A Level Economics 63: Tradable Pollution Permits

Tradable pollution permits, also known as cap-and-trade systems, are a market-based approach to environmental regulation that aims to reduce pollution levels efficiently and cost-effectively. The rationale behind tradable pollution permits is to create incentives for firms to reduce their pollution emissions while allowing them the flexibility to achieve these reductions in the most economically efficient manner.

The main objectives of tradable pollution permits are as follows:

1. Environmental Efficiency: Tradable permits aim to achieve a predetermined level of pollution reduction, which is set by the government or regulatory authority. By capping the total allowable emissions at this level, the system ensures a reduction in pollution over time.

2. Cost-Effectiveness: Tradable permits allow firms with lower pollution abatement costs to reduce emissions further than required and then sell their excess permits to firms facing higher abatement costs. This creates a market for permits and ensures that pollution reductions are achieved at the least cost to society.

3. Flexibility and Innovation: Tradable permits provide flexibility to firms in meeting their emission reduction targets. Firms have the freedom to choose the most efficient pollution abatement technologies or strategies, which can lead to innovation in pollution control.

4. Certainty and Transparency: With a fixed number of permits issued, the total level of pollution is known in advance. This certainty allows for better planning and investment decisions by firms.

Methodology of Tradable Pollution Permits:

The process of implementing tradable pollution permits involves several key steps:

1. Setting the Cap: The government or regulatory authority determines the total level of allowable emissions (the cap) for a specific pollutant for a given period, such as a year. This cap is based on environmental goals and scientific assessments.

2. Issuing Permits: The government allocates or auctions tradable permits to firms, with each permit allowing the holder to emit a specific amount of the pollutant. The total number of permits corresponds to the predetermined emissions cap.

3. Compliance and Reporting: Firms are required to monitor and report their actual emissions regularly. They must hold enough permits to cover their emissions; otherwise, they face penalties or fines.

4. Trading and Market Mechanism: Firms can buy or sell permits on a secondary market, allowing them to adjust their emissions to match their production levels. Firms with excess permits can sell them to those facing higher emissions, creating a market-based mechanism for achieving the overall emissions reduction target.

5. Periodic Reviews and Adjustments: The cap and the number of permits may be adjusted periodically to align with changing environmental goals and industrial developments.

Examples of Tradable Pollution Permits:

• European Union Emission Trading System (EU ETS): The EU ETS is one of the world's largest and most prominent tradable permit systems. It covers various industries, including power generation, aviation, and manufacturing, and aims to reduce greenhouse gas emissions across the European Union.

• Regional Greenhouse Gas Initiative (RGGI) - United States: RGGI is a cap-and-trade program in the northeastern United States that focuses on reducing carbon dioxide emissions from power plants.

• California's Cap-and-Trade Program: California has implemented a cap-and-trade system to reduce greenhouse gas emissions across multiple sectors, including energy, transportation, and industry.

In conclusion, tradable pollution permits offer a market-driven approach to environmental regulation, allowing for cost-effective pollution reduction while providing flexibility and incentives for innovation. By capping total emissions and allowing firms to trade permits, these systems strive to achieve environmental efficiency and contribute to global efforts in combatting pollution and climate change. 

The richest 10% produce half of greenhouse gas emissions. They should pay to fix the climate

This is not simply a rich versus poor countries divide: there are huge emitters in poor countries, and low emitters in rich countries writes Lucas Chancel in The Guardian

‘At current global emissions rates, the carbon budget that we have left if we are to stay under 1.5°C will be depleted in six years.’ Photograph: Friedemann Vogel/EPA 


Let’s face it: our chances of staying under a 2C increase in global temperature are not looking good. If we continue business as usual, the world is on track to heat up by 3C at least by the end of this century. At current global emissions rates, the carbon budget that we have left if we are to stay under 1.5C will be depleted in six years. The paradox is that, globally, popular support for climate action has never been so strong. According to a recent United Nations poll, the vast majority of people around the world sees climate change as a global emergency. So, what have we got wrong so far?

