Personal carbon trading: making the system fairer

Report to the Institute for Public Policy Research on moderating the distributional impacts of personal carbon trading

Project duration: June 2009 to September 2009

Back in 2008, when interest in Personal Carbon Trading (PCT) as a method to reduce the levels of carbon emissions was at its height, Defra commissioned CSE to undertake an analysis of the likely distributional impacts of PCT in the UK. Who would win from the introduction of such a system, and who loses out?

Our 2008 study [click here] showed that the overall system - based on an equal allocation of carbon allowances to every adult - is broadly fair: most ‘winners’ are low or middle-income households who use less energy and can therefore trade their surplus carbon credits for cash. Conversely, most ‘losers’ are high income households; their energy consumption exceeds their carbon credits, so they either have to buy more credits to maintain their current lifestyle, or reduce their consumption. However, a small proportion of low-income households would be made worse off by PCT. These are households that cannot easily lower their energy use, for example because there are many children living at home, or the house is unconnected to the mains gas network.

So, could the system be tweaked in order to moderate the negative impacts on low-income households? The Institute for Public Policy Research (IPPR) commissioned CSE to find out.

“We looked at two approaches for making the system fairer – or ‘impact mitigation’ in analysis-speak” said Vicki White, one of the two authors of CSE’s report. “The first looked at alternatives to giving every adult the same amount of credits - can the allocation be skewed in favour of the ‘losers’? The second approach explored the financial compensation route.”

The first approach applied a set of ‘modified allowance allocation rules’ – i.e. giving certain households more carbon credits according to a range of factors, namely :
•    Number of children
•    Rurality
•    Age of head of household
•    Category of dwelling - detached, semi, terraced etc
•    Central heating type

Only those factors considered ‘structural’, rather than ‘life-style’, were included in modified allocation system – i.e. factors that mean a household can’t ‘help’ using up its carbon allowance more quickly.

Our modelling suggested that this route wouldn’t reduce the number of ‘losers’ (because whilst some households gain credits, others lose them), but it would shift the deficits burden onto households which choose carbon-intensive lifestyles and which could therefore avoid deficit through behavioural change and no/low cost measures.

The second approach modelled a system of financial compensation for ‘low income’ households. Our analysis showed that the costs of doing so vary considerably depending on a range of factors, but that there are basically two options: providing financial compensation to low-income ‘losing’ households for the exact value of their allowance deficit or providing compensation to all ‘low income’ households, regardless of household allowance balance.

The former option costs considerably less than the latter, but it would be information intensive and could lead to perverse incentives to increase emissions.

CSE’s full report, 'Moderating the distributional impacts of personal carbon trading' is available for download by clicking here.

Our analysis contributed to a report by the Institute for Public Policy Research published in September 2009. Plan B: The prospects for personal carbon trading is available by clicking here.

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