"To be truly radical is to make hope possible, rather than despair convincing." - Raymond Williams

Fee and Dividend or TEQs? In the aftermath of Paris COP21, what *should* effective climate policy look like?

by Shaun Chamberlin on December 21st, 2015

We Saved The World

We just sent out our Fleming Policy Centre newsletter, with reflections on the Paris climate summit. Bottom line: it’s not good. In the words of the author Naomi Klein, “Our leaders have shown themselves willing to set our world on fire.”

Meanwhile, the mainstream media seem to be doing their best to put the world to sleep again. One excitable front-page headline I noticed in The Observer proclaimed:

“World leaders hail Paris climate deal as ‘major leap for mankind’: Almost 200 countries sign historic pledge to hold global temperatures to a maximum rise of 1.5C above pre-industrial levels”.

The same article concluded on p9, with a quiet mention that: “there will be no legal obligation for countries to cut emissions”.

In truth, the good news is found elsewhere, with the ever-swelling numbers of ordinary people realising that our future is being destroyed in our name. In the print edition of the paper though, one tiny voice of sanity did sneak in to a sidebox, as climate scientist James Hansen commented on the agreement: “It’s a fraud really, a fake”.

But if we are so dismissive of what global politics is producing, then it is perhaps fair to ask what we wish to see instead. Hansen, a long-time hero of mine, argues for Fee & Dividend – a tax on carbon whose revenue is paid out to the population of the nation implementing it. And the recent peer-reviewed paper that I lead-authored on this topic (now the most read in the history of Carbon Management) instead advocates TEQs – a carbon rationing system with free rations for the population of the nation implementing it.

Jim and I have in fact been discussing these alternatives via very occasional emails since I first wrote to him on it in 2008 (and Citizen’s Climate Lobby UK opened the same discussion on Facebook earlier this year), but it feels the right time to broaden out the conversation.

My hope is that we can either agree that one approach or the other is preferable or (perhaps more realistically) at least identify the circumstances/aims for which one or the other is preferable, so that we know when to reach for one tool, and when to use the other.

So, below are the similarities and differences between the two approaches, for your delectation and deliberation. I will again be sending the link to Hansen and the Citizen’s Climate Lobby for comments, and may edit it based on comments received, especially if any inaccuracies come to light.


So how are they similar?

Let’s start with why both TEQs and F&D are excellent ideas that would represent a radical break from the status quo.

Both are ways of ensuring that society finally gets serious about addressing our climate challenge, neither is open to the extensive corporate windfalls that characterise existing ‘Cap and Trade’ schemes (which have no effective cap, and thus are really just ‘Trade’ schemes) and both would protect the poorest in society as energy prices rise to take account of the impact of the carbon therein.

Both are also grassroots alternatives to the UN process of which the Paris COP21 summit is the latest expression. Instead of seeking global agreement on a global deal, both TEQs and F&D allow adoption by individual countries or groups of countries. Any countries doing so will necessarily introduce import tariffs alongside, to ensure that their manufacturers are not disadvantaged relative to international competitors (discussed here). And since these tariffs will generate revenue for the ‘adopter countries’ when they import goods, this will in turn provide a strong incentive for the exporting countries to themselves implement similar policies, so that they can collect this revenue, instead of letting it flow overseas. In this way, effective climate policy could spread around the world, without the necessity for the apparent impossibility of global agreement.

Importantly though, both are also vulnerable to a lack of political ambition. Both require adoption at government level, and thus require defence against being corrupted and compromised by lobbying interests as they move towards implementation. And if F&D was adopted with too low a carbon price, or TEQs was adopted with too high an emissions cap, either could provide merely a useful means to inadequate ends.


And what are the essential differences?

Fee and Dividend & TEQs

Now let’s look at where they differ. There are two fundamental design decisions here – the choice between a price-based framework and a quantity-based one, and the choice between an ‘upstream’ framework and a ‘downstream’ one.