There is a fundamental problem in contemporary discussion of climate policy: it rarely acknowledges inequality. Poorer households, which are low CO2 emitters, rightly anticipate that climate policies will limit their purchasing power. In return, policymakers fear a political backlash should they demand faster climate action. The problem with this vicious circle is that it has lost us a lot of time. The good news is that we can end it.

Let’s first look at the facts: 10% of the world’s population are responsible for about half of all greenhouse gas emissions, while the bottom half of the world contributes just 12% of all emissions. This is not simply a rich versus poor countries divide: there are huge emitters in poor countries, and low emitters in rich countries.

Consider the US, for instance. Every year, the poorest 50% of the US population emit about 10 tonnes of CO2 per person, while the richest 10% emit 75 tonnes per person. That is a gap of more than seven to one. Similarly, in Europe, the poorest half emits about five tonnes per person, while the richest 10% emit about 30 tonnes – a gap of six to one. (You can now view this data on the World Inequality Database.)

Where do these large inequalities come from? The rich emit more carbon through the goods and services they buy, as well as from the investments they make. Low-income groups emit carbon when they use their cars or heat their homes, but their indirect emissions – that is, the emissions from the stuff they buy and the investments they make – are significantly lower than those of the rich. The poorest half of the population barely owns any wealth, meaning that it has little or no responsibility for emissions associated with investment decisions.

Why do these inequalities matter? After all, shouldn’t we all reduce our emissions? Yes, we should, but obviously some groups will have to make a greater effort than others. Intuitively, we might think here of the big emitters, the rich, right? True, and also poorer people have less capacity to decarbonize their consumption. It follows that the rich should contribute the most to curbing emissions, and the poor be given the capacity to cope with the transition to 1.5C or 2C. Unfortunately, this is not what is happening – if anything, what is happening is closer to the opposite.

It was evident in France in 2018, when the government raised carbon taxes in a way that hit rural, low-income households particularly hard, without much affecting the consumption habits and investment portfolios of the well-off. Many families had no way to reduce their energy consumption. They had no option but to drive their cars to go to work and to pay the higher carbon tax. At the same time, the aviation fuel used by the rich to fly from Paris to the French Riviera was exempted from the tax change. Reactions to this unequal treatment eventually led to the reform being abandoned. These politics of climate action, which demand no significant effort from the rich yet hurt the poor, are not specific to any one country. Fears of job losses in certain industries are regularly used by business groups as an argument to slow climate policies.

Countries have announced plans to cut their emissions significantly by 2030 and most have established plans to reach net-zero somewhere around 2050. Let’s focus on the first milestone, the 2030 emission reduction target: according to my recent study, as expressed in per capita terms, the poorest half of the population in the US and most European countries have already reached or almost reached the target. This is not the case at all for the middle classes and the wealthy, who are well above – that is to say, behind – the target.

One way to reduce carbon inequalities is to establish individual carbon rights, similar to the schemes that some countries use to manage scarce environmental resources such as water. Such an approach would inevitably raise technical and information issues, but it is a strategy that deserves attention. There are many ways to reduce the overall emissions of a country, but the bottom line is that anything but a strictly egalitarian strategy inevitably means demanding greater climate mitigation effort from those who are already at the target level, and less from those who are well above it; this is basic arithmetic.

Arguably, any deviation from an egalitarian strategy would justify serious redistribution from the wealthy to the worse off to compensate the latter. Many countries will continue to impose carbon and energy taxes on consumption in the years to come. In these contexts, it is important that we learn from previous experiences. The French example shows what not to do. In contrast, British Columbia’s implementation of a carbon tax in 2008 was a success – even though the Canadian province relies heavily on oil and gas – because a large share of the resulting tax revenues goes to compensate low- and middle-income consumers via direct cash payments. In Indonesia, the ending of fossil fuel subsidies a few years ago meant extra resources for government but also higher energy prices for low-income families. Initially highly contested, the reform was accepted when the government decided to use the revenue to fund a universal health insurance and support to the poorest.

