In the face of an urgent need to reduce emissions, we are proposing a TEQ scheme replace the Emissions Trading Scheme. This article argues that price-based schemes to reduce emissions are unfair to the poor and not working anywhere. They must be replaced by a numbers-based scheme. And since the Government has recently reduced the excise tax on fuel, we must now decide the purpose and future of fuel excise taxes.
We are proposing a method of reducing Greenhouse Gas Emissions that is:
- Stimulates widespread creative solutions
- Does not involve government micromanaging solutions.
What does TEQ stand for?
Tradable Energy Quotas (TEQs). TEQs are a system which achieves a phased, planned reduction in carbon emissions and in the use of oil, coal and gas which produce them, while at the same time ensuring equal and fair access to energy. It includes everyone –individuals, industry and the Government – and it enables users to sell the TEQ units they do not use. It brings everyone together in a single scheme. It supplies the incentive to take the long-term action needed now to achieve a transformation in the way we will be using fuel in the future. It is fair. It is simple and practical. It gets its results by uniting us all in the common purpose.
At the heart of TEQs is a non-negotiable respect for the limits set by physical reality, as revealed by climate science. This gives society as a whole a clear signal as to future emissions limits, stimulating a collective focus on adapting to these limits.
TEQ stands for Tradable Energy Quotas, as there is embodied energy in every product and service we buy. It was designed by economist David Fleming, using the model invented by Japanese Toyota executive Taiichi Ohno after World War 2. It is a system so that, according to Fleming, “Everyone has the incentive to make it work; they actually want to do so; they apply their creative judgment; they monitor their own performance; they create a momentum and a flow. Success is built in.”
What are our emissions now and what did we promise at Paris or pay a huge penalty if we missed the target?
We promised to drop our emissions by 41% of the gross emissions in 2005, and to do this by 2030. Our emissions as at 2005 were 82.486 MtCO2-e and we have to reduce this by 33.819 MtCO2-e. In other words get our emissions down to 48.667. Well our gross emissions have been hanging round or dropping a wee bit below the 82 MtCO2-e since 2005 and are much the same now.  So are we going to reduce our gross emissions or not by out target date?
No, the Minister has already announced we will pay other countries to reduce their emissions instead. Oh, yes we will do a bit, maybe a third. As Pat Baskett has written, “Recent government policies give a false assurance that our comfortable lifestyles are secure – for more summers of fossil-fuelled pleasures. Meeting our targeted emissions reduction (of 41 percent below 2005 levels), as agreed to at the 2015 Paris climate conference, will require little, or no change in our individual activities. We’ve decided to simply buy our way out of the problem.”
Clearly with agricultural emissions being excluded, with so many free units being given to the cement, natural gas, dairy and aluminium industries, and a hopelessly complicated ETS scheme with anomalies and exceptions all over the place, the Minister knows it is not going to happen.
What do Governments do in emergencies?
Rationing worked in the war. When the petrol emergency came, government couldn’t muck around trying other schemes. Climate change is such an emergency. A warlike footing is needed. It can easily be argued that our decision about how to deal with climate change is more momentous than war because more lives are at stake. But rationing without allowing trading in ration units has its problems. Trading is necessary to avoid a black market. During the war the government didn’t increase petrol taxes (using a price mechanism) as that would have been too hard on the poor.
How TEQs work
The first step is to establish a total energy budget to achieve a desired goal, a certain budget of carbon energy. This total amount of energy is then converted to quotas ( e.g. 1 quota equals 1 ton of CO-e). By limiting the quotas available total energy is capped, ensuring that the desired target is reached.
The next step is to establish the time frame in which the goal is to be achieved; for example, 10 years.
Next is establishing a desired rate of decline over the time frame (e.g. equal amounts yearly, or accelerating declines over time). This feature ensures energy use and therefore emissions decline year by year.
First there has to be a weekly tender to set the price. This is attended by banks and brokers who on-sell them to businesses, organisations and central and local Government.
Then we have to know would what proportion of quotas should be given to individuals and what to businesses etc. Say it is 40% to individuals. That means 40% of the budget is divided equally among eligible individuals.
Individual adults (driving age and over) are given free allocations of tradable quotas; each adult is given a year’s worth of quotas and these are topped up weekly, so a year’s supply is always available.
