Originally published in The Globe and Mail February 16, 2009
In 2006 and 2007, Canada’s newly elected Conservative government, led by Prime Minister Stephen Harper, was much criticized by the opposition Liberals, NDP, Bloc Quebecois and Greens for its unwillingness to promise that Canada would meet its Kyoto Protocol commitment to reduce greenhouse gas (GHG) emissions in 2010 to 6% below their 1990 level. Since emissions were already more than 20% above this target, and the Kyoto deadline was imminent, these parties were obviously engaged in political posturing. Although it had been clear to experts and politicians for some time that Canada could not possibly meet its target, much of the public still associated Canada’s commitment to Kyoto with action on climate change. The opposition parties found it politically advantageous, therefore, to link the governing Conservatives to Canada’s Kyoto failure. The participation of the Liberals in this charade was particularly galling given the fact that they were responsible for negotiating the Kyoto target in 1997 and ratifying the protocol in 2002. Yet, throughout their lengthy tenure in power, under Prime Minister Jean Chretien, the Liberals failed to implement policies that would stop or even slow the country’s rising GHG emissions.
It bears repeating. Climate policies that leave the atmosphere as a free waste receptacle will not reduce emissions. But how do we price carbon? Former Liberal leader, Stephan Dion, unsuccessfully promoted a carbon tax in the 2008 federal election. That is a very transparent way of pricing emissions. But as he found out, a bit too transparent. Another way is for government to cap emissions and allocate tradable permits that equal the cap. Such a system could start with industry. Permits could be allocated based on a firm’s previous emission levels, or they could be auctioned (some or all). Then firms could trade the emission permits. Those who find it relatively cheap to reduce emissions could have surplus permits to sell to those who find reduction expensive. The trading price of permits effectively provides a carbon price that creates the business case for investments in GHG abatement. Even the fuels used by consumers (gasoline, diesel, natural gas and oil for home heating) can be part of this system. Retailers of these fuels would simply be required to purchase permits to cover the carbon content in the fuels they sell, a carbon price that would be embedded in the prices faced by consumers.
Canada is sure to follow this trend. But we are not there yet. In 2007, the Conservative government rolled out its “Turning the Corner” climate policy. While this policy represents a nudge in the direction of carbon pricing, it is still woefully inadequate and needs a quick and dramatic revamp. First, the government claims that its policy includes a “cap” on industrial emissions. Actually, it does not. It has a “performance standard,” which requires the intensity of emissions (emissions per unit of industrial output of steel, oil, etc.) to decrease over time. Depending on the rate of output growth, emissions might not fall the desired amount. The government must change this to an absolute cap, as the Europeans have done and as the US government is about to do. Second, the so-called cap in Canada applies only to industrial emissions. There is no carbon pricing for the 50% of Canadian emissions that come from transportation, buildings and small industry. The cap must be extended to all emissions in the economy. Third, the so-called cap includes an enormous loophole. Under the cap, industries do not need to reduce their emissions if they can instead pay non-regulated industries and consumers to “apparently” reduce their emissions – what is commonly referred to as “offsets.” But offsets are subsidies. And we already know from our previous policy failures that subsidies are flawed. Often, we end up paying people for a more efficient fridge, but they buy a bigger one, for house insulation, but they expand their house, to plant trees on their farm, while the neighbouring farm converts its woodlot to farmland. If we instead put a cap on all emissions, offsets are not necessary. Everyone is required to participate in permit trading, which means that carbon pricing becomes universal – which is the only way we make the substantial reductions in emissions that scientists are calling for over the coming decades.