The limits of complexity and capacity in climate policy: What can we learn from Britain?

November 22, 2010, by Tim Stumhofer

Introduction

In a wave of reorganization initiated by Her Majesty’s Treasury Spending Review, the British government has brought reform to the UK’s gleaming new climate program: the Carbon Reduction Commitment and Energy Efficiency Scheme (the CRC). The CRC, an ambitious organizational GHG trading scheme, is facing substantial restructuring under the banner of simplification. As a part of this reconfiguration, the program will: shed some of its more complex elements including a carbon trading regime with indirect linkages to the European Union Emission Trading Scheme (EU ETS); reduce the scope of its reporting requirements; and, in a development that has raised eyebrows around the world, scrap its revenue recycling provisions, effectively converting the program’s performance-based economic incentives into an ad hoc carbon tax levied across participants and expected to deposit £1bn per annum into public coffers (the program was previously revenue neutral).

A yawning deficit in Britain easily explains the overnight amendments to the CRC’s revenue provisions. But the sudden and sweeping reform of the program’s other design elements demand closer consideration and a number of tough questions regarding the British approach to regulatory complexity and capacity in climate programs.

The UK Emission Trading Scheme

The case of the CRC is not unique in Britain’s climate policy history. In 2002 the British government launched the United Kingdom Emission Trading Scheme, a voluntary program designed to reduce emissions and give participants a venue to practice in advance of the implementation of the in-design EU ETS. The program attracted 34 direct participants who committed to making emission reductions before concluding in 2006. The scheme is credited with yielding a number of practical lessons and other positive developments, including cementing London’s place as the global locus of carbon trading and associated service activity. The program’s reviews, however, have been mixed. The UK ETS was sharply criticized for its administrative complexity. A government-commissioned postmortem (available in British archives here), summarized the scheme’s complexity as follows:

Although some aspects of the scheme (e.g. the registry) have been commended for their simplicity, others have been criticised for being over complicated (e.g. the detailed rules). … Indeed it is essential that a scheme is practical if it is to function at all.

This review was not unequivocal in challenging complexity, however stating in its closing analysis:Experience from both the UK and EU emissions trading schemes has shown that there is a trade-off between keeping the rules simple, effective and fair.

The Carbon Reduction Commitment

With a headache of an overly complex program so near in Britain’s policymaking memory, the groundwork for the CRC is rife with references to the UK ETS’s cautionary lessons. Consider the following excerpt from a frequently cited CRC presentation:

Keep it as simple as possible

– Experience from the voluntary UK ETS is that voluntary programs can be highly administratively complex

– CRC is a simpler approach than the voluntary UK ETS, which featured a complex site based changes of operation regime

Yet, while British policymakers honed communications condemning administrative complexity in the development and implementation of the CRC, the realities of the program they finalized stand in defiance to this rhetoric.

It is true, as the presentation cites, that the CRC’s framers were aggressive in fighting needless complexity in many program rules. However, in marked contrast to the “as simple as possible” adage, the CRC’s fundamental program design elaborately mixes policy approaches, incorporating elements from nearly every compartment of the environmental policymaker’s toolbox. Prior to the CRC’s modification, the scheme integrated reputational and economic drivers through the publication and dissemination of emission league tables, performance on which was to serve as the basis for “revenue recycling” (i.e., performance-based direct payments back to affected organizations). The CRC was also designed to serve as a self-contained emission trading scheme, which would have auctioned tradable emission permits and in some price scenarios would have allowed the use of EU ETS allowances for CRC compliance. In sum, the ambitious inclusion of so many linked elements meant that a point-by-point listing of the CRC’s design read more like the topics in a postgraduate “methods of environmental policy” syllabus at the London School of Economics than a working program blueprint.

A hallmark complement to the CRC’s complexity is the program’s ambitious reach. As originally designed, the CRC required roughly 4,000 large British organizations to fully participate in the scheme and a further 12,000 to report their organizational emissions without further obligation. For its point of regulation (i.e., using energy consumption thresholds to mandate organizational GHG reporting and trading program participation) and the number and type of organizations it directly touched (i.e., obligating organizational participation and reporting) the CRC was without precedent.

Conclusion

So what does the British government’s streamlining and scuttling of so many of the CRC’s design elements tell us? (Beyond suggesting that Britons are capable of developing a climate program so elaborate it would make Rube Goldberg blush.)

Looking past the impossible to ignore realities of unprecedented economic challenges and a change of political horses, reform to the scope and complexity of the CRC appear to add support to the importance of the guiding principle of capacity. For organizations required to simply report to or fully participate in the CRC alike, capacity to measure and actively manage organizational GHG emissions represent new and substantial challenges. The British government’s effective referendum on the more elaborate and ambitious components of the CRC signal both a hard tack to a simpler program design, but also point to an insufficiently fortified base with respect to the capacity of affected organizations to be the GHG measurers and managers the program’s designers anticipated.

Who knows, with an aggressive GHG measurement and management capacity building push maybe we’ll one day see a quintessentially British policy layer cake of a climate regime up-and-running. However, if recent recommendations are any indication of the state of GHG capacity, no matter how sound the program, implementation will continue to fall short of ideal.

The principle is sound: saving energy, reducing emissions and improving competitiveness through a clear and transparent nationwide programme. But the implementation fell short of the ideal. We share many of your concerns about the CRC. That is why we have made a commitment to simplify it.

Chris Hune
Secretary, UK Department of Energy and Climate Change
November 17, 2010


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