Once I realized that a comprehensive national carbon policy was not in the near future (see my last blog post) I started looking for alternatives. What else could our government do to help us reduce emissions? Anything but Rick Mercer’s One Tonne Challenge, I thought.
In this post on the Globe and Mail’s Economy Lab, I investigate policies that might encourage us to live in greater density. Read more here.
Suggested Reading:
Glaeser E. L., and M. E. Kahn (May 2010), “The greenenss of cities: Carbon dioxide emissions and urban development,” Journal of Urban Economics, Volume 67, Issue 3, pp 404-418.
McConnell, V, and M. Walls (2009), “U.S. Experience with Transferable Development Rights,” Review of Environmental Economics and Policy, 3(2): 288-303. doi: 10.1093/reep/rep008
Okay I get it. Canada will not have a national carbon tax anytime soon. There will be no upstream cap and trade system either.
There is a slim possibility that we might see a federal version of the Western Climate Initiative. This version will include weak and mostly ineffectual incentives to encourage the participation of provinces not already committed. Even this slim possibility depends on two unlikely conditions. First, we need either a Liberal, or NDP, or a Liberal-NDP coalition government to form in the 41st Parliament. Second, we need all parties other than the conservatives to continue to agree (see Pembina Survey) on the merits of pricing carbon. This would be a much harder once they are in government.
Realistically, irrespective of which government forms in the upcoming parliament, the federal government of Canada is not going to do anything different from what the United States does on climate change. The Environmental Protection Agency will mandate command and control regulations on large sources in the United States. Faced with the threat of border tax adjustments, we will follow.
So reluctantly I accept that incentive based climate policy is not in the near federal future. There is no way a climate change bill is getting through a republican house of representatives in my lifetime.
The campaign for the 41st Parliament got me thinking about Canadian Environmental Policy. Inspired by Stephen Dion’s ‘green shift,’ the last federal election generated the most vibrant debate on environmental policy ever seen at a national scale. Two spectacular crashes later, that of Stephen Dion and the World Economy, this election campaign will at best, pay marginal attention to environmental issues.
My theme for the first series of posts on this blog: what would I like to see in environmental policy announcements from the major political parties?
The first item on my wish list, a national carbon tax, that is, a tax on the carbon content of fossil fuels. Clearly, I am not easily discouraged by reality.
Most economists know that a carbon tax is the best instrument to address climate change. It is cost-effective, that is, it reduces carbon emissions at the lowest cost. The revenue collected provides the best chance for a government to reduce the burden imposed by the tax on the poor. It is the best policy instrument if we are uncertain of the cost of reducing carbon emissions in the future. This cost depends on unpredictable fuel prices, energy demand, or the growth of energy saving technologies. Finally, it is the simplest climate policy to administer. Institutions to tax fuels are already in place in most countries, including Canada.
A cap and trade system is not too bad either. Eventually, anything that puts a price on carbon emissions is an improvement over our status quo. However, to measure up to a carbon tax, the cap and trade proposals in most policy initiatives, including the Western Climate Initiative (WCI), need a major overhaul.
It is unlikely the costs of building and administering a cap and trade system would ever be lower than that of an equivalent carbon tax. But theoretically, a cap and trade system can be as good as a carbon tax in all other criterion discussed above. If the cap and trade covers as many as the tax, and it allows the banking and borrowing of allowances, it is at least as cost-effective. Simple modifications can render it as good as a carbon tax in case of uncertainty of the future cost of reducing emissions. Finally, if each allocation of permits occurs in an extremely well designed and competitive auction, the government should have as much revenue as under the carbon tax.
However, there are two major problems with all cap and trade proposals in circulation. The first is that they target users of fossil fuels. While this seems sensible as users create emissions, the cost to bring most users into the program is prohibitive. In the first compliance period of the WCI (2012 – 2015) only 40% of British Columbia’s sources are included. Even in the second compliance period, most small producers will not be included due to minimum size provisions. Thus to achieve reductions equivalent to a carbon tax, a much smaller subset of users are targeted. This raises the cost of reducing the same amount of emissions significantly. The second problem is that current cap and trade proposals give away most of their emissions allowances. This is thought of as being a useful way to win political support. The WCI will auction at most 25% of its allowances. Research suggests that at least 50% of allowances be auctioned to prevent creating windfall profits for firms receiving them. By auctioning such few allowances, not only do the programs restrict their ability to help the poor, they are also making firms receiving these allowances richer than before.
Sensible carbon taxes, and cap and trade proposals would target producers upstream in the fossil fuel chain. This would be coal mines, imported and produced petroleum products and natural gas. Even in a economy as large as the USA or Europe this would require regulating only 2000-3000 entities. The administrative costs would be minimal and, directly or indirectly, all consumers of fossil fuels would be included in the system. Further, if a majority of allowances were auctioned in a competitive system, the government would generate revenue that could defray the increased burden of the tax on low income households.
Recommended Readings:
Hall, D. (2007), “By the Numbers: Greenhouse Gas Emissions and the Fossil-Fuel Supply Chain in the United States, in Assessing U.S. Climate Policy Options, edited by R. J. Kopp and W. A. Pizer, Washington D.C.: Resources for the Future.
