VISITOR PLEASE NOTE
This is a page from the old DTQs website and is now somewhat outdated. The new site can be found at:
TEQs (Tradable Energy Quotas) is the new name for DTQs.
Key Principles of the Market
Carbon Policy Committee
The Carbon Policy Committee is designed and managed managed on the model of the UK’s Monetary Policy Committee (MPC). Its role is to set the Carbon Budget, to monitor it, and to maintain the policy link between the Budget and the wider international context. The Carbon Policy Committee (CPC) – alternatively, Energy Policy Committee (EPC) – is independent of Government, but subject to guidelines laid down in its terms of reference, as in the case of the MPC. It is essential that the Government itself should not be burdened with the responsibility of setting the Carbon Budget, which may require unpopular decisions which the Government would be reluctant to take. Instead, the Government should concentrate on the urgent practical task of helping, encouraging and enabling the economy to achieve the deep reductions in fossil-fuel use which the CPC has set. See Government’s Role in DTQs.
DTQs provide a shared incentive to achieve decisive reductions in carbon dependency. They do this in two ways. It is in the interests of individuals to reduce their own demand for units, and to cooperate with others to reduce their demand: the lower the demand for units, the lower the price – and the lower their expected price in the future. But the supply of units is inflexible, so that if demand increases, all that happens is that their price rises. That means that the price we all have to pay for units is affected by your demand. And that in turn means that your consumption is my business: if you are a rich person and can afford to buy lots of additional units, you will be contributing towards a rise in the price of units for everyone, so that I, along with everyone else, will have an incentive to encourage, persuade and enable you to reduce your demand for units.
This is one of the ways in which there is a sense of “pulling together” with DTQs. Each individual will know that the scheme will only work smoothly – that is, without the pain of very high prices for carbon units – if everyone – every individual, every firm, and the government itself – does everything possible to reduce the demand for units. DTQs cultivate, and depend on, a sense of common purpose.
And there is consistency here: cooperation in very practical forms will be necessary if there is to be serious progress towards the low-carbon economy. Local areas will need to share in the provision of sources of renewable energy; members of local communities will have an incentive to help each other with the installation the new energy systems and conservation technologies.
This cooperative quality is not only a powerful feature of DTQs. It is a necessary feature of any programme to achieve the massively ambitious programme of cutting down - ultimately towards zero - on the use of fossil fuels.
Dealing in carbon units: a hands-off scheme
Modern information technology makes it possible to ensure that DTQs provide fair access to fuels for everyone whether or not they participate in the scheme or even understand it. Among those who may not (or will not) be able or willing to participate actively in it are the very old, those with mental incapacity, foreign visitors, and those who, as a matter of personal preference, do not want have anything to do with it – such as very busy people who do not feel they have space in their lives to take on any new commitments, no matter how trivial.
DTQs do not require active participation, for these reasons:
1. People who want to opt out of the scheme can simply sell their carbon units as soon as they receive them, and pay the money into their bank accounts (or take it as cash and spend it).
2. The total price charged for purchases of energy, such as petrol, electricity or gas, consists of the cost of the fuel plus the cost of the units. People who have opted out of the scheme, or who (e.g. foreign visitors) are not included in it will simply pay the total cost of the purchase, including the cost of the carbon units they will have to surrender: they will need to buy them first, in order to surrender them.
3. DTQs are a flexible instrument, so several kinds of arrangement can be made for people in institutions. For example, prisoners or patients in long-term care could surrender their units to the institution in which they are living, or transfer them to their families during their absence from home.
4. Children’s use of fuels would be taken into account in the existing transfer arrangements, such as child allowances. This is to avoid the problems of equity and efficiency that would arise if every new born infant automatically qualified for a full adult DTQ entitlement. Babies can need a lot of energy – e.g. for heating – but infant-care methods which required the same amount of energy as the average car-driving householder would be startlingly inefficient.
