Carbon taxes and cap-and-trade not that different: report

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Canadian politicians overstate the differences between carbon taxes and cap-and-trade programs as tools to reduce greenhouse gases, a new report suggests.

A study prepared by the Pembina Institute, an energy think-thank, on behalf of the TD Financial Group suggests neither approach will effectively cut emissions on its own. Furthermore, the two systems have more in common than politicians in the recent election campaign would admit.

Both the Conservatives and the NDP advocated variations of the cap-and-trade model, which imposes a limit on the emissions that a company can produce and then allows corporation who do not meet the targets to buy further credits.

The Liberals’ much-maligned Green Shift proposed a new tax on fossil fuels that would fund cuts to income and corporate taxes. Conservatives quickly branded the Green Shift as a “new tax on everything.”

But either method would result in price hikes for consumers, according to Don Drummond, TD’s chief economist.

“It was not a balanced debate from anybody’s perspective,” Mr. Drummond said. “The ones supporting a cap-and-trade never mentioned the impact on households, pretending I guess that there wasn’t going to be any impact, which of course is not true.”

When they unveiled their climate change strategy, the Conservatives estimated it would hike electricity costs by 4% and natural gas prices by 2%.

While either system could increase the cost of living, either is also a viable way to cut emissions, according to Matthew Bramley of the Pembina Institute. “The debate we’ve seen publicly between carbon taxes and cap-and-trade has exaggerated the differences between the two ways to do things,” said Matthew Bramley, one of the report’s authors. “The more you look at them, the more similar they appear.”

Both systems can be designed to offer flexibility for different industries, to minimize administrative complexity and to conform with the Kyoto protocol and other international reduction regimes, according to the report.

“From an environmental perspective, the more important question is how stringent is the policy,” Mr. Bramley said. “Those questions are more fundamental than the ones we’ve been hearing about one versus the other.”

All of the proposals brought forward by the national political parties had their disadvantages, Messrs. Bramley and Drummond said. The Conservative proposal was a “considerably weakened” form of cap-and-trade because it sets targets based on units of production, which allows total emissions to rise with a company’s productivity.

Meanwhile, the Green Shift was hampered by using tax revenue to fund poverty reduction programs, Mr. Drummond said.

Neither system would be effective on its own in reducing emissions, the report concludes. “Carbon pricing is necessary but not sufficient,” the report states. “A comprehensive suite of policies - so-called ‘silver buckshot’ rather than a silver bullet - is likely needed.”

Among the other measures that might be needed are regulations to make vehicles, homes and appliances more energy efficient as well as investments in the development of new technology.

Mr. Drummond acknowledged a possible recession could cause the government to delay its climate change initiatives, but argued that it would be better for the economy for the government to clarify its current targets and plans to implement a cap-and-trade system.

“There is a huge cost right now being borne by the economy because of the uncertainty of future environment policy. We have uncertainty through the financial sector crisis. Why add to that? We should at least remove one of uncertainties,” he said.

The report’s suggestion that Canada must look beyond carbon pricing to address its greenhouse gas emissions is “sensible,” said Don Dewees, a professor of economics and law at the University of Toronto.

“My emphasis would be slightly different. I think that carbon pricing is essential but I agree that along with carbon pricing, you’re going to need some other things as well,” he said.
By James Cowan, National Post

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