Cap-and-trade can save the planet

To mitigate a huge problem like climate change, we need to be open to big ideas. One of these has been around since the 1990s but may only now be ready for prime time: the issuance of tradable carbon allowances not only to companies (as in existing cap-and-trade systems) but to all of us individually.

In essence, this kind of flexible rationing follows the same logic whether applied upstream to industry, as in the European Union's emissions-trading system, or downstream to every single consumer. Policymakers cap the overall amount of carbon to be emitted and reduce that over time. They then hand out free permits to emit the carbon, which people can buy or sell in the aftermarket.

Similar to carbon taxes, these certificates attach a visible price to emissions that are otherwise invisible and thus the cause of what economists call an externality, namely global warming. Unlike taxes, tradable permits allow more precise targeting of incentives. Those polluting less than their allotment can cash out and make extra money. Those needing more certificates have to pay up. Everybody will try to become more green.

The elegance of this mechanism is the freedom it leaves people to respond as they please. That's why economic liberals like me have long favored cap-and-trade systems over other policies such as government subsidies for some technologies or bans on others. Markets generally work better than central planning, and can even be extended internationally.

So far, however, our attention has been focused on upstream cap-and-trade systems such as the E.U.'s, which is the world's largest and due to be expanded even more. These schemes are complex, so it's good to have them administered not by consumers but by professionals — the executives at electricity companies or cement and steelmakers, say.

In systems for individuals, by contrast, hassle is a deal breaker. Around 2008, the U.K. looked into personal carbon allowances. Those would have been quite limited, capturing only consumers' household emissions from electricity and heating. But the details would still have been fiddly, requiring new types of carbon "accounts" with plastic cards and such. People wouldn't have accepted the system. The idea was discreetly dropped.

Well, a lot has changed in the past year or so. Writing in "Nature Sustainability," Francesco Fuso-Nerini, Tina Fawcett, Yael Parag and Paul Ekins — researchers collaborating between their universities in Sweden, Britain and Israel — argue that personal carbon allowances now deserve another look.

For one thing, we've become much more aware of climate change as an existential threat, owing to movements like Fridays for Future and this summer's apocalyptic fires, heat waves and flash floods. There's no longer any reasonable doubt that climate change is the culprit and that much worse is to come, requiring a bigger response from us.

For another thing, the pandemic and other trends have changed our relationship to technology. We've grown accustomed to using our smartphones as one tool to fight the virus, as ever more people in ever more places use apps to trace contacts or prove vaccinations. They're also tracking their health, nutrition and exercise, shopping and ordering food, transacting and trading. Carbon allowances would be just one more app.

If designed well, an individualized system could therefore reach consumers in a way that's not only simple but even fun. People would use their phones to surrender, buy and sell their allowances. In the process, they'd also discover — aided by artificial intelligence behind the scenes — where they cause the most emissions.

Currently, it's fiendishly hard to figure out where, when and how we pollute in daily life. We know vaguely that we should fly and drive less, walk and bike more, eat less meat and more veggies and so forth. But we couldn't begin to quantify in real time how running the dishwasher stacks up against ordering delivery, how to daisy-chain our errands to save fuel, or how to compare the carbon footprint of different products.

Fuso-Nerini, the study's lead author, told me that this "cognitive" effect may be the biggest advantage of personal and app-based carbon allowances because they encourage and enable us to change our behavior. Managing our carbon budgets, he thinks, would become socially cool.

Policymakers still have a lot of work to do, of course. One problem is how a new personalized system would fit with existing upstream cap-and-trade schemes. If your power utility already bought its permits and priced them into your electricity bill, you'll feel double-charged if you have to surrender another allowance to turn on the lights.

In practice, of course, public policy constantly mixes upstream and downstream measures to fine-tune incentives throughout an economy. Company profits, for example, are double-taxed, first in corporate taxation and then again in individual taxes on the dividends.

The bigger challenge will be social and political. In principle, personal allowances should help reduce inequality because poor people tend to emit less than the rich, so that folks with lower incomes can make money out of the jet set, in effect taxing the fat cats. Still, people in rural areas, who drive more, might need extra permits to keep the peace.

Even then, not every country will be culturally ready. Polarization has already split societies from the U.S. to Brazil and Poland. Some Americans now feel that questions about whether to wear a mask, get a vaccine or acknowledge human-made climate change are matters of identity or party loyalty rather than science and common sense. Adding yet another government intrusion, however snazzy we make it look, could spark riots that make France's yellow-vest protests in 2018 look like a dress rehearsal.

That shouldn't stop some brave and innovative countries from becoming pioneers. Cohesive societies with relatively high trust among citizens, and between citizens and their governments, are the obvious candidates. New Zealand springs to mind, or Iceland, maybe Singapore. As with most Next Big Things, somebody has to do it first. That's the hardest part.