Why I was wrong about rationing

A far simpler way to constrain carbon is to deal "upstream" with the few dozen companies that produc

I should start with an apology. In October 2006 I wrote an article for the New Statesman strongly advocating carbon rationing as the only appropriate response to the emergency of climate change. So you might expect me to be furious that the Environment Secretary, Hilary Benn, has shelved a suggested rationing scheme following a lukewarm government feasibility study. But I believe Benn has taken the right decision. Rationing now seems to me both unnecessary and possibly counterproductive.

It sounds like an attractively egalitarian way to distribute a limited resource. That is why it worked in the Second World War. But carbon is not a necessity like food or water. While we are aiming for a zero-carbon society, it would never make much sense to aim for a zero-food society. Carbon is simply a euphemism for energy, and fossil-fuel energy can be substituted by that from cleaner sources, or consumption reduced.

Hence the proposal to make personal carbon allowances tradable. If someone is carbon-thrifty, goes the logic (perhaps they holiday in Cornwall rather than Cannes), they can sell their unused ration to someone who wants more. That gives people a financial incentive to be more climate-friendly. It sounds simple, but actually involves some pretty complicated financial reasoning. At what point should you sell your unused ration? Carbon prices will doubtless fluctuate, like prices in any tradable commodity. Might you get more for your carbon buck in six months' time? Would you be better off flogging the lot the moment it comes through the door, and then buying carbon on the spot market the next time you fill your petrol tank? I can't see most ordinary people - most of whom wouldn't dream of speculating on currency exchanges or the commo dities markets - understanding how to play the system. And that means they are likely to lose out or get ripped off. It also means that people would not be getting the correct price signal to encourage them to change their behaviour.

What "tradable allowances" actually means is setting up a parallel currency in carbon. The government or the private sector would need to establish 50 million carbon accounts (one for every adult), and monitor withdrawals and additions as people bought fuel at petrol stations or paid heating bills. The study by the Department for Environment, Food and Rural Affairs suggests that the scheme would cost between £700m and £2bn to set up, and between £1bn and £2bn a year to run, mainly for this reason. Yet this expense is already largely unnecessary: electricity is covered at company level by the EU Emissions Trading Scheme (energy firms have to buy carbon credits to cover their production), and aviation is due to come under the ETS within the next few years. Moreover, even strong rationing proponents shy away from suggesting that every consumer item - from washing-up liquid to bananas - should carry simultaneous sterling and carbon prices: calculating the latter would be almost impossibly complicated. So, the only bits left over are road transport and domestic oil and gas consumption. Hardly an argument for establishing a hugely complicated parallel currency.

So, is there a better solution? Yes: the system we already use to ration our consumption - the price mechanism. A far simpler way to constrain carbon is to deal "upstream" with the few dozen companies that produce or import fossil fuels, rather than "downstream" with tens of millions of consumers. Companies drilling, mining or importing carbon into the domestic economy would have to buy tradable quotas to cover the emissions from their products. The rest of us simply find fossil fuels becoming more expensive and change our behaviour accordingly. The financial incentive is the same as with rationing, but we don't have to become experts in trading.

The remaining question involves equity: more expensive fuels make some people, primarily the poor, worse off; hence the egalitarianism of rationing. True, but it is what happens to the money that counts. If revenue raised from auctioning carbon quotas to companies is targeted at those who most need it, perhaps through the tax and benefits system, then a progressive outcome can still be achieved. I hate to admit it - but in abandoning carbon rationing, the government, for once, has got it right.