Six reasons to delay joining California's cap-and-trade program

By Mark Jaccard and Hadi Dowlatabadi 
Originally published in the Vancouver Sun June 9, 2011

In 2007, frustrated with an absence of federal climate policies, 25 states and provinces in the U.S., Mexico and Canada formed the Western Climate Initiative. Their aim was to introduce meaningful climate policy even as the central governments dragged their feet. Since then, B.C. has introduced some of the best climate policies in the world. Our carbon tax, the most economically efficient in the world, covers 75 per cent of emissions and charges the same rate to businesses and consumers. Revenues from the tax are used to reduce individual and corporate income taxes, a tax shift that stimulates economic growth.

In 2012, California will launch its greenhouse gas cap-and-trade program but only B.C. and
Quebec have stayed the course as potential participants while the other 22 have either dropped out or taken a wait and see position. We give six reasons for B.C. to delay participation in the California cap-and-trade system.

First, all new markets have teething troubles. California's own 1999 experiment with electricity markets is an example of a poorly designed and privately exploited fiasco. Consumers paid a heavy cost in skyrocketing electricity prices, blackouts and market scams by Enron. Two years should give B.C. enough time to see if this market is working as planned.

Second, the point of cap-and-trade is to create an economy-wide price for GHG emissions.
However, B.C. already has this with its carbon tax. Given the sorry state of the California
industry, the cap-and-trade system will involve granting of free permits to powerful lobbies. This will bring uncertainty in the price of carbon in B.C. and undermine investments in greening our economy.

Third, carbon taxes have allowed B.C. to shift taxes away from lowincome households and
corporations on to consumers of fossil fuels. A successful cap-and-trade will take away carbon tax revenues in B.C., necessitating increases in income and corporate taxes or cutting back on government services.

Fourth, the strongest proponents of cap-and-trade are brokers and traders in that market. With each transaction they collect commissions, meaning that cap-and-trade systems have higher costs to society than a carbon tax. B.C.'s carbon tax, in contrast, required no new administrative costs and no commissions for brokers and traders. Perhaps one day it will be desirable to mesh our carbon tax with a regional, national or continental cap-and-trade system, especially if that is the policy direction that is widely chosen. But it makes little sense to absorb the extra costs of cap-and-trade today, in order to tag on to the California initiative, when we already have a more cost-effective mechanism in place.

Fifth, markets work well when there are many players of similar size. We are too small for our interests to be taken seriously by California. We have plenty of experience with that imbalance of power with how the U.S. has responded to Canada in our NAFTA disputes. Should we be a valuable addition to the market at some future time we will have more bargaining power then than we do now.

Sixth, market systems' strongest claim of superiority is that they lead to investments where cost of reducing GHGs is lower. The B.C. economy, thanks to widespread use of hydro and natural gas, is less carbon intensive than California's. A cap-and-trade system would lead to GHG compliance investments from B.C. being spent in California.

In principle, we are not against capand-trade as a mechanism for emissions pricing, especially where the involvement of many jurisdictions offers opportunities for permit trading that reduces costs. But joining the California cap-and-trade at this time presents many risks and few likely benefits. While waiting for that policy to be tested and hopefully joined by other jurisdictions, there is much we can and should do to sustain and improve our climate policies.