The idea of Tradable Energy Quotas or TEQs has been floating
around political circles since it was proposed by Dr. David Fleming in 1996. It’s
been called the most influential scheme of its type, and has attracted cautious
interest from both Labour and the Conservatives within the UK, as well as from
EU bodies concerned with climate change.
TEQs are, in effect, a rationing scheme designed to curb the
use of carbon-intensive energy sources. Each TEQ certificate would be a licence
to emit a certain quantity of CO2, and would have to be surrendered by energy
generators to the TEQ registrar at the end of each year. The TEQ certificates
would begin in the hands of the end consumers of energy, and would travel up
the production chain as TEQs would be used alongside cash as a parallel payment
system for energy.
At the heart of the TEQ system is the idea that a country
should be held to an annual ‘carbon budget’, and that each adult citizen should
be entitled to an equal proportion of the domestic part of that budget.
Businesses and industry would have to purchase rights to the remainder of that
budget in order to power offices and machinery. TEQs would replace the more
traditional method of emissions limitation, the carbon tax. The schematic below
was reproduced from a report
on TEQs by the All Party Parliamentary Group on Peak Oil.
In the TEQ scheme, 40% of the annual carbon budget would be
distributed free to citizens, perhaps through an online account. The remaining
60% would be available to purchase from the TEQ registrar, and is mainly aimed
at businesses. However, domestic users who exceed their free allowance of TEQs
can also ‘top up’ by purchasing TEQs from this pool.
People who don’t use their full allowance of TEQs could sell
their surplus on a market that is overseen by the registrar. This encourages
domestic energy users to be frugal in their energy use in order to profit from
the sale of TEQs. Businesses too would need to curb their energy use in order
to avoid having to buy too many TEQs. Finally, the generators and importers of
energy would have to gather all the TEQ certificates gained from sale of energy
and return them to the registrar at the end of each year. If they are unable to
provide enough TEQ certificates to cover the energy they have produced, they
would face financial penalties.
The TEQ scheme is designed to produce a profit for the
government through the sale of 60% of the TEQ certificates. This income would
replace that of a more traditional carbon tax, and could hopefully be ploughed
back into creating more low-carbon energy.
Now I’m going to put my cards on the table. I like this scheme. My instinct tells me
that TEQs, or rationing of some form, is a sensible response to the problem of
climate change. But as it stands, I don’t think this scheme would work.
Let’s start with the most pressing problem: Who is the
registrar? In the proposed TEQ system, an astonishing amount of power and control
is given to the ‘registrar’, without any firm idea of who or what the registrar
is.
Perhaps it’s a public-sector organisation? With 60% of the
TEQs initially allocated to the registrar for tender, the power it has over the
price of each TEQ is practically insurmountable, allowing them to increase or
decrease prices almost at will. With this kind of control, they will come under
intense pressure from the treasury to raise TEQ prices to generate more
revenue. At the same time they would be lambasted by the populace, who would
demand an ever lower TEQ price. To offer control over the registrar to a
government department would be akin to offering someone a grenade without the
pin- it’s political suicide. To put it mildly, I suspect the creators of the
TEQ scheme would have trouble finding someone to do the job.
So how about letting a private sector company have control
of the registrar? Well, I’m certain you would have companies lining up for the
job, but trusting any of them would be a fatal mistake. With such a remarkable
monopolistic power, a private sector company would inevitably succumb to the
temptation to appropriate a larger and larger proportion of the revenues. It
wouldn’t be anything illegal of course, merely a creeping expansion in
administration costs and a slow rise in wages- especially of the top
executives. And how long would it be before the first accusations of insider
trading surface? It wouldn’t be hard for a company in charge of the registrar
to conceal its preference for certain other firms, offering them cheaper or
earlier deals on TEQs. Handing control of the energy industry to a private firm
also has energy security implications; how can we be certain that the company
will work in the best interests of our country? In the worst case, it might
even be persuaded to work in the interests of a foreign power. The final
problem with private-sector control is transparency. Once the government loses
control of the registrar, it will lose sight of the intricacies of running the
TEQ scheme. At this point, it becomes very difficult to verify if the registrar
is doing a good job, and even harder to justify reprimanding them.
Centralising power over the market and allocation of TEQs
also has one other major problem. What happens if the registrar’s servers
crash? It would paralyse the country’s energy network, ensuring nobody could
buy or sell energy. We wouldn’t have to worry about energy security anymore; we
could have all the fuel in the world stacked in warehouses around the UK, but
if the TEQ exchange goes down it would all be effectively useless. My
conclusion: having a single TEQ market overseen by a single registrar would
make us incredibly vulnerable to hackers or hostile governments.
So is there a remedy for all these problems? I think there is.
Decentralise.
First, split the job of regulating TEQ markets away from the
task of allocating and collecting TEQs. There is no strong reason why both jobs
have to be done by the same
organisation, and it’s far safer for it to be done by two separate ones.
Second, open up the job of administering TEQ markets to private sector brokers,
but make them liable for the exchanges they handle. This means that hackers
would have to target several exchanges to bring down the country’s energy
network, rather than just the one.
Finally, eliminate the job of administering the TEQ accounts
of every citizen completely. Users could store their TEQs in digital wallets
that reside on their own computers and mobile devices, and the value of their
TEQs could be cryptographically protected using something akin to a blockchain.
Decentralisation might not solve every problem that TEQs
currently pose, but it could go a long way towards making it a more secure and
accountable system. Will TEQs be introduced anytime soon? I doubt it, but it’s
possible that a smaller scheme may be trialled somewhere in the world over the
next few years, as governments struggle with the problem of emissions
reduction.
This blog is written by Cabot Institute member Neeraj Oak, the Chief Analyst and Energy Practice Lead at Shift Thought.
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Neeraj Oak
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