Personal carbon allowances: A revised model to alleviate distributional issues

Abstract

Personal Carbon Allowances (PCAs) are a policy proposal designed to facilitate carbon emissions reduction and engender carbon consciousness: they were investigated by the UK government in 2006–2008 but subsequently shelved. With continuing growth of atmospheric CO2 concentrations and increasing interest in behaviour change agendas PCAs are worthy of fresh development.Wide variation in energy usage between households of similar incomes implies that under the ‘standard’ model of PCAs significant numbers of low-income high-emitters would have to purchase top-up allowances. If PCAs penalise some of the worst off in society it creates a major political obstacle to their introduction.Solving this distributional problem by allocating additional allowances to certain groups or offering compensatory state benefits has been investigated and appears costly and only partially effective. This paper proposes a new ‘Mean & Max’ PCA model whereby higher usage is necessary before purchase of top-up allowances is required; potentially highly effective but consequently the volumes and values of surplus and top-up allowances become significantly different. This difference renders free market carbon allowance trading unworkable, potentially eliminating a hallmark (but publicly unpopular) PCA feature. The new model potentially offers the first solution to the distributional problem since it was highlighted in 2008.