To accelerate the energy transition, we must also think outside the box. Consider, for example, a progressive tax on wealth, with a pollution top-up. This would accelerate the shift out of fossil fuels by making access to capital more expensive for the fossil fuel industries. It would also generate potentially large revenues for governments that they could invest in green industries and innovation. Such taxes would be politically easier to pass than a standard carbon tax, since they target a fraction of the population, not the majority. At the world level, a modest wealth tax on multimillionaires with a pollution top-up could generate 1.7% of global income. This could fund the bulk of extra investments required every year to meet climate mitigation efforts.

Whatever the path chosen by societies to accelerate the transition – and there are many potential paths – it’s time for us to acknowledge there can be no deep decarbonization without profound redistribution of income and wealth.

VW is further evidence that global business has become a law unto itself

Will Hutton in The Guardian

A well-functioning capitalism has, and will always need, multiple and powerfully embedded checks and balances – not just on its conduct but on how it defines its purpose. Sometimes those checks are strong, uncompromised unions; sometimes tough regulation; sometimes rigorous external shareholders; sometimes independent non-executive directors and sometimes demanding, empowered consumers. Or a combination of all of the above.

CEOs, company boards and their cheerleaders in a culture which so uncritically wants to be pro-business do not welcome any of this: checks and balances get in the way of “wealth generation”. They are dismissed as the work of liberal interferers and apostles of the nanny state.

Germany’s economy has been a good example of how checks and balances work well. But the existential crisis at Volkswagen following its systematic cheating of US regulators over dangerous diesel exhaust emissions shows that any society or company forgets the truth at its peril.

Volkswagen abused the system of which it was part. It became an autocratic fiefdom in which environmental sustainability took second place to production – an approach apparently backed by the majority family shareholder, with no independent scrutiny by other shareholders, regulators, directors or consumers. Even its unions became co-opted to the cause. Worse, the insiders at the top paid themselves, ever more disproportionately, in bonuses linked to metrics that advanced the fiefdom’s interests. But they never had to answer tough questions about whether the fiefdom was on the right track. The capacity to ignore views other than your own, no external sanction and the temptation for boundless self-enrichment can emerge in any capitalism – and when they do the result is toxic. VW, facing astounding fines and costs, may pay with its very existence.

So why did a company with a great brand, passionate belief in engineering excellence and commitment to building great cars knowingly game the American regulatory system, to suppress measured emissions of nitrogen dioxide to a phenomenal degree? Plainly, there were commercial and production benefits. It could thus sell the diesel engines it manufactured for Europe in the much tougher regulatory environment – at least for diesel – of the US and challenge Toyota as the world’s largest car manufacturer. Directors, with their bonuses geared to growth, employment and profits, could become very rich indeed.
Nor did the risks seem so outlandish. It was an open secret that car emission tests are artificial constructs, with special tyres, lubricants and measures to reduce car weight and air drag all allowed with the connivance of the regulators. To create a special piece of software that closed down nitrogen dioxide emissions during a test must have seemed to the executives involved only an extension of this artificiality. In any case, regulations are for busybodies, especially in areas as controversial as climate change and air quality. The software ruse was merely taking the game of cat and mouse between regulator and car maker to another level.

Former CEO Martin Winterkorn, who resigned last week over the scandal, claims he knew nothing of what was going on, blaming a few unnamed executives for making a catastrophic error of judgment. Winterkorn was the consummate German engineer, knowing every dimension of engine performance; if he did not know how the dirty diesel engines of some popular VW brands were successfully passing US emission tests it was only because he chose not to ask. He did not need to. He had the backing of the Porsche family, who own just over 50% per cent of VW’s shares and who agree to vote as a block; the support too of the state of Saxony with a further 20% per cent –and of union members on the supervisory board. Winterkorn could run a company of 600,000, as Süddeutsche Zeitungremarked, as if it were North Korea.