The essential difference between price-based frameworks and quantity-based frameworks, then, is which of two variables is adjusted.

Price-based policy frameworks (e.g. F&D) act to raise the price of carbon-rich purchases in the belief/hope that consequent emissions reductions will be sufficient to avoid climate catastrophe, while quantity-based frameworks (e.g. TEQs) act to place a cap on emissions in the belief/hope that the price rises this is likely to cause will not cause economic catastrophe.

The second difference is between ‘upstream’ and ‘downstream’ approaches. The terms draw an analogy between the flow of water in a stream and the flow of energy/carbon through an economy.

‘Upstream’ advocates (e.g. F&D) want to regulate the few dozen fuel and energy companies that bring carbon into the economy, arguing that this is cheaper and simpler than addressing the behaviour of tens of millions of ‘downstream’ consumers. ‘Downstream’ advocates argue that such engagement with the general populace is essential if we are to meet the climate challenge, with TEQs providing a way to deliver that without the need for downstream monitoring.


Tentative conclusions

Thoughtful

It is undoubtedly true that current politics favours the price-based and upstream approaches, which present far less of a challenge to today’s dominant thinking. Certainly in the U.S. political context, Jim Hansen has argued that TEQs are just too radical an option for the American public to swallow. I am not an expert on the U.S. political scene, so he may well be right.

However, I do worry that a more radical shift in society *is* needed here. There is a rift between political reality and scientific reality, and they must be reconciled. To my mind, upstream price signals are not going to be enough, though a scheme like F&D would certainly be a step closer to sanity than current policy. To really achieve the change required, we will need TEQs.

And since I believe that the economy is fully dependent on a functioning ecology, for me a hard cap on emissions must be primary, and the price of goods and services has to be secondary, which is why I favour a quantity-based approach. I also don’t believe a long-term emissions trajectory can be set effectively through a tax/fee alone.

I do think that Fee & Dividend would be far cheaper and more effective than current carbon policy, but while upstream frameworks are clearly cheaper (and politically easier) to implement, I believe that this is partly because they don’t bring about the fundamental changes that are needed in society. Of course it is more straightforward to pass laws that only affect energy suppliers, but Big Energy Companies alone are not going to be able to resolve climate change, even if they wholeheartedly wanted to. They supply what we demand, and this challenge demands that we all engage with the need to change the way we live, work and play.

TEQs, accordingly, is built on the latest work in social psychology, and provides visibility to the intrinsic incentives that exist for businesses, government, communities and individuals to collaborate in working towards the shared long-term desires to retain both a benign climate and secure access to essential energy services. Upstream schemes can only provide an extrinsic (price) signal to encourage low-carbon behaviour. In the words of the UK Environmental Audit Committee (the UK government’s oversight body on the environment):

“We remain to be convinced that price signals alone, especially when offset by the [additional income from the dividend], would encourage significant behavioural change comparable with that resulting from a carbon allowance … A meaningful reduction in emissions will only be achieved, and maintained, with significant and urgent behavioural change.”

In summary then, in addition to their shared benefits, I see the relative advantages of the two schemes as:

Fee & Dividend: Cheaper and faster to implement; less challenging to politics/markets; carbon price set by the Department of Energy.