The balance of tradable quotas are available for public and private organisations, local and national government and businesses, who would buy them from brokers or banks.
When a person or organisation buys fuel or energy (petrol or gas or electricity) that results in GHG emissions, they surrender units with their money; a credit card like system is used, making it as easy as topping up your Auckland HOP card or acquiring Flybuy points. These then flow through the system of retailers, wholesalers and producers and eventually back to the Registrar.
Quotas are tradable. Those who need more could buy surplus units at the national price, with the process of buying and selling comparable with topping up a mobile phone or travel smart card (e.g. Auckland HOP card, Wellington Snapper card or Flybuys). High energy users can buy units from low energy users. If you don’t allow trading, a black market turns up.
Desirable Features of TEQs
TEQs have several desirable features, including:
- Effectiveness: Unlike what appears to be happening with the ETS, we will reach our target. By establishing a budget ceiling on emissions and only issuing enough quotas to reach the budget ceiling, the total amount of emissions is assured. Given the seriousness of the climate emergency this guaranteed ceiling on emissions would seem to be the only way of reaching our target and avoiding a financial penalty in 2030. Relying on price to do this is unwise and risky.
- Universality/ inclusivity: everyone is involved in the process of reducing emissions, not just large emitters as with the ETS; everyone thus comes to understand the importance of reducing emissions and that they have a contribution to make. Everyone will have skin in the game and people will naturally cooperate to create new businesses and technologies.
- Fairness: It ensures that everyone has access to their fair share of energy or emissions. It delivers climate justice. Not relying on price to reduce consumption, it means that the vulnerable will not be priced out of their rightful access to energy. For instance, the ETS price will be up to $250/tonne of CO2-e in 2050, even under the Climate Commission’s recommendations.
- Transparency: TEQs are easier for everyone to understand than the ETS; the impact of the quotas are direct and evident, whereas with the ETS the impacts are hidden and mixed with other market factors so that parties have greater difficulty determining whether prices are rising due to the ETS or some other factors. Journalist Marc Daalder in an explanatory piece March 2021 wrote, “Despite being one of New Zealand’s most important tools for reducing emissions, the Emissions Trading Scheme (ETS) is horribly complex and poorly understood.”
- Simplicity: because the impact of quota transactions are direct and evident with credit card use, the TEQ approach is simpler than the ETS and not as easily gamed.
- Integration – cross-sector engagement, motivation and collaboration Bringing individuals, households, business and all energy-users into climate policy in an engaged and integrated way would open up significant new possibilities for cross-sector co-operation. TEQs stimulate creative solutions all along the supply chain. Because everyone is involved, everyone has a stake in adapting to a lower ration the next year; transacting parties will work out solutions to doing what they need to do to change the way they live, work and play. By giving citizens agency over decisions about how to change their life you liberate all that brainpower and energy. All parties have freedom within their quota.
- The TEQ approach does not involve increasing prices of the ration unit (the market will affect prices of goods and services but not the TEQ itself) as will the ETS. If it is working well and people are adjusting, the price of TEQs will be low.
- The TEQ approach does not involve the government micromanaging solutions. As above, all parties have motivation to cooperate to reduce emissions so they can sell their quotas rather than use them; this dynamic will unleash considerable creativity within the country to reduce emissions. All the government needs is to do is make firm rules, and then legislate when public pressure arises. Government will also have no trouble passing laws when the public needs them, so it is easier for the Government on many fronts.
- TEQs provide a managed energy descent whereas the current solutions, by tackling emissions only, just bring more problems. It is the only viable solution to our environmental problems. Clean energy might help with emissions, but it does nothing to reverse deforestation, overfishing, soil depletion and miss extinction. A growth obsessed economy powered by clean energy will still tip us into ecological disaster.
- It ensures that there won’t be social chaos which would come from an unmanaged energy descent, should the global supplies fall off more suddenly than is hoped.
Where did you get this idea?
It came from the UK in 1996. Invented by the late Dr David Fleming, an economist who was also a historian. He played an important role in setting up the Transition Towns movement and the UK Green Party. See http://flemingpolicycentre.org.uk/faq for more details. Invented as a Tradable Energy Quotas, it works to reduce emissions and pull countries back from overshoot.
