified by ‘cap and trade’ schemes. Such schemes have
three main elements. First, an overall limit is placed on the amount of carbon dioxide
(CO2) to be emitted by those party to the scheme; second, a fixed number of permits are
distributed amongst the users (typically firms and states, but on some accounts
individual persons) each year which must be surrendered for every metric tonne of CO2
emitted; third, the users are at liberty to trade the emissions permits under their control
in order to balance their carbon budgets either by selling excess permits to make a profit
or by buying additional permits to meet their budgets if they face high marginal
1
Paper presented to the Swedish Political Science Association Annual Conference, Linköpings
Universitet, 19 October 2007. Author details: Ed Page, Department of Politics and International Studies,
Warwick University, Coventry, CV4 7AL, UK. Email: [email protected].
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abatement costs. I take it that, as commonly presented, the ethical value of such
schemes is derived from the instrumental benefit of achieving any given global carbon
budget at the lowest possible economic cost rather than from any intrinsic value that the
scheme itself might possess (Sorrell and Sijm, 2005, p.195; Mehling, 2005). Cap-andtrade schemes can be contrasted with ‘credit mechanisms’ - such as those developed
under the Kyoto architecture through Joint Implementation (JI) or the Clean
Development Mechanism (CDM) - which allow users to gain credits in exchange for
investing in emission reduction activities in other countries.
P1: A Safe Atmosphere
The ‘ultimate aim’ of the United Nations Framework Convention on Climate Change
(UNFCCC) is specified by Article 2 as the ‘stabilization of greenhouse gas
concentrations in the atmosphere at a level that would prevent dangerous anthropogenic
interference with the climate system’ (UN, 1995, p.5). Following Article 2, a central
pillar of any viable global climate architecture is that it specifies and enforces a
significant regime of climate change mitigation. Perhaps the most common way to
interpret Article 2 is in terms of the aggregate benefits for human well-being of staying
below a ‘safe’ ceiling of atmospheric CO2 concentrations. Early accounts suggested that
a doubling of CO2 over its pre-industrial level of 280 parts per million might be safe but
no more. More recently, it has been claimed that dangerous impacts will swiftly follow
if the 450 parts per million CO2 threshold is broken (for the purposes of comparison,
global concentrations of CO2 reached 380 parts per million in the atmosphere in 2006
(Alley et al, 2007)). Still others suggest that the focus should be on the impacts of
increases in CO2 on key climate variables, such as rises in global temperature or sealevel, rather than their atmospheric determinants. The picture becomes even murkier
when other greenhouse gases are brought into the equation, since the current combined
atmospheric concentration of the six Kyoto gases has been estimated at roughly 430
parts per million of CO2 equivalent (CO2e) (Alley et al, 2007), which suggests that the
lower values for a safe atmosphere quoted by environmentalists, and some social
scientists, will be breached within 10 years assuming current emissions rates.
Can emissions trading of the cap-and-trade variety serve as a valuable tool in achieving
a more modest interpretation of Article 2 in terms of the objective of stabilising
atmospheric levels of CO2e below 475 parts per million? There is no straightforward
answer to this question either in theory or practice. Theoretically speaking, there is at
least some reason to think that climate regimes incorporating global emissions trading
will be more likely to achieve this objective than those without. The basic idea is that a
global emissions trading mechanism will minimise the costs associated with achieving
any prior determined carbon budget by minimising the costs of compliance for all users.
Once permits have been distributed, they will, according to conventional economic
theory, flow to their highest valued user. Those users who derive less value from the use
of their permits than their market value (mostly developing countries) have an incentive
to sell them to those that value them more highly (mostly developed countries) with the
result that a costless trade-off between efficiency and equity is achieved. Emissions
trading, then, provides a mechanism for introducing a global price for carbon and other
greenhouse gases thereby facilitating global emissions reductions at the least economic
cost for users of the atmosphere (Stern, 2006, pp.371ff).
The growing interest in market-based solutions to environmental problems reflects a
clear shift away from ‘command-and control’ mechanisms after many years of
refinement in theoretical circles (Mehling, 2005; Stewart, 2001). Command-and-control
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mechanisms (such as mandatory environmental performance targets) are those that
‘depend upon government agencies to define both the goals [of environmental policy]
and the means of meeting them’ (Tietenberg, 2005, pp.167-8). Such approaches can be
cumbersome and bureaucratic, particularly when applied to environmental problems of
the scale of global climate change. They imply that the most efficient approach to
climate change would be for a regulatory body to both set and enforce emissions targets
over some specified time period for all users of the atmosphere. Yet, if the ultimate goal
is the protection of a valuable environmental resource in the most efficient manner
possible, and not to fetishise the role of regulatory bodies to frame and deliver valued
aims, market-based solutions seem an essential compliment to conventional regulatory
measures (Stewart, 2001; Mehling, 2005; Parry, 2005).