TEQs: Deeper engagement with the whole population based on principles drawn from social psychology; consistent, cohesive integration of a long-term perspective; stimulation of cross-sector collaboration in reducing emissions; a carbon cap set in accordance with climate science.

~~~

As ever, it comes down to that rift between scientific reality and political reality. To my eyes, Fee & Dividend represents the less challenging political path to policy change, and that is certainly attractive. However, while it is tempting to think of adoption of a carbon fee or cap as a solution in itself, the true political challenge is quickly getting and keeping the fee high enough (or cap low enough) to avoid destabilising our climate. Which in turn means the transformation of our society so that it can thrive within such a limit. Without such a fundamental transition to low-carbon living, society will start hurting badly as any effective policy makes carbon-rich energy less accessible, and then the political pressure to loosen or abandon any such policy will become irresistible.

Why does that point me towards TEQs? Well, the full arguments and evidence are set out in the peer-reviewed paper I recently lead-authored (I believe it’s worth a look – it has proved popular, perhaps due to the extensive efforts I made to keep it more readable than academia usually manages!). But in short, I believe that TEQs is far better placed to support and facilitate the depth of decarbonisation required – and thus defend its long-term political feasibility – than an increase in the price of carbon ever could.

This is because it has been shown to be more popular with the public (due to its fairness and effectiveness); because it destroys at a stroke the impossible political tension between needing to keep energy prices low and carbon prices high; and because it does not treat all emissions as equal (in recognition that while some are within people’s discretion, others are not, and that these decisions should be left with the people in question), nor require the inherently uncertain and faintly absurd estimation of an ‘appropriate carbon price’.

Of course, with the current direction of politics, the catastrophic destabilisation of our climate looks far more likely than either alternative, but if we are to fight, it is important that we clearly identify the alternative course or courses worth fighting for.

We Are Not Drowning, We Are Fighting

Finally, for those who prefer a more visual layout, here is a quick comparison table (also including the existing EU Emissions Trading Scheme), with thanks to Nicola Terry for the idea and initial work:

I look forward to hearing what you think, in the comments below.

Long-time readers may note some similarities with this 2008 post on TEQs and Cap and Dividend (an older variant – a quantity-based, upstream system), or my summer piece on the dangers of carbon pricing.

I do believe that carbon pricing is an inherently flawed approach, and that the World Bank/IMF/Big Oil’s reasons for pushing it are not what they pretend – see this brilliantly straightforward explanation on that – but nonetheless, Fee & Dividend is certainly worthy of respect and discussion as the gold standard representative of that path.

  1.  Mr. Brown says:
    23 December, 2015 at 1:15 pm

    This is super helpful. I knew both were good ideas, but now see why TEQs is more ambitious/appropriate. Either would be great though!

  2.  piyush says:
    26 December, 2015 at 9:33 pm

    Neither of these are likely to work in a grow or die economic regime. We have enough evidence now about how money is manipulated to any extent when economic growth stalls, tremendous pumping of money supply into the market and growing debt to somehow try to keep the GDP growing.

    Fee and dividend is directly money based, so the price of carbon will be compromised with money manipulation if the carbon price does not bring out true renewable substitute (true substitute means one that stands on its feet without any subsidies for mass scale production and consumption of the renewables, not R&D dollars).

    TEQs looks more innocent with respect to this argument in that it is based on physical quantity such as Co2 produced by consuming energy. But it is tied to money supply through the T (tradeable) in the TEQs, the trade is price based i.e TEQs will be bought and sold using dollars in the marketplace which means if TEQs become too expensive (because true renewable substitutes do not emerge), the money will be pumped to dilute and distort them in effect continuing the growth in CO2 production and consumption.

    The only proper response looks like direct regulation of production of fossil fuels i.e physical quantity based directly at source, which means globally policing (UN energy corps?) all oil wells, coal mines, natural gas wells etc to allow only a fixed and diminishing quantity every year (whether or not there is depletion) to be extracted out in line with the profile needed to keep below 1.5 C.

  3.  Shaun Chamberlin says:
    28 December, 2015 at 12:53 pm

