The Kyoto Protocol takes as its starting point the historical levels of national greenhouse gas emissions. The same starting point is implicit in negotiations for its successor to be decided in Copenhagen in December. It should be abandoned. It amounts to ceding squatters' rights to the atmosphere to the industrialised countries. Similarly, exemptions for developing countries should be scrapped. Although intended to shield poorer countries from a problem not of their making, the two-tiered system of “commitments” and exemptions is at the heart of the political problems that have hindered acceptance of the Protocol.
Developed countries dependent on emissions intense industries have been concerned that greenhouse gas pricing would put their resident industries at a competitive disadvantage compared to those in exempt countries. Where the protocol has been ratified and CO2 pricing schemes have been put in place, acquiescence of heavy emitters has been bought at the price of exemptions and grandfathering that have blunted the pricing signal.
The current pre-Copenhagen haggling over reduction levels and reluctance among major emitters to commit to specific reductions until a method of bringing rapidly developing countries within a CO2 pricing regime are continuations of this problem. A further complication is added by the objection that should concern about global warming be misplaced the increase in the price of energy caused by emissions pricing would unnecessarily and predominantly hurt the poor.
An alternative starting point which avoids these problems is to treat the environment's ability to absorb greenhouse gases as a global commons in which everyone has one share and for the use of which users would pay the owners a Global Commons Rent (GCR) proportional to their use. Three corollaries follow. First, countries would have ownership and receive payment in proportion to their population. Second, there would be no national targets, rather, only a global target. Third, we can think in terms of a global per capita emissions target.
Today's emissions equate to around 7 tonnes of CO2 equivalent per person per annum - far below that of any advanced country but far above what many around the world live on. If global emissions are to be reduced with a constant or increasing population then over time this average must be reduced.
Administration of such a system, by comparison with the current system of national accounts, would be simple. A Global Commons Rental Board (GCRB) along the lines of a greenhouse reserve bank would be established. It would have access to the best scientific and economic advice and, like a reserve bank, operate at arms length from its political masters to achieve the climate target set by international agreement. Its charter would be:
- to stabilise greenhouse gas emissions at the internationally agreed level by setting aggregate emissions permits or carbon tax rates;
- to distribute or auction emissions permits or collect emissions taxes and to audit emissions accounts; and
- to distribute takings to shareholders, i.e. to countries in proportion to their population.
The GCR could be implemented as a cap and trade system or as a carbon tax. As a cap and trade the GCRB would issue permits to countries in proportion to their population. Countries would be free to sell or reissue permits as they saw fit. Countries issued with more permits than they needed, i.e. countries with per capita emissions below the per capita target, could generate income by selling their excess permits. Alternatively the GCRB could auction permits and distribute the proceeds to countries on a per capita basis.
A particularly simple approach would be to implement the GCR as a carbon tax with the tax on fossil fuel levied at the point of extraction. In this way 60-65 per cent of emissions could be accounted for by monitoring the relatively few sites of oil, gas and coal extraction. Moreover a point of reference is provided by detailed energy statistics that are already collected by a number of agencies. Non-energy emissions could be taxed at point of emission.
This approach results in a universal, effective, efficient, transparently fair system that is free of the problems that beset the Kyoto Protocol and which are clouding negotiations over its successor.
Being universal, it avoids competitive distortion and the possibility of “carbon leakage”, i.e. the movement of business and industries from countries where carbon pricing applies to those where it doesn't. It thus eliminates the major weakness and political stumbling block inherent in the current approach. Irrespective of the source of a product it would have an appropriate carbon price applied. Consequently all carbon costs would be passed through to the consumer. This is correct moral targeting as the consumer is the agent properly responsible for emissions.
Claims for compensation on the basis of competitive distortion would no longer have any merit. Thus the weakening of price signals and the hidden costs to tax payers that accompany exemptions and compensation are also eliminated.
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