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Carbon trading for all will save the planet!

Minister moots new, parallel currency as solution

Analysis David Miliband is widely viewed as quite the cleverest of the younger generation of New Labour Ministers, a fast riser headed for greater things, not excluding the top job. But puzzling over the text of his speech extolling the virtues of personal carbon allowance swipe-cards, one begins to suspect that maybe he's not so smart after all. Doesn't this man know any economists? Hasn't he had a word with anybody involved in keeping the credit card networks airborne? And secure?

Possibly not. "Imagine a country where carbon becomes a new currency," he tells us. "We carry bank cards that store both pounds and carbon points. When we buy electricity, gas and fuel, we use our carbon points, as well as pounds... It is easy to dismiss the idea as too complex administratively, too utopian or too much of a burden for citizens." And indeed it is, but we know from experience that that won't necessarily stop it. Miliband's bit of carbon card kite-fyling has been heavily influenced by a 2005 Tyndall Centre report into the subject. Miliband's blog, which sums up Government nicely by being both terminally dull and perplexingly expensive to produce, tells us that he intended to "sketch out a thought experiment of what it would be like to 'spend' carbon, save it and trade it in the same way we do with money," but in the speech itself he already seems seriously smitten.

Which is a worry. The Tyndall Report effectively envisages personal carbon allowances (PCAs) as taking the form of a whole new, parallel, currency with all of the verification, security, payment and transactional baggage this implies. So think bank, opening a bank account, getting statements, securing and using the plastic, moving your 'money' (Shall we call it beanz? Or barrelz?), exchanging the stuff, trading the stuff, not financing terrorist networks with the stuff (they appear not to have thought of that yet, but we have)... All of this to be deployed at the behest of the Government, possibly run and owned by the Government but (in our view) more likely to be farmed out to the people who've already done all of this stuff with real money, for very large fees.

The report notes (what a surprise) that the ID card system and National ID Register might be just the ticket to hang this off, but also notes widespread doubts about its viability and the Government's poor record on IT projects. So it takes on board the possibility of this route not being available, and considers other routes (effectively, the verification and security mechanisms currently used by banks) in order to get the system set up. But to what end?

If you're not wearing the weird specs when you read Miliband's speech, it becomes less clear as you go along. "As the Treasury set out in 1997, 'Just as work should be encouraged through the tax system, environmental pollution should be discouraged.'" So, um, you could discourage high carbon emissions through the tax system using, um, real money? Perhaps.

"As set out in the Energy Review, DCLG, Defra, DTI and HM Treasury... will examine what new policy options, such as tradeable personal carbon allowances, could contribute. A variety of models of tradeable personal carbon allowances have been proposed. But the basic elements are easy to describe. It is a compelling thought experiment – limit the carbon emissions by end users based on the science, and then use financial incentives to drive efficiency and innovation." Financial incentives? So that's real money, right? Uh, no.

"Imagine a country where carbon becomes a new currency. We carry bank cards that store both pounds and carbon points. When we buy electricity, gas and fuel, we use our carbon points, as well as pounds. To help reduce carbon emissions, the Government would set limits on the amount of carbon that could be used."

So carbon is real money. As well. Note in passing that, as they're both on the same card and surely therefore both being handled by the same machines and infrastructure, we are paying the banks a large wedge to sort it for us. Also note "the Government would set limits..." This is not, from our reading of the proposals, strictly the case. The government would set allowance levels, but you would be perfectly free to spend on carbon in excess of these levels by paying for more credits. So it's kind of like wartime rationing, except the blackmarket is legal and above board, and the spivs are A Good Thing, environmental crusaders dressed as stockbrokers. The system would work in pretty much the same way that the European emissions trading system for businesses works, although currently this appears not to, entirely, several Governments having apparently cocked up setting the allowance levels. As indeed you would expect them to, by accident or design.

Back, though to the Minister for bat-hugging. "Imagine your neighbourhood. The family next door has an SUV and realise they are going to have to buy more carbon points. So instead they decide to trade in the SUV for a hybrid car. They save 2.2 tonnes of carbon each year. They then sell their carbon points back to the bank and share the dividends of environmental growth." Which you might reckon sounds a bit like the pre-barrelz version, with real money - they realise their SUV's petrol bills are costing them a fortune, so they sell it and buy a hybrid, spend less money on petrol, and thus 'share the dividends of environmental growth.'

Why does that not happen now, but does happen when barrelz exist? And where in the equation is the 'environmental growth'? It could happen if barrelz spent on an SUV were sufficiently expensive for the cost of an SUV over the cost of a hybrid to become prohibitively expensive for the family. That is, if barrelz operated as a kind of tax, and the tax level were set appropriately by Government. Might that work with tax on petrol too if you applied the principle with real money? There's a thought.

Meanwhile on the other side: "The granny next door doesn’t drive and doesn’t do much air travel. So she has spare carbon points that she can sell. But she doesn’t want to be handling two currencies so she cashes in all her carbon permits as soon as she receives them. When she pays her electricity bill, her energy company builds in the price of carbon to her total bill. She simply pays carbon as she uses it. At the end of the year she finds herself better off." So she effectively just skips barrelz and continues happily through life with real money. Miliband does not mention what happens to her at the end of the following Q1, where we might speculate she gets a huge winter fuel bill, discovers she needs to buy more barrelz and further discovers that increased winter fuel use has resulted in barrelz costing far more than she got when she sold them. Barrelz can go up as well as down, gran - have you considered a hedge fund for next year? The SUV family meanwhile used its higher income to buy up her cheap barrelz last summer, and has been toastie-warm all winter.

From the perspective of most people, the system surely will operate as a tax, levied by Government according to its carbon (or more likely, Government being Government, its spending) requirements. It does however have the advantage of being presentable as money to the people, rather than taxes from. But it does, as far as we can see, appear to walk like the proverbial duck. The notion of a widespread 'people's market' in carbon allowances meanwhile will certainly have traction in some areas, but we could perhaps think of it as analogous to the 'shareholders democracy' of the Thatcher years. So we might see a burst of enthusiasm possibly followed by flurries of Internet-enabled day-trading, and then the bust to follow the bubble, and participation back down to more normal levels.

And we know from experience we can do the booms and busts with real money, so why do we need an extra set? Higher emissions go with higher incomes, Miliband tells us, so people with higher incomes will need to spend more on carbon allowances. But given that what is proposed is effectively a carbon tax, you could say precisely the same thing about a carbon tax, using real money, if that were imposed instead. And you could do that without all of the extra expenditure on PCAs - if. that is, you had the will to impose it.

And there's one more problem we think we can see. As PCAs would be effectively real money, the Exchequer would really have to treat them as such. So do we call that carbon trading helping control emissions by having a direct influence on economic policy, or economic policy dictating environmental policy? Best hail a passing economist for an answer, but it does look like Gordon's going to be calling this one. Recklessly however (given our lack of credentials) we propose to pursue this just a little bit further.

"Developments like the EU Emissions Trading Scheme show that it is not fanciful to think of all major emitters in the global economy being covered by a scheme of tradeable allowances", says Miliband. To which you may well respond, 'huh, in your dreams, squirrel-hugger.' But lets at least pretend the EU scheme is in fact only going through teething problems and is not morphing into a hugely expensive cunning wheeze for national Governments to subsidise local industries via over-stuffed allowances. So, we imagine, tradable carbon allowances take off across Europe, and follow the British lead into personal trading allowances, in a common currency valid across the continent. The currency would have to be managed centrally, of course, so nobody cheated, flooded the market and caused inflation. So we could call the people in charge the Central Bank, and we could call the common currency, ah, the Euro? ®

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