    Thanks both for your comments.

    @Piyush, yes, as you may already know, I wholeheartedly agree that economic growth and the nature of money creation would also need to be addressed if catastrophic destabilisation of our climate was to be avoided.

    To my eyes, TEQs and ‘degrowth’, with their shared inherent respect for quantitative limits, are both part of the same ‘new’ (actually ancient) cultural story. As such, support for either tends to build support for both, and a breakthrough for either would pave the way for the other.

    I also agree that the production (aka extraction) of fossil fuels must be regulated/stopped in a quantity-based rather than price-based way, and perhaps should have mentioned this in the comparison above. This is exactly what TEQs does, by carbon-rating all energy sources and then only allowing them into the economy in quantities in line with carbon budgets determined by climate science. As discussed here, the tradability does not undermine this hard cap, it only incorporates a necessary flexibility under that cap.

    That said, you are right to highlight that if true renewable substitutes for society’s demand do not emerge, then society will likely lose the political appetite for emissions reductions and TEQs may be abandoned (or organised crime will simply step up to extract the fuels that society demands). This is the real challenge, as discussed above, which is why I believe that TEQs’ focus on stimulating ingenious collaborative ways of reducing energy demand is key to enforceable limits on extraction. And as you rightly flag up, so is economic/monetary reform.

  4.  piyush says:
    29 December, 2015 at 1:34 pm

    Shaun, do you really believe that TEQs will not be printed out of thin air just like money is being to keep growth going? On the TEQ web-site, I don’t see any mention of hard-limiting fossil fuel extraction and how this would be enforced.

  5.  Shaun Chamberlin says:
    29 December, 2015 at 2:14 pm

    Hi Piyush, thanks for returning. Sorry if it wasn’t clear from my blog post and the website, but for sure the very essence of TEQs is that it is a methodology for implementing a hard, quantity-based, cap on emissions.

    Here in the UK the 2008 Climate Change Act created an independent committee whose job it is to review the latest climate science and set that cap for the country. There are valid questions as to whether their caps are ambitious enough, but critically, what we lack is any effective method for actually keeping the country’s emissions under that cap (and maintaining well-being in that context).

    Carbon pricing is one potential approach, and TEQs represents the other. As you can read in either David Fleming’s very readable Energy and the Common Purpose (2005), or our 2015 peer-reviewed paper, the hard limit on fossil fuel extraction would be enforced via the TEQs system. Any extractor (or importer) would have to surrender TEQs units to cover the lifecycle carbon content of their fuel/energy.

    As you say, enforcement is key, and this where I find the genius of David Fleming’s system design exciting, allowing for the essential combination of downstream engagement with upstream enforcement (see p 416 of the recent paper).

    Regarding your other question, the effect of “TEQs being printed out of thin air” would be to loosen the national carbon budget. And you are absolutely right to highlight this as the big threat (to any carbon policy), since the pressure to do this will increase as effective policy causes political/economic reality to run up against the limits of physical/scientific reality. To answer your question directly, I honestly think that by far the most likely outcome is that scientifically-informed carbon budgets will be vastly overshot as our politico-economic systems fail to respond appropriately. Then, of course, physics would pull rank and the biosphere would reap the consequences.

    But the fact that I see a sane response as unlikely doesn’t mean that we should stop shooting for it, and the core, central focus of our paper is detailing exactly why I see TEQs as the best remaining bet for reconciling economics and physics at this late stage.

    In other words, yes, in our current cultural context, doubtless too many TEQs would be created, just as money is, to keep growth going. And those of us who are trying to change this culture need to find common cause in challenging both of these. TEQs will be derailed without economic reform and economic reform will be derailed without TEQs.

  6.  piyush says:
    30 December, 2015 at 2:14 am