The hands-off aspect of DTQs is vitally important. Claims such as “People won’t be able to understand it”, “People won’t have the time”; “Not everyone has a computer” could eventually amount to significant opposition to the scheme. In fact, such criticisms are far from valid. Citizens can continue to live their lives without even noticing DTQs, if that is what they prefer. People who do participate actively in the scheme, however, will be more likely to take constructive steps to reduce their dependence on fossil fuels; they will also save money, because they will be able to surrender their own units rather than requiring the energy retailer to buy units for them which they can then surrender – but that reward for competence is standard in virtually all dealings in the market economy, and there is no case for making an exception in the case of DTQs.
Freedom from Command and Control
There are two ways of setting up a system which depends on people taking effective and coordinated action. One way is to issue people with a large number of instructions and regulations, to stand over them to make sure they carry them out, and then to correct the problems that arise when they haven’t done so properly. The trouble about this method is that it builds failure into the system; people cooperate because they must, but for no other reason; their hearts are not in it; they do not apply their minds to the invention of better ways of doing it, so that the system fails to make use of the immense resource of ingenuity and creativity which would otherwise be available to it free. And it is expensive, because it needs a lot of non-productive officials to write the rules, to enforce them, and to pick up the pieces when the system fails.
A better way of doing it is to set up the system so that everyone in it has the incentive to make it work: they actually want it to do so; they apply their creative judgment; they monitor their own performance; they creative a momentum and a flow. Success is built into the structure of the system.
It is the second of these alternatives which has been studied and adopted in the management style known as “Lean Thinking”. This, in its essentials, was invented in Japan following World War II by the Toyota executive Taiichi Ohno and, in its spreading applications across industry and the services all over the world, its results are spectacular, with productivity and reductions in waste improving by factors of 10-fold or more. The essential explanation for this is that Lean Thinking designs the system in such a way that it does not depend on “command and control”; on the contrary, it gives everyone in the system the incentive to make it work. The system is “taut”, in that it is immediately obvious what needs to be done; mistakes are revealed as soon as they are made; people respond to the system, rather than to a bureaucratic management standing outside it. In such a system, there is a convergence between the interests of the system and the motivations of the people that participate in it. There is “pull”; that is, actions are accurately pulled along by the system rather than roughly pushed along by authorities responding to the old rules of command and control.
This is the principle on which DTQs are based. Everyone participating in the scheme knows that by certain times ahead – 10, 20 years – they will have to be living and working within a defined, and much reduced, limit on their consumption of fossil fuels. They will invent their own solutions; they will take advice; they will refer to guidelines and standards; they will respond to the needs of their neighbours; they will join together in local schemes which can do much more to improve energy-efficiency than any household can manage on its own. But they will not need regulations to tell them what to do.
That does not mean that there will be no regulations; no doubt some will still be needed, but they will be peripheral to the system, and not the motor which drives it along. That is, DTQs are a system of Lean Thinking, which sets things up in such a way that participants will have good, passionate reasons to achieve far more than they could ever have imagined is possible. The nanny state is sent packing; command and control is obsolete. DTQs rely on the people who will have to live within the Budget, confident that, if the incentives of the system are properly specified, the results can be – unexpectedly – spectacular.
Government’s role in DTQs
At the heart of the DTQs scheme is the Carbon Policy Committee. It sets the Carbon Budget; it links the national Budget to wider EU and global obligations with respect to climate change and fuel depletion, and it monitors the progress of the scheme, month by month. The independent status of this Committee will be similar to the independent status of the Monetary Policy Committee in the UK, and it will be maintained for the same reason – there are clear advantages in the Carbon Budget being kept separate from the political process and decided on its own terms.
But that in turn has the benefit of allowing the government itself to concentrate its efforts on the major task of helping and enabling the nation as a whole to achieve the targets set by the Carbon Budget, with the least possible damage to the economy, living standards, and well-being. This enabling and encouraging role is a rich one, requiring government to take the lead in focusing national effort, providing training programmes, and helping to develop the technologies and changes in land use which will be needed. Instead, the government will not be encumbered with having to defend the Carbon Budget, since that will be outside its remit; instead, it is actively and intelligently on the side of the people who have to meet the challenge which the Carbon Policy Committee has set.
International trade: DTQs and competitiveness
What would happen if one nation, or a few nations, implemented a DTQs scheme and the majority did not? Well, first of all, it would mean that the defaulting nations would need to achieve the necessary sharp reduction in fossil fuel use in other ways. If they failed to do this, then they would be throwing their weight into wrecking the prospects of a successful response to climate change - and the consequences of that would outweigh any short term benefits won by a competitive advantage in international trade.
