Is individual action on emissions really futile under the EU ETS?
- 06 Feb 2013, 11:30
- Grischa Perino
paper on the interactions between the European Union's
Emission Trading System (EU ETS) and the individuals' ability to
reduce total greenhouse gas (GHG) emissions sparked some attention
Guardian. Much of the media response focused on my
argument that under the ETS, it may be less worthwhile for
individuals to curb their own emissions by avoiding activities like
flying. But I would like to point out some of the wider
implications of my research.
The EU ETS is a cap-and-trade scheme. It imposes an
upper bound on total GHG emissions from all sources the scheme
covers - which now include aviation. It splits this total cap up in
tiny parcels called emission permits, and allows firms to trade
Each source can emit as much or as little as it wants
provided it holds enough permits. If the cap is lower than what all
firms together would emit in its absence, then permits are a
valuable commodity - and will trade at a positive price. So the
fewer permits there are, the higher the price.
Once the cap the government sets is in place, trading
among sources ensures this emission target is achieved in the
cheapest way possible. The key difference to a carbon tax is that
with the latter the government sets a predetermined price for
emissions and total emissions by regulated sources depend on the
market response. With a cap-and-trade scheme, it's the other way
round: the government fixes emissions and the market finds the
Individual efforts to reduce GHG
The very fact that the EU ETS fixes total emissions
by regulated sources implies that individual efforts like buying
energy efficient appliances or reducing number of flights within
the EU do not affect the cap.
So as long as there are participating firms that
would like to emit more than their current permit holdings, total
emissions are unaffected by consumption or lifestyle choices.
Permits not used by one source will be traded and used by another.
Only if all regulated sources together want to emit
less than the cap, even at a permit price of zero, then individual
actions start to have an impact again. In this case, however, the
cap-and-trade scheme is redundant and the price of permits zero.
This is what happened at the end of Phase I of the EU ETS.
Government policies targeting EU ETS
Exactly the same reasoning also holds for government
policies within EU ETS sectors. Take the example of the ban of
incandescent light bulbs. While the European Commission claims that
this policy "will reduce emissions of carbon dioxide by 15 million
tons each year" But this is not the case.
Electricity production is part of the EU ETS so any
emissions avoided by installation of energy-efficient light bulbs
are merely relocated to other sources. The same holds for schemes promoting renewable energy. They do
not affect GHG emissions.
Cap-and-trade schemes like the EU ETS disempower both
consumers and - to some extent - governments. Anything that does
not directly affect the number of permits available within the EU
ETS does not reduce total emissions by regulated sources.
This is not a problem if the cap is sufficiently
strict and the permit price comparable to the damages emissions
cause to human health and the environment. In this case there is no
need for individual actions or supplementary policies.
Low permit prices
Things are different when the cap is too generous and
the price for permits is very low. Additional reductions
would have a clear benefit to society. But such efforts are futile
unless the EU ETS completely collapses.
Today, the EU ETS is in exactly this position. The
price for permits is extremely low but still positive. In
contrast to the conclusion drawn by Leo Hickman in The Guardian, I
strongly believe that the current crisis of the EU ETS makes my
findings more, not less relevant.
Additional reductions are desirable but cannot be
achieved within EU ETS sectors - neither by green consumers nor by
So what can we do?
Individuals have several options. First, they can
focus efforts to reduce GHGs on sectors the EU ETS doesn't cover,
such as agriculture (eating less meat), domestic heating and road
The second is to buy and retire EU ETS permits which
removes them from the system and reduces total emissions by
regulated sources. Sandbag is a charity offering this service.
The third is to use the political process to lobby
for EU ETS reform. One measure to improve the EU ETS is to
substantially reduce the number of permits available. This could
happen as a
one-off intervention or in the form of
a rule linking the number of permits to their price, reducing
permits as the price drops and issuing new ones if it rises again.
Another option is to, at least temporarily, transform
the EU ETS into a carbon tax. This would render individuals' and
governments' reduction efforts effective. It can be achieved by
imposing a minimum price on permits sold in EU ETS auctions that is
above their current market price. The cap would no longer be
binding, GHG emissions in EU ETS sectors would drop and efforts by
consumers and governments would be able to reduce it
What about social change?
Individuals' efforts ot reduce emissions in EU ETS
sectors - including by avoiding flying - could still be important
to bring about the social and behavioural changes needed to achieve
long-term climate targets.
Nevertheless, the effects described above still have
bearing. It is easier to induce changes in behaviour and norms on
the scale needed if they have an immediate impact rather than
relying only on the promise of potential effects in the
What's more, trying to reduce emissions in EU ETS
sectors can result in an increase in total GHG emissions if those
inside the EU ETS are replaced by emissions outside the system. For
some, that might be too high a price to pay.
Perino is a senior lecturer in economics at the University of