    Thanks Shaun for the detailed response. I looked at “energy and common purpose”, what I understand is that TEQ will be parallel to money system, all fuel transactions will still be made in money but TEQ transactions will happen in parallel (when buying fuel in money, TEQs will be deducted and there is trading of TEQ on the side). Nowhere does the paper clearly mention “you will not be able to buy fossil fuel if your TEQ account reaches 0”, which probably it means but it needs to state that clearly, otherwise the TEQ system will be sterile in trying to achieve its purpose, it will be just a sideshow. If there is no fear that one can run out of TEQ acccount (just like the fear that one can run out of money), it will not motivate individuals, corporations, government or other bodies to take action ahead of the time when TEQ depletes significantly, which is the original purpose of TEQ (while allowing individuals also to adapt to lower consumptions effectively making the poorer or more mindful folks who consume less and efficiently to gain over the extravagant ones, a good thing). I am also afraid without such clear statements, there will be an entirely new credit market for TEQs, similar to the credit market for money, which is in effect printing money/teqs out of thin air in anticipation of growth and therefore the growth religion will win again. Without an explicit “thou must not print your way to (false) growth”, which you emphasized in your last statement well, there is little chance of this scheme being as effective as it is intended to be. The economic system must be reformed (to a steady state economic system, not a growthist system) in parallel or prior to the launching of TEQ.

  7.  Shaun Chamberlin says:
    30 December, 2015 at 12:50 pm

    My pleasure Piyush. And yes, to confirm, the TEQs system is one in which you will not be able to buy fossil fuels without TEQs units.

    Best,
    Shaun

  8.  piyush says:
    30 December, 2015 at 1:32 pm

    Shaun, this needs to be clearly stated at the web-site. It doesn’t have to “look nice”, we are dealing with serious problems here.

    Another critique I have is regarding population numbers. I usually look at any such proposal about what it does to population vector, is it neutral, encourages population stabilization or encourages population growth. For fee and dividend, it is clear that it is not neutral and looks like it is almost an incentive for population growth as all children will get the dividend, which means that having more children will be kind of advantageous, it is not too different from how “more hands on the farm” is behind population growth in rural areas (that is the prime cause of overpopulation world-wide). While I think it is morally correct to make sure that when the scheme comes into effect, all present children should be getting their fair share just like adults, but there should be some kind of disincentive for any new children that are being bred, for example a decreasing amount for children beyond 1-2 as determined by the respective governments (democratically).

    The TEQ looks only a little better than fee and dividend in regards to population although it is somewhat ambiguous, I guess due to political correctness around population. The paper you referred talks vaguely about “child allowance” with no details of what it really is. And there is nothing that says beyond some number of (newly born after TEQ scheme goes into effect) children, there will not be an automatic increase of TEQ per child but say a diminishing amount. This obviously should be accompanied with free contraception.

    Not addressing population is a kind of injustice, those who breed responsibly will be penalized by those who don’t as the TEQ is an absolute quantity (CO2 is an absolute limit, not a per capita limit) and TEQ per person will decrease if persons increase (presently 200,000 net births minus deaths every single day). It is similar to the inequitable consumption that is being addressed by the TEQ’s tradability (lower consumers being able to gain against higher consumers), it needs to be addressed too else TEQ is being dishonest and civil society is unlikely to endorse it. The more things are tried to be hidden/subtle under political correctness, the more it will appear dishonest and scheming to the public, we need to be direct and acknowledge problems as they truly are.

  9.  Shaun Chamberlin says:
    10 January, 2016 at 5:33 pm

    Hi Piyush,

    You’re right of course that sharing out between more people is just as difficult as having less to share. And you’re right that TEQs is “ambiguous” on population policy, as per our FAQ on this issue. In short, TEQs could be implemented with large child allowances or no child allowances, and the essential functioning would remain the same, though as you say the implications for population policy would be very different.

    This flexibility is not so much through political correctness, as simply that we’d be biting off far more than we could chew (if we haven’t already!) by campaigning on population issues too. As with monetary reform, we’re part of a wider movement for respecting limits, and while I have written on population, this is others’ specialisation.

    TEQs is not the panacea for all ills, just the methodology for achieving real radical emissions reductions while protecting fair access to essential energy supplies.

    ps After almost a decade of giving presentations on TEQs, I can’t say I’ve ever encountered the problem of people not understanding that a rationing system means that you can’t get what you want if you don’t have rations. So I’m not too worried about that one!