VW is about production and jobs which trumps concerns about environmental sustainability – a culture than unites unions as much as the Porsche family. And Winterkorn was its standardbearer, leading the charge against the tightening of EU emission regulations – urging weaker targets and a longer timetable. Despite a vast R and D budget, VW is far from a leader in the electrical car or hybrid market. Mr Winterkorn’s bonuses were based on his capacity to deliver production, jobs and profits: environmental sustainability or engaging with wider stakeholders did not get a look-in.

Make your god the share price, as so many British and US companies do, and you create one basket of problems – under-investment, excess deal-making and cutting corners. Abuse the stakeholder system, as did VW, and make your god production on any terms, damning the concerns of outsiders as irrelevant, and your end can be equally grisly. Capitalism, in short, may have boundless creative and innovative energy – but it also has boundless ways to go wrong. Intriguingly, recent work by a group of researchers at Harvard and the London Business School compared 90 American companies that took sustainability seriously with 90 who did not. Over 18 years the 90 committed to sustainability delivered annual financial returns 4.8% higher than the other 90.

In order to deliver sustainability they had to organise themselves around a core purpose, and then embed checks and balances to keep themselves honest. They shaped the way they were governed to open up to outside stakeholders with whom they checked their strategy. Their reporting measures embraced many metrics beyond share price and they rewarded directors for meeting them. Sustainability was a route to more open governance and rounded strategy – and it delivered.

VW did not believe in this any more than the British government does, now steadily rolling back “green crap” and efforts to promote sustainability as “anti-enterprise”. Transport secretary Patrick McLoughlin, under fire for doing nothing when he was sent the same damning report as the Americans 11 months ago, will have known that in Tory terms there would be no rewards for being cast as a bleeding-heart green. Enterprise is about getting regulators off car-makers’ backs and disempowering meddling stakeholders, especially trade unions.

Yet nor is it right in Corbynesque style to damn capitalism with a reflex call for stronger unions and public ownership. The government of Saxony and union members of VW’s supervisory board proved ineffective whistleblowers. They were not sufficiently interested in human betterment or the fatal consequences of excess nitrogen dioxide emissions. They just wanted jobs at any cost. Checks and balances alone don’t work: they have to be animated by an honest acceptance of mutual responsibility between firms and society – a moral ethic that must inform unions, regulators, shareholders and systems of corporate governance alike. VW lost the plot. But so, in a more profound way, have both the apologists and critics of western capitalism.

Stop using China as an excuse for inaction on climate change

George Monbiot in The Guardian


 

Workers walk near wind turbines for generating electricity, at a wind farm in Guazhou, 950km (590 miles) northwest of Lanzhou in China. Photograph: CARLOS BARRIA/Reuters

China is the world’s excuse for cruelty and barbarism. If we don’t behave atrociously, politicians and columnists assure us, China will, so we had better do it first, before we are outcompeted.

You want holidays, collective bargaining rights and fair conditions in the workplace? Forget it. When Chinese workers have none, such fripperies would “hamper British/US/Australian/Canadian industry”, making it uncompetitive.

Columnists like Thomas Friedman at the New York Times, gleefully regaling us with tales of Chinese workers being turfed out of their dormitories at midnight, marched to a workstation and obliged to perform a 12-hour shift to meet a last-minute order from Apple, insist that we either compete on these terms or perish. France, he once claimed, is doomed if it seeks to preserve a 35-hour week, while people in Asia “are ready to work a 35-hour day.”

