In 1997, a coalition of 38 countries signed the Kyoto Protocol, the first major global agreement to combat climate change. This pact, now ratified by 192 states, established limits on greenhouse gas (GHG) emissions and set in motion a mechanism that had been in operation in the US since 1990: emissions trading, a system whereby entities can emit more GHGs than they should if they buy these rights from others that remain below their assigned quotas. Cap and trade has been hailed as a powerful tool in controlling emissions, although not without some criticisms, including its impact on consumers.
Emissions trading originated as an alternative to the classical restrictions imposed by regulators. In the late 1960s, mathematical simulation models developed in the US showed that it was the most economically sustainable way to reduce emissions. In 1990, the Clean Air Act implemented this system, which alleviated the problem of acid rain—due to sulphur dioxide emissions from coal-fired power plants—at a quarter of the expected cost and quickly, as it was advantageous for companies.
A key tool for energy efficiency?
Cap and trade allows companies that find it more difficult to adapt their processes to emission reduction requirements to buy allowances from others that are less polluting or have adapted more quickly. This, however, never gives carte blanche to emit without limits—an essential element of the system is that the maximum amount of emissions for a country or an industry is fixed, and these caps are lowered over time. According to Nathaniel Keohane, vice president at Environmental Defense Fund, the organisation that designed the system for the Clean Air Act, in contrast to the traditional approach of government regulations, “cap and trade lets the market find the cheapest way to cut emissions.”
According to its proponents, this carbon market accelerates the transition from fossil fuels to renewable energy sources, incentivising innovation and energy efficiency, while at the same time energising the economy through the buying and selling of emissions. The European Union’s emissions trading system, the largest in the world, limits emissions from some 10,000 installations in the power sector and manufacturing industry, as well as airlines, covering 40% of the EU’s GHG emissions.
Thus, from its launch in 2005 until 2019, the European market achieved a 35% reduction in emissions from the installations included. The world’s largest GHG emitter—China—rolled out its emissions market at the end of 2017. All this is aimed at promoting progress towards carbon neutrality by 2050, a goal endorsed by 131 countries, with the ultimate objective of meeting the targets set by the 2015 Paris agreement, limiting global warming to 1.5°C above pre-industrial levels.
Market efficiency or greenwashing?
However, the carbon market also has its detractors. Critics often point out that the system can distract from long-term solutions and perpetuate dependence on fossil fuels as long as there are emission allowances for sale on the market, which also risks disadvantaging poorer countries. Some experts don’t dismiss the system as a whole, but consider it insufficient if it is not accompanied by other measures, arguing that its effects have not translated into a net reduction in emissions by oil and gas companies. Other, more critical voices see cap and trade as mere greenwashing by capitalism.
In terms of its impact on users, it has been suggested that the benefits of cap and trade would offset the potential increases in energy prices. But on the flip side of the coin, it has also been pointed out that the most polluting energy companies do not bear the final burden of this extra cost, but pass it on to their customers in the form of higher prices. As emission caps come down and energy companies move towards a transition to renewables, it is to be expected that these cost increases will be avoided.
But while the focus tends to be almost exclusively on the transition to clean energy, it is often at the expense of overlooking the immense importance of energy savings and efficiency, an approach that is increasingly prominent in the analyses of experts. Energy efficiency must involve industries, through the upgrading and maintenance of facilities, as well as governments, by defining standards such as those for vehicle emissions or the efficiency of household appliances. A 2020 report estimated that without the energy efficiency investments made since 1980, energy consumption and related emissions would be 60% higher today than they currently are, and consumers would be paying almost $800 billion more per year in energy costs.
According to the International Energy Agency (IEA), energy efficiency alone can achieve more than 40% of the emissions cuts needed to meet the Paris agreement targets; however, this requires strong and sustained investment. The IEA estimates that annual investment in energy efficiency would need to double by 2025 and double again by 2040. But it is a profitable investment—every euro invested in energy efficiency saves three times as much over the lifespan of a technology.
A responsible role for consumers
But in addition to companies and governments, consumers also have a key role to play on the road to energy efficiency. One well-known case is the switch from traditional incandescent light bulbs to LEDs, an important measure that reduces electricity demand; the global use of LED lights avoids the emission of an estimated 570 million tonnes of CO2 per year. But the scope for improvement is much wider; according to one estimate, more than a third of the energy consumed in commercial and residential buildings is wasted on inefficient fixtures, poor insulation or lights that no one is using. Thus, responsible energy use encourages savings, while the maintenance and upgrading of our lighting, appliances, heating and air-conditioning installations, and other devices contribute to energy efficiency.
This is also where hourly electricity rates, such as those recently introduced in Spain and which also operate in other countries, make sense. There are large differences in energy demand at different times of the day and night. Daytime peaks require a large volume of production and may require the construction of new facilities, which are under-utilised at night. This is why companies encourage a more equitable distribution of demand throughout the day, by subsidising consumption at night.
However, as can happen with costs, placing the burden of responsibility for energy use on users is also subject to criticism, as it requires a change in consumption habits and schedules, which, moreover, is sometimes not voluntary but forced by economic needs, which can aggravate the problem of energy poverty. According to Morten Fibieger Byskov, an expert in climate policy ethics at the University of Warwick, putting the onus on consumers “is something akin to victim-blaming because it shifts the burden from those who ought to act to those who are most likely to be affected by climate change.”
Much room for improvement lies in technological innovation: the self-production of energy through solar panels, household battery systems for storage, smart grids and smart meters, and dynamic demand systems that adjust the activity of appliances at any given moment according to consumption on the grid are all examples of energy efficiency solutions that do not require consumers to change their habits. But as Fibieger Byskov stresses, “all of this is not to say that individuals cannot or should not do what they can to change their behaviour where possible. Every little contribution helps.”