  10.  Jenny Kendwick says:
    18 January, 2016 at 9:03 pm

    Wow!! So good to read someone who can write clearly on climate policy!! I get so tangled up in ‘cap and trade’, ‘fee and dividend, ‘carbon trading’ and all.. Thank you for this.

  11.  Neil Bye says:
    2 March, 2016 at 5:00 pm

    What is stop poor people selling their TEQ’s because they have run out of money then freezing because they have no TEQ’s?

  12.  Shaun Chamberlin says:
    2 March, 2016 at 5:30 pm

    Hi Neil, thanks for your question.

    The short answer is that everyone receives an equal free weekly entitlement of TEQs, and this leaves poor people better off.

    The slightly longer answer involves comparing TEQs with our present situation, in which there is nothing to stop the rich buying all of a scarce energy resource, leaving none for anyone else.

    TEQs, crucially, would make things a lot fairer. Everyone in the country would be guaranteed an equal entitlement to energy, regardless of wealth. If an individual chose to be energy-thrifty and sell part of her entitlement (at the prevailing national price) then she would benefit financially, and whoever purchased the right to use that energy instead would effectively be paying her (rather than Big Oil) for the privilege of doing so. This is clearly fairer than the current setup, under which those with low-carbon lifestyles do not benefit at all from the energy-profligacy of others.

    It also means that the scheme would benefit the poor – a number of studies of TEQs have confirmed that the poor use less energy/carbon on average than the rich, and so would benefit financially. Government modelling of the distributional impacts of TEQs has found that 71% of the lowest-income households would benefit from TEQs, while 55% of the highest-income households would be worse off.

    That said, there would be a minority of low-income households which would be worse off (perhaps due to factors such as medical conditions, cheap and inefficient appliances, lack of control over home insulation etc). These households are likely to be in no position to deal with being worse off, and this is why we advocate (as do the Government studies) that a ‘benefit’ or other compensatory measure be introduced alongside the TEQs scheme. This would be easily funded from the revenue to Government that would be generated by the Tender of TEQs units. Further research has been conducted by the Centre for Sustainable Energy considering the best ways of aiding any such disadvantaged poor households.

    Overall, though, the key point is that most poor households would be financially better off with TEQs, even before any such benefit, as well as being guaranteed an entitlement to energy that is conspicuously lacking at present.

    If you’d like to read more, the late David Fleming’s very readable booklet about TEQs is available for free download here:
    http://www.theleaneconomyconnection.net/downloads.html#TEQs

    Best,
    Shaun

  13.  Neil Bye says:
    2 March, 2016 at 5:46 pm

    Hi Shaun
    Thanks to your swift reply. However it has not answered my question. Let me rephrase. A person on benefit gets his money and TEQ’s on Monday. All the money is gone by Wednesday so TEQ’s are traded for cash. The TEQ’s run out on Thursday. No heat until Monday. Is it fair to make people make such a decision?
    Kind regards

    Neil

  14.  Shaun Chamberlin says:
    2 March, 2016 at 5:56 pm

    My apologies Neil, let me try again!

    First, let’s consider the situation you describe without TEQs. A person on benefits gets his money on Monday. All is gone by Wednesday. No heat until Monday.

    As you imply, this is clearly not a fair situation.

    The TEQs system would improve matters by giving him a free entitlement of TEQs units, but he does remain free to sell them if he considers something else more critical than heating.

    So it’s true that the TEQs system would not abolish fuel poverty, but it would greatly improve the situation, which is why it is favoured by fuel poverty campaigners such as Brenda Boardman.

    I hope that answers your question, but if not just let me know and I’ll be happy to discuss further.

    Best,
    Shaun

  15.  Neil Bye says:
    2 March, 2016 at 9:30 pm

    I think a better response is that the food/fuel dilemma would occur under any carbon saving system.

  16.  Shaun Chamberlin says:
    3 March, 2016 at 11:45 am

    True enough. Or without a carbon saving system, for that matter. It is happening already.

    If someone on benefits cannot afford the fuel and food they need, they are in trouble (unless they have non-monetary means for meeting their needs – community/family/growing/foraging etc).

    Either TEQs or Fee and Dividend would help somewhat in the short term, and of course they both aim to keep low-carbon energy affordable in the long term. My piece above explains why I believe TEQs would do a better job in this regard, but it is a clear aim of both.

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