Secondly it would mean that the defaulting countries were failing to develop the low-energy technologies which will be an absolute requirement for successful competition in the international market. It is already becoming harder to sell technologies which do not maintain very high standards of energy efficiency, and an economy which had protected its energy-inefficient industries by not participating in a DTQs scheme or equivalent would be at a disadvantage.
Thirdly - in the event of oil depletion - it would mean that the defaulting countries were making no provision to share out access to oil and gas equitably among firms and households in their populations, despite increasing scarcity and high prices. An economy that does not ration fuel when the time comes will be subject to such a level of social unrest that the question of whether it is a competitive international trader or not will scarcely matter.
Market behaviour: prices and quantities
The market is a rolling market. On the opening day, a full twelve months-worth of carbon units is issued. After that, they are topped up a monthly basis so that, on the first day of the second month, a further one-month’s supply is placed on the market. In other words, between 11 and 12 months supply of carbon units will be on the market at all times. In practice the normal frequency for such Government tenders is weekly, and there may be an argument for preserving that in the case of DTQs.
Subject to these defining principles, the market for DTQs is essentially the same as the market for all other commodities. Prices will be published in the papers every day, giving either formal bid and offer prices, or (for the more distant periods) estimated prices, for every month for the next twenty years. These prices will have a stabilising effect. That is, if the demand for carbon units should rise, then prices will rise; this will tend to encourage people to reduce their demand, and to offer more units for sale – and this will tend to reduce prices.
Prices will be mainly governed by the rate of decline in the Carbon Budget, along with the market’s estimations of how well the economy will be able to accommodate itself to these reductions without disruption. However, they will be influenced by many factors, of which the following will be among the most important:
1. Changes in the Carbon Budget. The Forecast Period (Years 11-20) will be subject to regular revision as necessary. The Intention Period (years 6-10) will be reviewed and confirmed annually. The Commitment Period (Years 1-5) is subject only to enforced changes, due to short term force majeure. That force majeure could, however, be a quite frequent occurrence, owing to unpredictable interruptions in the supply of oil.
2. Changes in the extent to which the market is able to cope with reductions in the Carbon Budget. If the market copes poorly, the price of units will be high.
3. Changes in the price or availability of fuel, especially oil and gas. High prices of oil and gas could have the effect of reducing the price of units, and in this sense, DTQs would tend to have an overall stabilising effect on fuel prices. Reductions in the availability of oil will lead to a corresponding reductions in the issue of units, ensuring that fuel will be distributed in accordance with a fair rationing scheme, rather than by an uncontrolled auction for access to limited supplies. This will have the effect of helping to stabilise the price of fuel. (See Rationing and DTQs).
4. Dynamic changes in the market itself. The price of carbon unit will be liable to some fluctuations, due to the day-to-day processes of buying and selling. These fluctuations will be slight in the early years, when the price of carbon units is low, but as the market matures, and the Carbon Budget reaches low levels, the demand for units will become increasingly taut, so that volatility can be expected to increase to some extent. However, there is no reason to think that, at any stage, this would be a volatile market.
Personal carbon allowances
Another form of rationing, limited to citizens; that is, it excludes other uses such as industry and the Government from the rationing scheme in the form of personal carbon allowances, and deals with carbon emissions from these sources in another way. See Memorandum on DTQs
There are three ways of cutting down on oil, gas and coal, and if our dependence on them is to be cut on the needed scale, all three must be taken forward towards the limit of what is possible. They are:
1. Conservation, ranging from advanced technologies to the application of simple changes in everyday practices affecting the use of energy. Examples: Houses can be designed to conserved energy so well that they are substantially – or entirely – free of any dependence on energy from oil, gas and coal. Cars can be designed to be much more fuel-efficient. Organic agriculture, with greater emphasis on small scale production, crop rotations, closed systems, more use of labour and freedom from fertilisers and chemicals derived from gas, makes better use of energy than industrial systems.