The reason it seems superior to FEASTA’s Cap and Trade, Canada’s Carbon Fee and Dividend and all others is because Fleming was a historian/environmentalist who later in life got a PhD in Economics. He understood how the economy works. He saw the close correlation between energy use and economic growth. He knew that if the economy doesn’t grow it collapses because it is designed like that. So he took all of this into consideration when he invented TEQs, a managed energy descent framework that wouldn’t result in economic collapse, widespread unemployment and social unrest. He was also aware that rations must be tradable or else a black market develops.
Have TEQs ever been tried anywhere?
Yes, after two years preparation it was tried in 2013-14 for a short while in Norfolk Island, but it never became a true TEQ scheme. The technology for point of sale wasn’t integrated across the small island territory, and only 29% of the community or 486 people were involved. It was a voluntary scheme for 15 months. It wasn’t designed under Fleming’s structure. It was more like an instrument to measure your household carbon footprint and then aiming to reduce it.
Banks didn’t cooperate to produce a carbon card, claiming it was not core business. Because of the lack of infrastructure, they abandoned the trading element of the scheme. The same rations were given to all the population children and all, which meant a backlash from single-person households. They excluded households not purchasing petrol or diesel in a given month. They reduced the price of petrol 4 cents a litre to encourage cardholders to use their card. The Norfolk Island scheme ended up more like that of a CRAG (Carbon Rationing Action Group), a voluntary effort to reduce household emissions. It was not a TEQ. Household members measured and reported your emissions and your health status on a large list of indicators including BMI, a measure of obesity.
Eight years later the climate issue is more urgent, the model is clear, the data is available, the technology better and our New Zealand government knows how to get its team of 5 million on board.
What happened in the UK after TEQs were invented in 1996?
Yes, for the years 2004-2011 TEQs were scrutinised in detail by various agencies of the UK government including the House of Commons. In that process, they have also been judged the best of all the Personal Trading Schemes.
Colin Challen, MP, introduced a Private Members Bill in 2004, leading to extensive international research.
In 2006, the then Secretary of State for the Environment David Miliband, gave a strong speech in support of TEQs, and a government department feasibility study followed. (They studied TEQs as an example of Personal Carbon Trading, PCT). One of their four reports concluded, “there were no technical obstacles to implementation, that PCT would be a progressive policy and that public acceptability was compatible with or slightly better than the presented alternatives of upstream trading and carbon taxation.” Unfortunately, in one study which was more influential than the others, although the authors were told to examine TEQs as the best option, they had examined another PCT scheme, (PCA), where trading only applied to individuals and they concluded the costs would outweigh the benefits. Chamberlin et al (2015) conclude that the working group effectively converted PCAs to a price based framework.
And so when the topic went to Defra (Dept of Environment, Food and Rural Affairs), they concluded that “personal carbon trading has potential to engage individuals taking action to combat climate change, but is essentially ahead of its time and expected costs for implementation are high.”
At that stage the government, although still interested, discontinued its research programme.
However, just a few weeks after Defra’s, the influential House of Commons Environmental Audit Committee (EAC) published its own report. It described PCT as “the kind of radical measure needed to bring about behavioural change and regretted Defra’s decision to discontinue its research programme.” Chamberlin et al say, “There were press claims that the idea had been banned by Gordon Brown at the Treasury.”.
But that still wasn’t the end. Another MP emerged. This time it was Tim Yeo, calling for a pilot scheme. But TEQs weren’t really a candidate for a pilot scheme; it was nation-wide by design and no local authority could effectively pilot it.
Three years later, in 2011 an All-Party Parliamentary Group on Peak Oil published a report on TEQs. It made a strong case in favour of TEQs and urged a second government feasibility study, questioning the cost benefit analysis previously done. There was accompanying high coverage in the British media and internationally with several high profile MPs being involved.
Interestingly the authors note, “without a public groundswell to drive political engagement, TEQ development slowed.” It remains core policy of the Green Party of England and Wales.
But while TEQs have been under discussion in the UK House of Commons and UK government departments, there appears to be no discussion of the grassroots political action and the pro-TEQ coalition building and activity?
All of which shows it is important, nay critical, to get the wider public involved and convinced. And because TEQs are a progressive policy, favoured by low energy users, many of whom but not all are in the low income brackets, low energy users must be involved too.
