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What are the tradable permits ?

September 2003

website of the author : www.manicore.com - contact the author: jean-marc@manicore.com

 

The international negociations on greenhouse gases emissions have led certain countries to adopt the principle of a reduction of their emissions.

But once this principle adopted, how is it possible to convert this wish into an effective diminution from the concerned agents ?

Several ways are possible:

it is possible to make new rules (or laws) that apply evenly to everyone: every actor must diminish its own emissions by X%, and trespassers are fined or punished one way or another,

it is possible to negociate: every actor, or group of actors, commits to reduce its emissions in exchange of given advantages. But if effective constraints are provided for those that do not respect the commitment, and that one of the parties around the negociation table is the state, this situation is comparable to the previous one (laws or rules).

it is possible to impose a tax: each tonne of carbon equivalent emitted will be "imposed", so that companies will have an incentive, to pay the least possible amount, to reduce their emissions as much as possible. As they stop to reduce as soon as the amount of the tax is inferior to the cost of further reduction, by fixing the amount of the tax the government chooses, in a way, the effective reduction that will be achieved.

The tradable permits are just a tool to "put oil in the wheels" to allow a group of actors to achieve a collective reduction goal that has been set by law, or through an agreement. Let's imagine that all companies are asked, by law (or accept, through an agreement), to reduce collectively their emissions by 10% in 2 years.

The company A will very easily meet the collective objective, and actually could very easily achieve 20%: it is a biscuit factory and it had already planned to switch from fuel oil to gas to heat its ovens.

The company B will have a hard time doing anything better than 5%, whatever money is invested into a reduction attempt: it is a glass producer, and to achieve more than 5% it should replace all its production tool, what requires at least 3 years.

The whole idea of tradable permits is that the company A and the company B "manage together" so that the result of A+B is a reduction of 10% of their joint emissions. Practically A will "sell" to B the reductions that A can easily do over the global goal, and that B won't be able to achieve. The "tradable permits" are precisely the reductions that are achieved over the global objective, and that can be sold to somebody else, that buys a "permit to emit" over what is normally the limit.

Practically A and B do not necessarily know each other, just as a seller and a buyer (of anything) do not necessarily know each other before a sale. It is therefore necessary to organise a market, just as a stock market, where companies that easily achieve reductions can sell them to companies that don't. It is this market, with the description of the way reductions can be traded, and with what limits, that is called a "tradable permit system".

One immediately sees that the system is globally balanced by nature: a permit can only be bought from someone that did better than the global objective, and that sells the surplus to a company that has a hard time. This system is not aimed at allowing everyone to stay beyond the reduction goal, and such an eventuallity is mathematically impossible (as long as the collective goal is achieved, of course): in a market, there can't be only buyers ! There is therefore nothing immoral in this trading system: it is a simple way, that might prove useful, to smooth differences. Setting up a tradable permits system does not imply that the collective goal is limited whatsoever.

It is also possible to organize a market between countries: some countries will be able to go over the commitment they took (in the framework of the Kyoto Protocol, for example), while some others won't be able to meet their objective. The idea is then to transfer, in conditions that remain to be set up, extra reductions from ones to others. Let's recall that the tradable permits system can only be set up between Annex I countries (that is basically the industrialized countries) and that this system does not allow rich countries to buy the possible reductions of "poor" countries in order to avoid any effort at home.

Some have condemned the idea and used the expression (in France) of "right to pollute", that would be unacceptable. Well, each one of us takes the "right to pollute" every single day of one's normal life:

any amount paid to a water company in exchange of the right to pour waste water in their collection pipes is a "right to pollute"

buying gasoline is paying a "right to pollute" (gasoline pollutes !)

any local tax paid for waste removal is a "right to pollute"

any administrative authorization given to a factory to emit a given substance in the environment is a "right to pollute" up to the limit of the authorization,

more generally any norm is a "right to pollute" up to the norm, any tax a "right to pollute" up to the tax, etc.

 

The main inconvenients of tradable permits are not of moral but of practical nature:

it is necessary to reach an agreement regarding the collective reduction objective,

it is necessary to define the penalties that will be applied if the collective goal is not achieved, and to whom they apply,

This system is not well adapted to small individual sources: the means that should be devoted to measuring, controlling and managing the emissions of domestic central heating systems, or cars (or trucks, or planes), would be totally out of proportion with what is at stake. And if the emissions of heating and transportation means are not taken into account it's roughly 50% of the CO2 emissions that "skip through".

an most of all it is necessary to reach an agreement on the repartition of the collective goal among the actors: is anyone assigned an objective proportional to its past emissions (what immediately advantages heavy and non efficient emitters, for which it is easier to start to reduce) or proportionnal to the mean emission by production unit of the sector (what immediately advantages efficient - or low-emitting - units, that emit less by production unit than the average) ?

And at last the following question remains unanswered: when a company met its objective for a given period only with the help of permits bought on the market, on what reference level should the objective for the following period be assigned ? On the basis of the "physical" emissions that have effectively been measured, or on the basis of what should have been achieved ?

Compared to permits, the tax (on the emissions themselves, or on products that lead to emissions, as gasoline for example) is much easier to handle:

it avoids the initial discussion on the distribution of the effort, or more exactely the individual negociation (to pay less) becomes the exception and note the common rule,

the price paid is immediately proportionnal to the nuisance, and therefore taxes does not allow a bonus to "bad boys", as is a system of permits with an assignment proportional to the past emissions,

the management costs are much lower, because the collection of the tax can be done in a very "concentrated" way (from the oil companies, or the coal electricity producers, for example),

if the tax is applied to emission precursors (any fossil fuel), it is not necessary to measure the emissions themselves for consumers taken one by one.

 

An additional consideration is that the tax applies to all the emissions while permits only apply to traded emissions.

But setting up a new tax - that would be the thing to do if we are coherent between what we wish "for the planet" and what we are personnally ready to undergo - supposes an international agreement, otherwise there is a risk of "fiscal dumping": the heavy greenhouse gases emitters might then move their plants to countries that do not have such taxes and as the emission location is of no importance for greenhouse gases, the goal - a global reduction - might not be achieved.

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