2. Structural change. The political economy of the future will require radical reorganisation in its use of space and distance; it will develop the “proximity principle”, which requires goods and services to be produced close to where they are needed; it will move towards localisation. Examples: local food production; local generation and distribution of energy; localities enriched economically, socially and culturally so that they can provide most needs from local resources. The transport-dependent systems of the present day will become obsolete, as the political economy evolves and reorganises itself for a more rational use of land.
3. Renewable energy systems. Solar power, wind power, water power, and the other renewable sources can make an adequate contribution to energy supplies if, and only if, they are applied in an energy system in which high standards of conservation and structural change have already been achieved.
All these three practical responses to the coming energy deficit imply major reorganisations requiring a minimum of twenty years intensive effort as the primary aim and common purpose of the Government, industry and citizens. DTQs provide both the incentive and the long vision that will be required if this task is to be achieved. It is already on the very limit of what is possible. Its difficulty and urgency tend to be underestimated.
Carbon units can be defined in whatever way seems appropriate according to the time and circumstances. However, the working presumption is that DTQs should be set up as a policy response to climate change, and the logic of this is that units should be defined on the basis of each fuel’s global warming potential (GWP), that is, its impact on the climate. On this basis, the key measure is the climate-impact of 1 kilogram of carbon dioxide released at ground level; this is defined as one carbon unit (although, like currencies, it can be traded in fractions of a unit). The “carbon rating” of all other fuels is evaluated in terms of this basic measure. For instance, the GWP of nitrous oxide is about 310 times as great as the GWP of carbon dioxide; therefore if the combustion of a litre of fuel were to be estimated (on average) to release 1 kilogram of carbon dioxide plus 0.01 kilogrammes of nitrous oxide, the carbon rating of that fuel would be 1 + 310/100 = 1 + 3.1 = 4.1.
The carbon emissions of fuels in a DTQ scheme will be expressed in terms of their carbon rating. This will apply to fuels as follows:
1. The fossil fuels (oil, gas and coal).
2. Nuclear power. Although nuclear fission is not itself a source of greenhouse gases, all the other operations associated with nuclear power do produce substantial emissions of carbon dioxide. When poor uranium ores are used, a great deal of energy - derived from oil and gas - is needed to extract it. Owing to the depletion of the rich uranium ores, nuclear power is approaching the point at which the carbon emissions associated with the production of a kilowatt of energy are as great as, or greater than, the emissions associated with the production of the same quantity of energy from the combustion of gas. One of the main purposes of DTQs is to make the carbon emissions from the production of various kinds of fuel as explicit and visible as possible. It is therefore proposed that nuclear-generated electricity should bear a carbon rating appropriate to the carbon emissions associated with its production.
3. Other large-scale renewables. All other renewable sources of energy, such as biomass and hydropower, are associated with carbon emissions. Farm-produced energy generally has a poor energy balance. That is, the energy used for fertilisers, cultivation, processing and distillation can be nearly as much, or even more than, the energy that is eventually extracted. It is important that all carbon emissions should be made explicit in the carbon ratings associated with the production of renewable energy systems.
In effect, the inclusion of carbon ratings for (2) and (3) means that the energy providers will obtain the units they need for their own use of fuel from those who buy their energy. The system would still function if they bought the carbon units they need on the market, and added the cost of this to the cost of the fuel they are selling. The total price for consumers would be the same in each case, but (for the reasons explained) providers will be required to make their carbon emissions explicit, by the use of carbon units covering the quantity of fossil fuels used to produce these “non-fossil fuels”.
4. Very small-scale producers of renewable energy will not have to require consumers to pay separately for the carbon units associated with the fuel they provide. This exemption will apply to all local producers: e.g. wood cutters, and operators of small schemes such as local hydroelectric schemes and wind turbines.
Rationing and DTQs
So far, carbon reduction schemes have been discussed almost entirely in the context of climate change, which is in itself a matter of extreme urgency which should be given greater priority in public policy. However, it is becoming likely that the most significant impact on fuel in the coming years will in fact be due to high prices and supply interruptions, both of which can be expected to increase sharply, and become very volatile, in the second half of this decade. The policy instrument required in response to fuel shortages is, of course, not taxation: that would only increase the price of already-expensive fuel. On the contrary, it will be necessary to impose some form of rationing system to ensure fair access to fuel among the population as a whole.