Chamberlin et al’s paper in 2015 led to a 2018 debate in the European Commission in Brussels, but failed to prompt meaningful action.
But aren’t carbon taxes the answer?
The difference between a scheme like carbon taxes and TEQs is that the former relies on high prices to reduce demand. But when you rely on a high price to reduce demand, it penalises the poor who can’t afford it but need energy. Effectively it is rationing by price. Moreover, there is no guarantee that targets will be met. It doesn’t embed a long term perspective into society’s decision making and it doesn’t integrate cross-sector engagement with intrinsic motivation.
While carbon taxation is a cost even to those who produce very few emissions, trading in carbon rations rewards those with low emissions, and only penalises those who exceed their allocation. Both methods use a stick, but personal carbon trading offers a carrot, too. Richard Heinberg writes in Resilience 15 March 2022, “Nearly 50 countries have some form of price on carbon, either through carbon taxes or emissions trading schemes. Economists generally agree that carbon taxes should eventually work; but, so far, the taxes haven’t been high enough, or enacted in enough places, to actually turn the tide.”
Finally, carbon taxes aren’t acceptable to the public. e.g. The Yellow Vest movement in France started when the Government imposed a green tax on diesel in 2018. It had been in operation two years but President Macron stopped it after the protests. After a turbulent political time, Prime Minister Julia Gillard was removed from office in Australia after imposing carbon taxes. It lasted from 2012-2014. Relying on high pricing is political poison because it deprives the low energy users of their rightful share.
Why not use Canada’s Fee and Dividend?
It certainly is the fairest way of doing carbon taxes. It delivers climate justice. But there are so many exceptions needed so it is heavy on bureaucracy. It still relies on the price of carbon rising which is not as effective as a reducing energy allowance. But it differs in many ways which his colleague Shaun Chamberlin summarised well in his 2015 post here. For effective climate action, every citizen needs to be involved to change the way we live, work and play, so TEQs involve every citizen.
All other schemes like Cap and Adapt, Cap and Share are similarly dependent on a high price for carbon.
As members of the carbon management community, we must frankly recognise the shortcomings of carbon pricing frameworks.
But isn’t the Emissions Trading Scheme doing the job of reducing emissions?
Actually, according to Catherine Leining et all in their review of the ETS, it was never the intention of the ETS to reduce emissions. And the facts speak for themselves. Since 1990 our net emissions have gone up by 57%.
ETS only covers 52% of our emissions, it hasn’t worked, it needs serious tweaking. It was never designed to reduce emissions. A Climate Commissioner Catherine Leining is a lead author of a review paper that says so.
There were many things wrong with the ETS. It became a black box game for a few insiders, who believe in efficient markets. For many years it was a Cap and Trade scheme without a cap. We cut down more trees than we planted. New Zealand was proportionately the largest purchaser of Ukrainian and Russian credits which were fraudulent. New Zealand has continued to use the dodgy credits because they’re cheap. The country’s emissions trading scheme allows companies to buy carbon credits to offset their emissions, and the money goes to those who absorb greenhouse gases, such as the forestry industry.
The ETS is dense so people won’t dig deeper into it.
Yes, the Labour government did improve the ETS in 2021, with the commencement of auctions and raising the lowest minimum price, but still it isn’t a true market, as it has a highest maximum price too. And most New Zealanders are unaffected by it and have no stake in reducing emissions other than knowing it is the right thing to do to drive less etc. Relying on voluntary actions has never worked. In fact it is naïve to imagine it could work.
But aren’t we committed to the Emissions Trading Scheme?
We are committed now to honouring our own target and there is a big financial penalty if we don’t meet it under the Paris Agreement (it looks like we will have to pay at least $1.9 billion and up to $11.5 billion).
While we are fairly embedded in the ETS, there have been many improvements to it, either implemented or signalled. Finally a cap was put on emissions in 2015. Auctions to set the price started in March 2021.The trouble is that the price of the unit of emissions is set at a range. If it gets too high the government will intervene by buying units overseas, thus decreasing demand and prices. That is allowing a rich country buying their way out of our obligation to reduce emissions. Even though the Climate Commission has recommended that the top price rise, the parties still won’t respond unless the price is really high. For example, when the price of ETS units was $38 a tonne, it only raised the price of petrol by 9 cents/litre. In March 2022, it raised the price by 18 cents a litre only and nobody seemed to blame ETS for the rise.