In practical terms, however, the evidence for the efficiency of emissions trading is
mixed both in terms of its historical operation in other sectors and its current operation
in the emerging global carbon market dominated by the EU Emissions Trading System
(ETS). It has been suggested that permit trading has lowered compliance costs relative
to traditional performance targets, enabled the setting of earlier deadlines for the
achievement of environmental objectives, and resulted in environmental objectives
being reached more frequently when they have been developed to protect environmental
resources such as fish stocks and air quality (Tietenberg, 2005). Evidence from the
initial period of the ETS, however, suggests that to be sufficiently popular amongst
existing users, any viable trading system will be too toothless to bring about any of
these putative benefits. In the case of the ETS, the key limitations have been that: (i)
only a small proportion of the possible user-base is included - some 11,000 firms
representing less than 50% of the EU’s total CO2 emissions; (ii) household and transport
emissions are excluded from the system; (iii) permits were allocated to users without
charge according to the ‘grandfathering’ principle thus missing out on possibility of
using revenue from allocation to reduce poverty to bolster adaptation funding; (iv)
initial targets were far too easy to meet with the result that many users received massive
windfalls after selling off excess permits; and (v) users were allowed to raise their prices
to reflect the value of the permits which were gained at no cost. Such obvious failings
do not, of course, mean that the creation of markets for tradable emissions allowances
have no role to play in fulfilling the safe atmosphere principle. But they certainly point
to a different set of risks than those arising for command-and-control measures.
P2: Effective and Equitable Adaptation
Robust policies and mechanisms of climate adaptation are essential to reduce negative
impacts that cannot be avoided through mitigation as well as to capture any benefits
arising from localised climate change. Among the innovative adaptation possibilities
discussed in the literature include the refinement or extension of existing funding
streams such as the Global Environmental Fund (GEF) or inaugurating new funding
streams such as levies on air travel (Stern, 2007, pp.622ff).
Emissions trading is mainly targeted at rendering mitigation more cost effective, yet it
may also have a bearing on the effectiveness of adaptation. Although these two
components of climate policy are usually treated separately, they are at a deeper level
interlinked since measures of adaptation will be more expensive, less effective or
potentially futile without corresponding mitigation (Stern, 2007, p.460). Emissions
trading, then, by increasing the efficiency of mitigation, could also be expected to
reduce the costs of adaptation (Stern, 2007, pp.622ff). Emissions trading provides new
opportunities for revenue generation for adaptation that may prove more palatable to
4
key users than direct aid transfers, either through redistribution of the revenue from the
initial allocation of permits or through continuous taxation on credit or emissions
trading. The Kyoto Protocol, for example, makes provision for an adaptation fund
comprised of 2% levy on most CDM transactions. I would suggest that it is a natural
move to extend this levy to all cap-and-trade and credit mechanism transactions to
harmonise adaptation and mitigation policy. But the sheer scale of the problem means
that emissions trading, even on the most optimistic view, can only ease the pain of
adaptation. The real challenge is to for such novel mechanisms to join, not supplant,
traditional command-and-control regulatory mechanisms (Parry, 2005). Perhaps the
boldest approach to this problem of coordination would be to create a new global
adaptation fund merging revenue from existing funding streams (such as the GEF and
CDM) with a new GDP-based levy on developed countries to reflect their wealth and
historical responsibility for climate change. This idea has been discussed briefly by
some writers (Stern, 2006, p.628) and could be linked to the principle that each
individual has a right to an equal share in the absorptive capacity of the atmosphere.
P3: Affordability
According to the affordability principle, the adoption of a post-Kyoto climate
architecture should not be excessively costly in terms of compliance for existing or
subsequent generations. Complex issues arise here as estimating the social and
economic impacts of alternative architectures rests on accurate projections of climate
change for different levels of CO2 as well as models of development, population growth
and migration – all of which are subject to huge uncertainties (Tol, 2002; Stern, 2007).
Developing the affordability principle is further complicated by issues of
intergenerational equity, sustainable development and global poverty reduction. It
seems clear, however, that no architecture that leads to a country being unable to
provide for the basic needs of its existing and future citizens as a result of fulfilling
climate commitments will generate the necessary allegiance and legitimacy to be viable.
Issues of affordability and legitimacy colour all attempts to construct solutions to largescale environmental problems, yet there are two basic elements to the affordability
principle that are unique in the case of climate change policy. First, the scale of the
problem invites an analysis that goes beyond traditional command-and-control
approaches that could involve huge economic and administrative costs (Tietenberg,
2005, pp.167-8). Second, uniquely for an environmental pollution problem, the nature
of the greenhouse effect is such that it is irrelevant where cuts in greenhouse gases are
made (or by whom) if the fundamental aim is to avoid dangerous climate change.