In fact French workers are doing fine: it turns out that European countries with shorter working hours (France, the Netherlands and Denmark for example) have higher productivity per hour than those whose workers have to spend longer at their desks (such as Germany and Britain). And a country whose people have both decent wages and time to relax can support millions of jobs – in leisure and pleasure – that don’t exist where workers are treated as little more than slaves.
You want your rivers, air and wildlife protected? What planet are you on? China, we are told, doesn’t give a damn for such luxuries, with the result that if we don’t abandon our own regulations, it will take over the world.

On no topic are these claims made more often than on climate change. What is the point of limiting our greenhouse gas emissions, a thousand bloggers (and a fair few politicians) insist, if China is building a new power station every two weeks (or days or minutes or whatever the latest hyperbole suggests)? Taking action on climate change is useless and stupid in the face of the Chinese threat.

China is not just a country. It is whatever powerful interests want us to be. It is, they suggest, a remorseless, faceless, insuperable threat to civilisation, to which the only rational response is to abandon civilisation. So often is the threat invoked to justify the latest round of inhumane proposals that it needs a name. Perhaps we could hijack one: China Syndrome.

China Syndrome is the 21st century extension of the Yellow Peril myth. First formulated by Kaiser Wilhelm II, whose extreme militarism, racism and anti-Semitism prefigured the rise of Nazism in Germany, the term reflects a long-standing apprehension about the people of Asia, dating back perhaps to the Mongol invasions of eastern Europe. It invokes an uncaring, undifferentiated horde of philistines, possessed perhaps with supernatural powers, but without moral limits or human qualities like empathy, pity, love or self-restraint. Unless we took extreme measures to defend ourselves against this threat, Wilhelm and others insisted, this human swarm would outbreed and overrun the nations of the west.

The myth became a staple of schlock literature and films, spawning such characters as Fu Manchu and Ming the Merciless. The idea that the people of China might “steal our jobs” is also deep-rooted. It triggered a number of pogroms in the United States during the later decades of the 19thcentury, during which many Chinese immigrant workers were murdered.

It is, of course, true that China contributes substantially to the threat of climate breakdown: it is now the world’s largest emitter of greenhouse gases. It is also true that its diplomats often prove to be a hindrance during international negotiations on the subject. That was certainly the case at the UN climate conference in Bonn that ended on Thursday, where they refused even to discussthe crucial issue: how much global warming the policies adopted by each nation will cause.

This stands in apparent contrast to the agreement struck this week, as a result of Angela Merkel’s diplomacy, at the G7 meeting, calling for “a decarbonisation of the global economy over the course of this century”.

But to suggest that China is an inherent and insuperable threat, as many of my correspondents do (mostly those who alternate between insisting that man-made climate change isn’t happening and insisting that we can’t do anything about it anyway), is grievously to misrepresent the people of that nation.

First, of course, much of its energy use is commissioned by other nations. As manufacturing has declined in countries like the US and Britain, and the workforce is mostly engaged in other activities, the fossil fuel burning caused by our consumption of stuff has shifted overseas, along with the blame. Even so, when China’s total greenhouse gas production is divided by its population, you discover that it is still producing much less per head than we are.

Partly as a result of a massive investment in renewables, the Chinese demand for coal dropped for the first time last year, and is likely to drop again this year. Perhaps because of the bureaucratic chaos of China’s centralised, unwieldy government, there is a gulf between the energy transition rapidly taking place within China and its negotiating positions in international meetings, which are “in the hands of completely different sets of bureaucrats.”

But perhaps the biggest surprise for those who unwittingly invoke the old Yellow Peril tropes is that the Chinese people care more about climate change than we do. A survey released on Monday reveals that 26% of respondents in the UK and 32% in the US believe that climate change is “not a serious problem”, while in China the figure is only 4%. In the UK, 7% don’t want their government to endorse any international agreement addressing climate change. In the US the proportion rises to 17%. But in China, Hong Kong, Indonesia, Singapore, Malaysia and Thailand, only 1% want no action taken.

Of course, the question that arises in undemocratic countries like China is the extent to which public desires can shape government policy. But what’s clear is that China’s failure to act decisively on climate change does not arise from any national characteristic.

