Beginners’ guide to emission trading

David Hone, Shell’s climate change advisor, broadcast a good overview of emission trading systems today.

One thing David makes a big thing of is the system for allocating credits. The carbon cost imposed by emission trading schemes permeates markets at different rates, depending on their international competitiveness. Electricity suppliers in Europe, for example, passed carbon costs onto consumers very quickly because there is no risk of those consumers switching to foreign suppliers with lower carbon costs. Industries that are able to pass on carbon costs will be sold their allowances through auctions, while those that cannot will be given theirs for free. In theory, the carbon cost will eventually permeate the whole economy and all allowances will be auctioned.

Correctly applied, this process creates “profit neutrality”.

I think the only missing part of the story is the cost of the reductions for industries exposed to trade. For an emission trading scheme to be worthwhile, it has to require its participants to reduce their emissions, which costs money. Even if you give them all their allowances for free, they still have to pay for the reductions or buy more allowances at their market value. Industries that cannot pass carbon costs onto their customers would probably show small amounts of leakage as a result of these costs.

I don’t have an opinion on Shell’s approach to environmental responsibility, but it’s dialogues series (that David Hone’s webchat was part of) is a great piece of engagement.

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One Response to “Beginners’ guide to emission trading”

  1. […] is inevitable while the government is giving out a large proportion of EUAs for free (see previous post on why the government has to allocate free credits in the early stages). It is not a significant […]

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