Enthusiasts, of course, claim that cost effectiveness is the real strength of emission
trading. Traditional economic theory suggests that a global tradable permits system will
lower the overall costs of climate mitigation for all users by encouraging emissions
reductions where the marginal cost of abatement is lowest. While it is difficult to put an
accurate figure on the benefits of moving to a comprehensive global emissions market,
some suggest it could prove as much as 50% cheaper in the long-term than a purely
command-and-control approach.
Putting aside doubts concerning the many theoretical assumptions made by emissions
trading optimists, and the mixed evidence from past trading mechanisms designed to
protect the value of other environmental resources, there are more intrinsically ethical
issues at stake here. I would argue that to fully evaluate the costs of adopting a global
emissions trading mechanism we need to expand the discussion to include the idea of
‘normative costs.’ A clear normative cost of market environmentalist solutions to
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climate change is that they finesse the question of historical responsibility for the
problem’s emergence. Emissions trading may be a cost effective way of reducing global
greenhouse emissions but a solution that does not cohere with the ethical convictions of
users concerning causal and moral responsibility is not only risky in terms of long-term
compliance but also potentially damaging for the self-respect of citizens, particularly
existing and future citizens of developing countries.
P4: Universal Participation and A Fair Distribution of Political Influence.
According to the universal participation principle, members of all countries should be
represented in the construction of the global climate architecture and its mechanisms
and policies; and while future generations cannot participate directly, their interests
should also be taken into consideration at all times. Great practical and conceptual
difficulties arise in making the voice of developing countries and future generations
heard in the climate policymaking process. One problem concerns the location of the
appropriate level of human agency that should be represented, whether it is individual
persons, corporations, or nations - or a combination of these (Caney, 2005). Another
problem concerns the way in which future agents can be represented when their
interests are as yet unclear (Page, 2006). These issues have often been ignored, but are
pivotal to the construction of a climate architecture that will be regarded as equitable
and efficient in the longer-term.
The mechanism of emissions trading seems, at best, quite indirectly linked to
participatory concerns. Emissions trading mechanisms are designed to be procedurally
fair in the sense that all eligible users have access to the market and can buy and sell
allowances according to pre-specified rules. Few argue, however, that emissions trading
is an equitable solution to climate change independently of its efficiency in preventing
dangerous climate change or that its value can be tied to its emergence from a
transparent and open policy debate amongst users of the atmosphere. By contrast, it is
clear that all of the Kyoto architecture’s ‘flexible mechanisms’ were championed by a
group of disproportionately influential developed countries against the wishes of a
number of developing countries (Mehling, 2005); and the introduction of emissions
trading through the EU ETS involved little or no public consultation or debate
(FEASTA, 2006).
Yet, there are some potential advantages in emissions trading from the procedural
perspective. First, the benefits of emissions trading mechanisms can be restricted to
users operating within countries that have ratified the global climate architecture in
order to encourage participation. Second, the emissions trading elements of Kyoto are
voluntary in the non-trivial sense that users can opt either to reduce greenhouse gas
emissions or purchase permits (or adopt a combination of these strategies over time). It
might, therefore, be thought to encourage user autonomy in terms of meeting carbon
budgets. Third, emissions trading stops short of privatising the atmosphere in the sense
of generating absolute property rights to pollute the atmosphere. Rather, it grants access
to the absorptive properties of the atmosphere to a pre-specified degree with the clear
implication that more stringent caps on emissions can be adopted by a future
architecture without paying full compensation for withdrawing a portion of any party’s
authorization to emit. Fourth, emissions trading mechanisms can allow for change in the
details and process of permit trading in subsequent rounds in response to new research
on science, equity and efficiency. In this way, they are more flexible in responding to
the needs and interests of future users than some command-and-control approaches to
climate mitigation. Fifth, the user base might be expanded so that emissions permits are
6
distributed equally amongst all living persons so as to reflect the principle of equality in
the distribution of the absorptive properties of the atmosphere (FEASTA, 2006).
There are two problems, however, which threaten the procedural equity credentials of
any emissions trading scheme. The first involves the dangers of transferability.
Unrestricted transfer can lead to the concentration of permits into the hands of a
minority of users with detrimental effects on social cohesion, competitiveness and
equity. Users that accumulate large numbers of permits can use their holdings as
leverage to gain economic and political influence over other markets, particularly if they
decline to sell excess permits to perceived rivals (Tietenberg, 2005, pp.186ff). The
second is the problem of initial allocation. Distributing permits free-of-charge is
potentially burdensome for future generations in that it magnified the already influential
position of existing generations of users. It is very hard to remove this bias, even in the
absence of grandfathering since on all schemes the price of carbon allowances is likely
to rise significantly over time.