Could TEQs co-exist with ETS?
No. This would involve double counting. Some companies would have to surrender units twice over. And you can’t just exempt the companies subject to ETS because you would have to sustain two carbon budgets covering different but overlapping areas. And as David Fleming has written, “Even if it were possible, it would set up a market in which there were two prices for the same good – an anomaly which black market arbitrage would quickly destroy.”
TEQs have to replace, not supplement ETS.
But nearly half our emissions are agricultural emissions. Do TEQs cover them?
Dr Mike Joy in a talk on the Future of Food at an Evidence Based Eating series of lectures said, “1 calorie of food uses 21 calories of fossil fuels to produce in the States. Fossil fuels are needed all along the food chain – to plough, plant, fertilise, harvest, transport, refine, package, store/refrigerate and deliver.” With TEQs, every time a farmer, a trucking company, a food refining factory, a slaughterhouse bought petrol or diesel they would have to surrender units.
So how would TEQs work to reduce our agricultural emissions? We import a lot of inputs like farm machinery, fertilisers, pesticides, herbicides. Moreover, the Ballance Agri-Nutrients factory in Kapuni has been producing urea since 1990, with natural gas being a major input. The embedded energy can be calculated. Two thirds of our urea comes from the Middle East where the input was natural gas. Likewise the sulphur used to manufacture superphosphate comes from the Canadian petrochemical industry so the embedded energy can be calculated. It is the same for pesticides, herbicides and insecticides.
The irony is that the bulk of our milk gets dried with coal and exported, along with its embedded fossil fuel emissions. Most of it is used as additives for processed foods.
All nitrogen fertilisers are produced with fossil fuels and a portion goes out the nitrogen goes out as nitrous oxide which has 300 times more warming potential than carbon dioxide. The other part goes out in the water and the atmosphere.
Why don’t you consider Universal Carbon Credits as a Carbon Currency, as endorsed by Steve Keen?
These are similar to TEQs in that they both reduce emissions, both are superior to carbon taxes or any price based mechanism like ETS. They are both more popular than petrol taxes, frequent flyer levies, meat production controls. Both involve all citizens and give freedom to them. Both can be started by a single country and both charge units on imports. Both require a central authority to be established for the purpose of overseeing the allocation and marketing of these units.
- Whereas TEQs are your units that appear on a digital card like a HOP card, “UCCs as a carbon currency” can be in the form of a digital currency as described here. But they can also be in the form of a card.
- UCCs are given to all citizens similarly but some of the individual quota is held back by Government for its own functioning.
- There is no tender with UCCs to set the price. Businesses and organisations (and presumably local authorities) have to get theirs when citizens buy products or services or by buying them from other businesses.
- UCCs are on the price tag of all goods and services.
- With TEQs you only have to surrender them when you buy petrol, diesel, gas or coal. But the UCC is more complicated in that everything needs to be priced in UCCs as well as dollars.
But wouldn’t the economy collapse with less energy?
The inventor of TEQs David Fleming knew the close correlation between energy use and economic growth. He knew that if the economy doesn’t grow it collapses because it is designed like that. He also had read about the Japanese work after World War 2. He took all of this into consideration when he invented TEQs, a managed energy descent framework that wouldn’t result in economic collapse, widespread unemployment and social unrest. He argued that people and businesses, given due warning as they would have with TEQs, can plan ahead to cope.
How will the vulnerable industries fare under TEQs?
Under the ETS, the big question for Government is what to do with Emissions Intensive Trade Exposed (EITE) sector that are protected now by exemptions from the ETS. These are the steel, aluminium, cement industries that could threaten to relocate overseas if they had to pay too much for their emissions. These have to be protected from cheaper imports. A better alternative than exemptions is border taxes or import tariffs for goods from countries with no TEQ or equivalent. According to the WTO in the December 2014 Financial Times, border tariffs are now allowed.
Since emissions are global, the idea is to put tariffs on imports from a country that doesn’t reduce its emissions. In July 2021 the EU announced its Carbon Border Adjustment Mechanism (CBAM) on energy intensive imports and the next, the United States and UK began making similar noises. This is in compliance with the WTO rules. EU’s proposal is to cover imports of iron and steel, aluminium, fertilisers and electricity.
