Emissions are largely created by the activity of the private sector and individuals, but have worldwide effects. We need a solution that recognises these realities, and forces solutions on emitters. As I argue in Trading Emissions, my pamphlet for the Social Market Foundation, a so-called ‘cap-and-trade’ system is the only realistic worldwide solution to carbon dioxide emissions.
Cap-and trade is the system of emissions trading already used in Europe. A central body sets the amount of a pollutant able to be emitted and issues permits to allow companies to do so within this limit. Under a global cap-and-trade system, countries will come to recognise that their own targets are no longer relevant. Emissions will be traded by companies on a world basis, who will decide how to cut carbon dioxide and how and where to make any necessary emissions, all according to a world price.
For this to work fairly, a new world body, a world environment agency (WEA), is required to uphold the three essential elements of any cap-and-trade system:
First, the WEA would as a forum for setting the cap and its application across an industry. The agency would decide a cap for all greenhouse gases. It should also decide the relative weighting between each gas. For example, based on scientific evidence, it should be possible to assess the relative damage of, say, a tonne of CO2 and a tonne of methane.
Next, the WEA would auction the world’s agreed levels of allowances (the right to emit a tonne of CO2 or its certified equivalent). These should be auctioned with no regard for national boundaries, into a world market, on a regular (even daily) basis. These allowances are not investment products – they would be issued in exchange for money, to be used as their owners emit gases. It is this feature that would make allowances the next world currency; a new, environmentally friendly gold.
The auction proceeds could be in excess of $1tr annually, but the agency should not spend this income itself. Governments must help their people accommodate a new world, with the behavioural and technological changes required. The new world body would therefore allocate auction proceeds to governments. Besides ensuring the money is not used to prop up old polluting industries, it would leave them to spend the money as they see fit.
Some carbon trading credits are allocated on the basis of current economic activity or pollution. However, because it is people who produce these gases, the WEA would move swiftly to a system where auction proceeds are allocated to countries on the basis of current (not projected) population levels. Governments would have to face up to the environmental dangers of a world population explosion. A young, growing population might be a national economic objective but it has an inevitable environmental cost. Such an increase should not be rewarded by a matching increase in allowances.
How does such an agency become established? Three principles must guide its creation:
Firstly, responsibility should not be put on any existing international body. These are largely based on alleviating poverty, promoting world trade, or world policing. The body that administers carbon trading needs to have its own identity, and take no responsibility for any other laudable world objective. For the agency, the environment has to come first. And there can be no ‘security council’. When countries join they must have rights equal to the founders’.
Second, the body needs to be hosted by a country whose commitment to the environmental cause is matched by its globalisation, its social stability, legal system, and its familiarity with the financial markets which deliver cap-and-trade. It is for the last of these reasons that I would like to see London volunteer to house such an agency.
Thirdly, strong political leadership is required. Gordon Brown has creditably spoken about a European carbon bank. If he took on a role as champion of a global carbon-trading scheme, he could increase the UK’s standing as a leader in the war against climate change.