The standard procedure for rationing consists of ration books, containing coupons, which are detached by tearing them off or cutting them out with scissors. This is 1940s technology, and there is at present the alarming prospect that it will be the technology that will be dusted-down and used again when a rationing scheme is suddenly, and urgently, needed.
But, of course, it has disadvantages. It is messy and troublesome to use. It is easy to forge. It does not transparently include companies and government under the same scheme. It does not provide easy access into any rationing scheme suited to the many people, such as self-employed traders, who are on the margin between being private and commercial consumers. It does not permit significant trading of rations apart form very informal and local arrangements between friends. It is expensive to administer. It is inflexible to enforced changes in circumstances. And it is clearly a gross anachronism in the age of electronics.
Electronic rationing must inevitably consist of Domestic Tradable Quotas in some form. There is no other way of doing it. The use of DTQs in the context of fuel shortages would be identical to their use for carbon reduction, except in one respect, namely, that in the case of fuel shortages, the flexibility and potential of DTQs’ rating system will prove itself.
Supposing that the supply of oil were cut, owing to forces outside anyone’s control, by 50 percent. The policy response would be in two parts. First, it would define units in terms of a quantity – e.g. 1 oil unit = 1 litre of petrol, or ~1 litre of fuel oil. Secondly, the total Oil Budget would be set at a level corresponding to the available quantity and expectations of future quantities. The existence of more than one kind of unit is a complication, but segmentation is intrinsic to a rationing system, which has to be defined specifically in terms of individual products. The alternative – if units were used indiscriminately for all fuels, including the scarce fuel (oil) – would have the effect of starting a rush to use units to buy oil, with some users ending up with all they need and others ending on with none – just what rationing schemes are designed to avoid.
In fact, the complication of a segmented market for units is not all that serious. DTQs should be set up in the first place so that there is the possibility of segmenting it, and sustaining two or more parallel markets of different kinds of unit. Since all rationing schemes have to be segmented, the segmentation of DTQs in a rationing scheme represents a net gain relative to alternative rationing schemes. It could be quickly implemented; it would be flexible; and it would have the advantages of the automated, hands-off quality of DTQs: consumers could – and many undoubtedly would – participate in the scheme without actually having to do anything at all – least of all cut out coupons with scissors.
The body which maintains all current account balances of carbon units in real time. (aka QuotaCo).
The Tender is the route by which all participants other than citizens – that is, industry, the government, etc – participate in the scheme. It takes place weekly on the model of the Tender for Treasury Bills and other Government debt.
The Tender is crucial. It sets the price from which dealing in the market begins. By making the market for units economy-wide, it ensures that it is liquid, enabling households to trade efficiently on a large market, along with many participants whose demand for units is on a different time-cycle from that of consumers. The efficiency of the scheme would be substantially reduced if it were limited to individuals: transaction costs would be higher in the smaller, less liquid market; there would be “poaching” as individuals in business – ranging from small traders to individuals on company business in large employers – used carbon units obtained on the consumers’ market for business purposes. The principle of a single market for all users and for all purposes is critical to the DTQs system, and it is the Tender which makes it possible.
Time and taxes
One of the critical features of the Carbon Budget is that it is defined over the long term, looking twenty years ahead. Over that period, there is no doubt that economic conditions, fuel prices, and many other factors will change profoundly, leading to continual changes in the price of units. However, there is no reason why these changes should necessarily imply any changes in the Carbon Budget itself: it can stay constant, while prices adjust around it.
It is essential that this long-term stability in the Carbon Budget should be maintained. This is because the profound changes in lifestyles and technologies which the low-carbon economy will need will not be available quickly. Small improvements in energy-saving technology can be implemented straight away; profound changes will require notice: the major changes will take at least twenty years to achieve.
Here, then, is one of the major weaknesses of taxation. No taxation regime can be set for twenty years ahead; it has to be constantly changed, so it does not give a signal for changes in the long term. No long-term signal means no incentive for foresight. DTQs provide the needed signal; they open up the possibility that the needed action will actually be taken,and that the commitment to reduce fossil-fuel use dramatically, equitably and quickly, will be achieved.