A chance to change some dubious climate accounting

The UK should change the way it accounts for emissions under its legally binding carbon budgets, whether or not it remains part of the EUETS.

An apparently technical question about the UK’s accounting for its carbon budgets raises broader questions about alignment of targets and policy instruments.

The UK’s carbon budgets are legally binding obligations under the Climate Change Act (2008) to limit total emissions from the UK.  Checking whether emissions are within the budget ought to be simple.  Measure the UK’s emissions to see if they are at or under budget.  If not there’s a problem.

But it does not work that way.  For sectors not covered by the EUETS actual emissions are indeed used.  However for those sectors covered by the EUETS – power generation and large industry – emissions are deemed always to be equal to the UK’s allocation under the EUETS (which is made up of both auctioned allowances allocated free of charge[1]), whatever emissions are in reality.  Actual emissions from the covered sectors could be much higher and carbon budgets would still be met

While this may sound bizarre, there was a logic to it when the rules were established.  If UK emissions from the traded sector are above the UK’s allocation UK emitters need to buy in EUAs.  If the scheme were short of allowances, as was expected when present accounting rules were set, the additional EUAs bought by UK emitters to cover emissions above the UK’s allocation would lead to reduced supply of EUAs for others.  There would in consequently be reduced emissions elsewhere matching the increased emissions in the UK.  The approach was therefore to some extent a reliable measure of net emissions.  It also aligned with the EUETS having clear National Allocation Plans (NAPs) for EUAs for each Member State, something that no longer exists.

Now this type of accounting no longer makes sense.  With a large surplus of allowances in the EUETS, if the covered sectors in the UK emit more than their budget they will simply buy surplus allowances.  These allowances would otherwise almost all eventually be placed in the Market Stability Reserve (MSR).  Under current proposals (and indeed most likely eventualities), these EUAs would eventually be cancelled.  Additional emissions in the UK are therefore not balanced by reductions elsewhere – they simply result in buying surplus EUAs which would never be used.  This type of situation is sometimes called “buying hot air”.

To avoid this occurring in future, accounting for carbon budgets needs to change to actual emissions.  This will necessarily happen anyway if the UK leaves the EU ETS.  UK allocations under the EUETS will no longer exist. Accounting cannot be based on a non-existent allocation.

But even if the UK stays part of the EU ETS the basis of accounting should change to prevent the UK is meeting its carbon budgets by simply buying in surplus EUAs.

The possibility of buying in surplus to cover UK emissions appears quite real.  UK emissions were above allocation until quite recently.  This was not too serious a problem then, because carbon budgets were being met fairly comfortably anyway.  However the situation may recur under the 2020s and early 2030s under fourth and fifth carbon budgets, which will be much more challenging to meet.  Total UK emissions could be allowed to rise above those carbon budgets simply as a result of an accounting treatment[2].

When a target applies to a jurisdiction that does not wholly align with the policy instrument there will always be a need to consider circumstances in assessing whether targets are being met.  The UK should not be able to meet its carbon budgets simply due to an accounting convention.  Current rules were put in place before the current oversupply under the EUETS arose.  It is no longer fit for purpose.  It should be changed to accounting based on actual emissions whether or not the UK is part of the EUETS.

Adam Whitmore -20^th June 2017

[1] This consists of auctioning plus free allowances plus UK allocation under the NER. In Phase 4 it would also include any allocation from the Innovation Fund. Future volumes placed in the MSR and thus excluded from auctioning would also be deducted from the total. If the UK were to leave the EU ETS and backloaded UK allowances currently destined for the MSR were to return to the market this would have a significant effect on measured performance against carbon budgets under current accounting.

[2] Whether this led to total actual emissions being above carbon budgets would depend on the performance of the non-traded sector.

Overcoming the difficulty of acting to reduce emissions

Limiting climate change poses major challenges to traditional decision making, but progress is now being made.

This is the second of two posts stepping back a bit and considering why the climate change problem is so difficult to solve.  My previous post looked at some of the physical feature of the problem such as the scale, dispersion and diversity of emissions.  This post looks more at the economic, social and psychological barriers to action[1].

Perceptions

The first area of difficulty is in perceptions of the facts.  The science of climate change now one of the best established areas of human knowledge.  However a gradual change, for example with temperatures on average increasing by around a fifth of a degree per decade, may be difficult to notice.  Shifting probabilities of extreme events may be similarly difficult to perceive. Consequently, even facts well-established academically may not readily become part of acknowledged personal experience, and so will not be as readily internalised into decidion making.

This may be compounded by an availability bias.  Those regions changing most rapidly and visibly, especially the arctic, are remote and sparsely populated, so changes are less available to people despite the best efforts of reporters.

These difficulties are compounded by a framing effect due to daily or seasonal temperature variation.  A three degree rise in annual global mean surface temperatures may not sound like much if you experience day to day fluctuations of much more than that, even though in reality a change of this magnitude would lead to very severe consequences. As a result of this framing, many of the consequences of climate change may not sound so bad to those not closely involved with the issue.

On the other hand, the risks of some solution may be seen as high – “the lights might go out” – because in many ways the current system works well.  People’s subjective perception of the balance between risk and reward may therefore be quite distorted.