CBAMs are also being considered by Japan and Canada. Australia’s exports will be hit badly. If China and the US went ahead and imposed it for products with embedded fossil fuels, it would spell curtains for our exports of milk powder. CBAM is fraught with political challenges. Of course, and we would have to impose tariffs on imported fossil fuels.
How would TEQs treat Renewable Energy?
The same as other products. Fossil fuels are used in the building of solar and wind power. These units and their batteries have to be rebuilt regularly, and maintained as they age, once again using fossil fuels. Fossil fuels were used to mine all the cobalt, lithium etc in batteries. Most of New Zealand’s electricity comes from hydro power stations, and while they are lighter on the use of fossil fuels, generators are often used during power outages, not just by hospitals etc but also by grid operators during peak hours. Generators need diesel or petrol to run.
And power companies which resort to using natural gas or coal to get through the peaks would have to buy Quotas, and this would put the price of their power up.
Will we also have to replace petrol taxes with TEQs?
It looks like there will have to be a big discussion on this. Currently about half the price of petrol is taxes of one sort or the other. Fuel taxes now comprise about 5% of crown revenue. Petrol taxes began in 1970 when 3c a litre was imposed. In 1974 when the newly formed ACC needed money, another 10c went on for ACC. In 1986 36c/litre went on for the expansion of the Marsden Point Refinery. Auckland has had a regional fuel tax since July 2018. By mid-March 2022, the 77 cents excise taxes imposed on every litre of petrol went to the Road Transport Fund. The Emissions Trading Scheme has also imposed a price, up to 18 cents a litre at that time. GST is then added onto all prices.
On 14 March 2022, after an outcry about the cost of living including rising petrol prices above $3/litre, the Government announced it would take 25 cents less in excise taxes and road user charges for three months.
So it’s complicated. It is clear there is more work to do to design a practicable transition to TEQs.
It is helpful to keep in mind that a TEQ system would eventually eliminate petrol as a major fuel; so the question of petrol taxes is irrelevant in the longer term. Given that we only have a few years (until 2030?) to eliminate fossil fuels, if we prioritised climate over all other issues, petrol taxes should not be a major concern. But politically it is not that simple, as high petrol prices raise inflation and cause hardship. The question becomes how to keep the government functioning with a reduced tax income from petrol taxes. Other forms of taxation may make more sense –e.g. a tax on natural resource extraction, or a tax on environmental or social externalities that need to be reduced. Wealth taxes and particularly land value taxes must be considered as an alternative, as land is our major natural resource. This could be an issue for public discussion by a process such as a Citizen’s Assembly.
- Peak oil and climate change are coming to us at the same time and both demand we reduce our use of fossil fuels. This has been dislocated and accelerated by the Ukraine war and it coincides with widespread inflation after the Covid-19 pandemic. Unlike the 1970s oil shock, this disruption involves oil, gas and coal. Energy disruptions and energy volatility will continue for the foreseeable future. 
- Price-based schemes like ETS and carbon tax and excise taxes don’t fit with political reality and won’t deliver unprecedented global emissions.
- It is time to rely on quantity-based mechanisms like carbon rationing with trading.
- Tradable Energy Quotas (TEQs) provide the best version of all Personal Carbon Trading (PCT) schemes.
- We must learn from what happened during the years of consideration from the UK Parliament.
- TEQs will be favoured by low energy users and opposed by high energy users or high energy businesses.
- TEQs must replace all price-based schemes like ETS and eventually excise taxes on petrol, though road user charges must stay.
- TEQs will liberate the ingenuity and creativeness of the whole population.
- Government will not have to micromanage the energy descent.
- TEQs are sure to reduce emissions.
 See Mar 22, 2011 article by Richard Heinberg https://www.resilience.org/stories/2022-03-18/after-the-ukraine-invasion-sobering-new-global-energy-economic-political-terrain/ After the Ukraine invasion: sobering new Energy-Economic-Political Terrain.
Contact: Deirdre Kent firstname.lastname@example.org 021 728 852
Many thanks to the following for their constructive comments: Jack Santa Barbara, Pat Baskett, Paul Bruce, Mike Joy.