P5: Fair burden sharing
According to the fair burden sharing principle, the costs associated with implementing
the emerging global climate architecture should be fairly distributed reflecting key
norms of global and intergenerational equity. This principle, confirmed in several
paragraphs of the UNFCCC, should be adopted for both intrinsically ethical reasons and
also because no global climate architecture will succeed in attracting the compliance
required in its absence (Neumayer, 2000). There is a clear need, however, to investigate
the conceptual and normative basis of the burden sharing principle specified in the
UNFCCC according to which the developed countries should shoulder the main burden
of climate policy in line with their wealth and special historical-ethical responsibilities
(Article 3.1, UNFCCC, 1995, p.5). This is because the notion of ‘common and
differentiated responsibility’ can be developed in terms of a focus on three key aspects:
(i) a user’s ability to pay a full share of the cost of tackling climate change; (ii) a user’s
historical and ongoing responsibility for the emergence of the climate problem; and (iii)
the benefits a user derives / has derived from activities that contribute to climate change.
A widespread assumption in the literature is that emissions trading is neutral amongst
competing accounts of burden sharing. Trading is here conceived as merely a ‘delivery
vehicle to help operationalize equity proposals’ (Baumert et al, 2003, p.138) regardless
of how equity is defined. Moreover, much of the ethical literature has assumed that the
above three approaches converge in identifying the developed countries, cleanly and
persuasively, as those responsible for managing and financing climate policy (Shue,
1999; Singer, 2002). However, the subtle differences and conflicts amongst these
approaches - as well as the possibility that might be merged into a single approach have yet to be fully explored (Caney, 2005). This problem cannot be resolved here, but I
would suggest that there is much to be gained from distinguishing between the method
adopted to identify the key burden-bearers from the method adopted to specify the
nature of the burden borne. The thought is that while ‘ability to pay’ considerations can
be used to identify the users who should shoulder the burdens of tackling climate
change, the specific demands we can legitimately make on each user should be specified
by a mixture of the ‘historical responsibility’ and ‘beneficiary pays’ principles.
A number of issues need further thought, here, but perhaps the most crucial is the initial
allocation method. While there has been discussion of the relative efficiency of the
alternative methods, there has been much less discussion of the ethical issues involved.
7
This reflects an assumption that the method of allocation has no bearing on the final
efficiency of emissions trading to deliver optimal cuts in greenhouse emissions (Stern,
2006, pp.379ff; Baumert et al, 2003). Although many discussions of emissions trading
assume a costless trade-off between equity and efficiency, it has been noted that an
emissions trading conundrum arises in the face of the initial allocation decision. Put
crudely, distributing permits free of charge to the first generation of traders facilitates
efficiency by increasing interest in the market while undermining burden sharing equity
by increasing spatial and temporal inequality. By contrast, other methods of allocation
(such as auctions or lotteries) can be used to enhance burden sharing equity but only at
the cost of undermining efficiency by jeopardising the motivational benefits of
grandfathering for early adopters.
To recap, the advantage of emissions trading is that users who reduce their emissions
and sell permits are rewarded for their environmentally sustainable behaviour by
revenues from selling their permits. In a sense, this rewards environmental
responsibility and so could be seen as enhancing fair burden sharing. However, there are
some serious drawbacks. First, emissions trading, in distracting the attention of
policymakers away from the issue of who has the responsibility to deal with climate
change and towards the issue of how the problem can be most efficiently managed,
violates the ‘historical responsibility’ and ‘beneficiary pays’ approaches to burden
sharing, and is a very approximate modelling of the ‘ability to pay’ approach even when
developing countries are exempted from binding emissions targets. We have already
seen that grandfathering has a tendency to create inequitable windfalls for existing,
heavily polluting, users (Parry, 2005, pp.234ff; Nash, 2000). Auctioned or lottery-based
permits are not subject to this effect but still distract attention from the ethical question
of who should shoulder the main burdens. This suggests that emissions trading will be
most effective, and achieve most support, when there is no clear or significant
differentiated responsibility for the degradation of an environmental resource or where
this differentiated responsibility is impossible to translate into policy, neither of which
hold in the case of climate change. Second, there is something ethically dubious in
allowing key polluters to offset their damaging emissions by purchasing permits from
users operating in other nations. It seems to make a mockery of the moral responsibility
that polluters have to clear up the mess they make themselves. Whereas it may not make
a physical difference to the atmosphere how global greenhouse emissions are reduced,
that is, abandoning principles of historical responsibility and shared sacrifice is morally
problematic (see Nash, 2000; Sandel, 2005). It will almost certainly be politically
problematic as well since no global architecture will achieve the required levels of
intergenerational compliance if it is perceived to be morally flawed by large numbers of
present and future users of the atmosphere. This, and other problems outlined above,
leads me to conclude that conflicts between equity and efficiency cannot be fully
resolved by any emissions trading programme.
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