Finally, the perceived solutions to climate change may conflict with some value systems (see here and here), making people less willing to accept what needs to be done.

Lags

The difficulty of action is compounded by long (and uncertain) time lags between cause and effect.  Many consequences, such as the worst effects of sea level rise, are thus seen as belonging to the distant future.  They are beyond the normal planning horizons of governments, companies and most other institutions – though it is worth noting in many cases not outside the lifetime of today’s children.  It also challenges our own individual decision making.  We often have a tendency to concentrate on those problems which seem most urgent.  This makes climate change difficult for people, companies and governments to deal with.

Damage is also often seen as remote in place as well as time.  Most people will tend naturally to be less concerned with changes perceived as unlikely to affect their immediate neighbourhood.

Imperatives from existing social structures

Furthermore, career and other motivating social imperatives are not often aligned with dealing with the climate problem.  A bonus may depend on this year’s profits, or a promotion on generating local value, an election on a more immediate problem.  And social norms may encourage bigger houses, bigger cars and more air travel despite their effect on the climate.  Many people (including me) would be reluctant to live in a smaller house for the sake of the climate.

Governance of a global public good

The most pervasive barrier to action is that emissions and the benefits of the associated activity tend to be largely local, whereas the resulting damage is global.  The global nature of the climate means that a stable climate is a global public good in the economic sense[2].  However this public good must be maintained by avoiding harmful emissions.

As in all such cases, there are incentives for some to free-ride on the efforts of others to support the provision of this public good.  No one country can by itself sustain a stable climate – although China can make a huge difference – but there is no global enforcement mechanism to oblige co-operation.

The ability of any one company or any one individual in influence the outcome is smaller still.  People are right to feel that they alone cannot solve the problem.  There is a need for co-operation at a global level.

Tropical deforestation, a major source of emissions, provides a further difficulty.  It is hard to solve in part because governance is often weak even at the national level in forest countries.  This leads to weak constraints on the actions of companies and individuals, often pursuing their own incentives, which fail to reflect the wider environmental damage.

What happens when these don’t apply

The Montreal Protocol on CFCs offers an interesting contrast, in that it was achieved in part because it lacked some of the characteristics of climate change.  Although the science is complex it could be boiled down to a simple message: “chemicals we are putting into the atmosphere destroy the ozone layer.”  The lags involved were perceived as comfortably within normal human timescales.  And the consequences of failure were easy to present as scary. “If we don’t fix this problem lots more people will get skin cancer” is about as simple and relatable as messages get.

Added to this, the uses of the chemicals were limited to a few sectors of the economy, with readily available substitutes.  This made the costs appear much lower, and opposition from businesses and their allies, some of whom would benefit from regulatory change, much less strong.

The result was relatively prompt and effective action.

A way forward for reducing emissions

This also points a way forward for climate change.  The extension international agreement to limit HFCs because of their effects on the climate is an example of similar forces at work, and is a cause for optimism.  A major threat to the climate has been addressed.  Although not perfect, the agreement appears to have every chance of being successful.  This is despite having many of the barriers to action that hamper all attempts to address climate change.

What was absent was the scale and cost of decarbonising the energy system.  But even here there is progress.  Low carbon technologies are rapidly improving and falling in cost, in some cases to a spectacular degree.  This is lowering the barriers to action, and will do so to an ever increasing extent.  It is creating a powerful constituency for action.  There are now many companies invested in the transition to a lower carbon economy and jobs in low carbon industries increasingly outnumber those in high carbon sectors.  Again this will increase over time.

These trends have combined with the greater political awareness of the problem, and the increasing desire to do something about it, which is embodied in the Paris Agreement. The reactions to statements from the USA of intention to withdraw from in the agreement indicate how solid the international consensus has now become.

While the Paris Agreement provides an overarching framework, the hard work of emissions reductions is now being achieved by a vast and growing range of regulatory interventions across the world.  There is a huge diversity of regulation now in place, from carbon pricing to emissions standards to technology incentives.  Compared with the situation as recently as the beginning of this century progress has been huge.

This is a counsel of optimism, not of complacency or of naiveté about the rate of progress compared with what is needed.  Limiting dangerous climate change will still require a great deal of hard work, and quite a lot of luck.  But progress has been enormous despite formidable barriers, and there is no reason why progress should not continue.

Adam Whitmore – 6^th June 2017  

[1] For further discussion of some of the issues raised in this post see file:///C:/Users/Adam/Documents/Book/Research%20material/The_Dragons_of_Inaction_Psychological_Barriers_Tha.pdf .  This is a useful review of psychological barriers, although in my view the author overemphasises the role of individual action.   See also: https://www.apa.org/science/about/publications/climate-change.pdf

[2] A stable climate is non-rival (someone can benefit from it without limiting the ability of others to do so) and non-excludable (there is no way of preventing someone benefiting).  According to the 2009 movie Star Trek this concept of a public good is sufficiently important to be included in the education curriculum on the planet Vulcan.  The reference to the definition using the terms non-rival and non-excludable occurs during the first scene on Vulcan, about 15 minutes into the movie.