The paternalistic assumption that only the rich nations can afford to care is also based on myth: a myth that – like the Yellow Peril story – dates back to the colonial era. As the Greendex survey of consumer attitudes shows, people in poorer countries tend to feel much guiltier about their impacts on the natural world than people in rich countries, even though those impacts might be far smaller. Of the nations surveyed, the people of Germany, the US, Australia and Britain felt the least consumer guilt; while the people of India, China, Mexico and Brazil felt the most. The more we consume, the less we feel.

There is no scope for moral superiority in the climate talks, least of all a moral superiority based on unfounded national stereotypes. Collectively, we are wrecking the delicate atmospheric balance that has allowed human civilisation to flourish. Collectively, we have to sort this out. And it will happen only by taking responsibility for our impacts, rather than by blaming other nations for what we don’t want to do.

Petrol from Air - Renewable Energy Solution?

British engineers produce amazing 'petrol from air' technology

Revolutionary new technology that produces “petrol from air” is being produced by a British firm, it emerged tonight.

Image 1 of 4

An Air Fuel Synthesis technical team member with a flask of AFS fuel Photo: Air Fuel Synthesis

By Andrew Hough

11:30PM BST 18 Oct 2012

233 Comments

A small company in the north of England has developed the “air capture” technology to create synthetic petrol using only air and electricity.

Experts tonight hailed the astonishing breakthrough as a potential “game-changer” in the battle against climate change and a saviour for the world’s energy crisis.

The technology, presented to a London engineering conference this week, removes carbon dioxide from the atmosphere.

The “petrol from air” technology involves taking sodium hydroxide and mixing it with carbon dioxide before "electrolysing" the sodium carbonate that it produces to form pure carbon dioxide.

Hydrogen is then produced by electrolysing water vapour captured with a dehumidifier.

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The company, Air Fuel Syndication, then uses the carbon dioxide and hydrogen to produce methanol which in turn is passed through a gasoline fuel reactor, creating petrol.

Company officials say they had produced five litres of petrol in less than three months from a small refinery in Stockton-on-Tees, Teesside.

The fuel that is produced can be used in any regular petrol tank and, if renewable energy is used to provide the electricity it could become “completely carbon neutral”.

The £1.1m project, in development for the past two years, is being funded by a group of unnamed philanthropists who believe the technology could prove to be a lucrative way of creating renewable energy.

While the technology has the backing of Britain’s Institution of Mechanical Engineers, it has yet to capture the interest of major oil companies.

But company executives hope to build a large plant, which could produce more than a tonne of petrol every day, within two years and a refinery size operation within the next 15 years.

Tonight Institution of Mechanical Engineers (IMechE) officials admitted that while the described the technology as being “too good to be true but it is true”, it could prove to be a “game-changer” in the battle against climate change.

Stephen Tetlow, the IMechE chief executive, hailed the breakthrough as “truly groundbreaking”.

“It has the potential to become a great British success story, which opens up a crucial opportunity to reduce carbon emissions,” he said.

“It also has the potential to reduce our exposure to an increasingly volatile global energy market.

“The potential to provide a variety of sustainable fuels for today’s vehicles and infrastructure is especially exciting.”

Dr Tim Fox, the organisation's head of energy and environment, added: “Air capture technology ultimately has the potential to become a game-changer in our quest to avoid dangerous climate change.”

Peter Harrison, the company’s 58 year-old chief executive, told The Daily Telegraph that he was “excited” about the technology’s potential, which “uses renewable energy in a slightly different way”.

“People do find it unusual when I tell them what we are working on and realise what it means,” said Mr Harrison, a civil engineer from Darlington, Co Durham.

“It is an opportunity for a technology to make an impact on climate change and make an impact on the energy crisis facing this country and the world.

"It looks and smells like petrol but it is much cleaner and we don't have any nasty bits."