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Rationing energy rebound

Everyone is in favour of energy efficiency. Using energy more efficiently is usually seen as the cheapest way to reduce/avoid carbon emissions. Certainly, given that energy has been relatively cheap until recently in countries like the UK, we have paid little attention to conserving it, so that there are substantial energy saving gains that can be made. However, once we have picked the easy and cheap “low-hanging fruit”, the next wave of energy savings are likely to be harder and more expensive to achieve. Energy-efficiency advocates, such as Amory Lovins, argue that, much as with many another technologies, as the market for them expands then they will get cheaper. But it is not clear if this is the case for all energy-efficiency systems. And even it is the case, then we come to a potentially much larger problem – the so-called “rebound effect”. But simply, if some commodity or service gets cheaper then we are likely to use more of it.

If for example, a consumer cuts energy bills by a few hundred pounds each year by investing in domestic energy saving (e.g. better building insulation), they are likely to spend this money on other energy intensive good and services, such as a holiday abroad by jet plane, thus wiping out some or all of the energy and carbon saving gains. Similarly, for drivers who replaces a car with a fuel-efficient model, only to take advantage of its cheaper running costs to drive further and more often.

There has been a long debate on exactly what the scale of this and other types of rebound or “take back” effect might be in practice. A report last year from the UK Energy Research Centre concluded: “For household heating, household cooling and personal automotive transport in developed countries, the direct rebound effect is likely to be less than 30% and may be closer to 10% for transport.” Moreover, “direct rebound effects for these energy services are likely to decline in the future as demand saturates”, although it warned that “indirect effects mean that the economy-wide reduction in energy consumption will be less”.

In terms of how to respond to rebound effects, the report points out: “Carbon/energy pricing can reduce direct and indirect rebound effects by ensuring that the cost of energy services remains relatively constant while energy efficiency improves. Carbon/energy pricing needs to increase over time at a rate sufficient to accommodate both income growth and rebound effects, simply to prevent carbon emissions from increasing. It needs to increase more rapidly if emissions are to be reduced.” That could be painful for consumers, already hit as they are by rising fuel bills.

One proposal to achieve reduction in energy used without relying on direct pricing is personal carbon rationing – with consumers being allocated carbon credits to limit their overall consumption. These credits would be tradeable, so that consumers who managed to use less could sell any excess to those who were less frugal. The annual allocations could then be gradually reduced.

Last year, Defra conducted a pre-feasibility study into Personal Carbon Trading but concluded that it was an idea ahead of its time, although the government remains interested in the concept and in further research. But costs were seen as a possible major problem. Defra said: “Estimates of the likely set-up costs of the type of scheme explored ranged between £700 m and £2 bn, and the running costs £1–2 bn per annum.” However, proponents have argued that retail loyalty-card schemes have demonstrated that large-scale schemes can be set up and operated without large costs.

There was also a hint from Defra of political concerns about pressing ahead with a mandatory rationing system at present: “There is scepticism that such a scheme would be fair, that government could be trusted to manage it or that it would deliver emissions reductions. In addition there was little evidence that people would be likely to trade – a crucial element of the scheme.”

The debate has continued. While enthusiasts say, not unreasonably, that personal rationing schemes would have an immense educational value, making people aware of their carbon debts, some people are likely to see personal carbon rationing as yet another unwarranted government imposition. But the Institute for Public Policy Research (IPPR), in its new report Plan B? The Prospects For Personal Carbon Trading, says that since “unlike food rations during the war, carbon credits would be tradeable” and “that could give an edge”. Even so, the IPPR admits that it would be a drastic and expensive move, “costing in the region of £1.4 bn a year to administer the millions of carbon accounts that would be needed. It is also likely to be unpopular.”

A recent UKERC report from the University of Oxford-based Environmental Change Institute seems to dispute that last point, arguing that the scheme could be made attractive if was framed “as a budgeting process to give individuals ownership and control over their emissions and because it is a familiar process…to many individuals through other aspects of their personal administration such as income management”. It adds: “Consumers are already familiar with complimentary currencies such as Air Miles or loyalty points; therefore it is likely that they are prepared for understanding currencies other than money.”

But it identifies “trust” as a potential issue: “Limits need to be set by a trusted authority and be transparent in how they are calculated to help public acceptability, and enable forward planning by consumers. They also need to be set at an appropriate level and with the appropriate aids to make it possible to live within the limits. The public should be convinced that scientific rationale for emissions reduction is sound and for the collective benefit.”

It doesn’t help that the newspapers are awash with reports of fraud and corruption in the wider carbon-trading world. For example, there is currently an international police inquiry into an alleged £1 bn emission-trading scam (Observer, 4 October).

Certainly with a system involving tens of millions of consumer transactions, there could be a lot of potential for fraud, illicit carbon permits, as well as black-market fuel, all of which could be socially divisive. For example, with the value of the credits gradually rising, the poor might be tempted to sell off their credits to the rich and then they might have to buy in unregistered energy/fuel illegally – a recipe for a spiv economy, requiring heavy regulation and policing to keep a check on rogue traders and fake credits.

So the result, in the worst case, could be increased emissions: the rich and energy profligate would simply buy in credits from the poor, to escape the overall cap limits, while the poor would try to buy in dirty “off-list” energy. Of course, in the best case, at least for the climate, given the increasing cost, the rich may cut back to some extent, and/or invest in efficiency/self generation, while the poor may decide to do without some energy services to continue to sell off their credits. So in that case you might get some reduction in emissions but at what social cost? To avoid negative outcomes, plainly there would be a need for massive support for the take-up of cheap, low-energy system by consumers, especially poor consumers. In this context is worth noting that the governments new Feed In Tariff for micro renewables (below 5 MW) is expected only to yield a contribution of about 2% of UK electricity by 2020.

It might of course be possible to do better than that, but it’s not clear that operating at the individual consumer level via caps and rationing is the best way ahead. It’s far easier to put caps on the relatively few energy generation and supply companies. A far as individuals are concerned, what we need is to ensure that money saved through energy efficiency is invested in renewable energy, so that we avoid the rebound effect and actually capture all of the carbon savings. Whether personal carbon rationing/trading will do this effectively and equitably remains uncertain.

IPPR Report

ECI/UKERC report

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