Course:ECON371/UBCO2009WT1/GROUP6/Article2
Group 6: Carbon Tax in Canada
Article 2: Province's Carbon Tax Rated The Top Climate Policy In Canada
Complimentary Reading: Sustainable Prosperity's report
Summary
Sustainable Prosperity, an Ottawa-based think-tank, completed a paper evaluating five provincial carbon pricing policies and plans using eight principles as criteria. The policies and plans were judged on: national scope; comprehensiveness; simplicity and readily implentable; transparency and accountability; environmental effectiveness; complimentary where a price signal alone is insufficient; comparable to other countries; and predictability but adaptable. British Columbia's plan received the highest compatibility score of 87%, Quebec's plan got 65%, both the federal plan and the Western Climate Initiative were given 48%, and Alberta's climate-change strategy received 30%. And though Sustainable Prosperity's chairperson Stewart Elgie suggests BC has the best carbon policy in the country, he pointed out it lacks national reach and strong long-term goals. The NDP plan of a cap and trade system was only looked at, but because of it's limited application on only 32% of emissions, it was found to be the weakest policy in Canada.
Analysis
The Eight Principles
For an economic policy to be effective, it must be predictable, as well as comprehensive. The policy's efficiency is dependent on the accuracy of its original predictions. This accuracy relies on the knowledge of relevant information. While creating a policy, all information about emission sources, and the costs and benefits related to changing current practices, must be accounted for. There are sources that are responsible for a large majority of carbon emissions, such as vehicles which account for approximately 33% of all C02 emissions (Environmental Economics, Field, Olewiler: Pg 413). A policy must account for all emissions caused by transportation, large industry, as well as buildings and equipment in order to forecast plausible results.
National scope is important when instating an emissions tax because pollution is a global problem. For a policy to be environmentally effective, each country, as a whole, should respond to the situation with full force if they hope to succeed in putting an end to global warming. In Canada, a policy should be applied on a national level, not only a provincial scale because the entire population should be concerned with cutting back carbon emissions. There is no single province that is responsible for all of the damage being done, therefore certain cutbacks should be dealt with nationally. If the population of a single province is the only group affected by an emissions tax, there is a notion of inequality. The policy will not be favored by the people, and it will be proven ineffective as Canadian citizens attempt to have it revoked.
An economic policy must be simple to implement because it has to be easily understood by the general public. The population will not easily accept a drastic change to current practices, because they will have difficulty imagining the success of such a policy. When making drastic changes, predictions become more difficult to make. It is key that a policy should be comparable. Accurate predictions involve references to past situations, and if the policy change shares no similarities with any others that have ever been implemented, predicting becomes more and more like guesswork.
As well as being transparent in linking the original plan to future pollution reductions, a policy must account for all of its financial gains. In the situation of an emissions tax, the tax money must be accurately measured and it should have a definite use. In the situation of BC's carbon tax, all revenue generated is expected to benefit British Columbians, in the form of tax cuts on individual incomes, and on large businesses.
In order to be effective, an economic policy should be complimented by other measures. This is because, sometimes, a price signal is not enough to achieve the desired reduction in emissions. An emissions tax, then, such as the carbon tax on gasoline, which may not cause a significant reduction in demand (gas prices can fluctuate more than the current 3.6cents/L tax in any given week), should be complemented by regulations designed to make pollution sources, like vehicles, more efficient. The more efficient the tools of production are, the less pollution is required per unit of output. More efficient vehicles result in less emissions per litre of gasoline consumed, and individuals' consumption will not increase just because they have a more efficient vehicle (same cost per litre, and same amount of litres required), so overall emissions will decrease. In combination with a tax, measures like this help to ensure that society reaches target levels of emissions.
Cap-and-Trade
While the NDP's Cap-and-Trade system was deemed to be the weakest policy in Canada, this does not mean Cap-and-Trade is not a viable option. In a Cap-and-Trade system, the government would set a limit (cap) on the amount of a pollutant - in this case CO2 - that can be emitted. Once this cap has been set, companies are issued "credits" based on how large they are. Credits are essentially licences to pollute a certain amount. If a company needs to or desires to increase their emissions in order to increase production, they can buy credits from other companies who pollute less than their alloted credit amounts. In this way, companies who wish to pollute more are forced to pay for their extra emissions, and all companies have an incentive to find more efficient means of production in order to maintain current production levels while polluting only, or less than, their alloted amount of credits. This means that, under the Cap-and-Trade system, companies who can most easily reduce their emissions will do so in order to sell off their extra credits to large companies with high abatement costs, resulting in an efficient level of emissions, at least insofar as emissions are produced at the lowest possible cost to society (lowest marginal abatement cost). Also, because the total amount of credits cannot exceed the cap set by government, it is easy for government to set the emissions limit at the desired, socially efficient level (assuming they know where that is).
The problem with Cap-and-Trade, however, is the scope of its policies and the difficulties of implementing it on an individual level. This sort of system may be quite effective for large businesses and corporations, but is much more difficult to apply to the general public. Consider consumption of a fossil fuel like gasoline. Well, how exactly does the government go about capping individual CO2 emissions from gasoline? Does every individual recieve a certain amount of emission credits like companies do? How does the government keep track of how much gasoline each individual consumes? Cap-and-Trade seems like a nearly impossible system to implement on an individual level, thereby limiting its scope and overall effectiveness. In the case of individual consumption, the Carbon Tax seems to be a much more practical system; the more fuel an individual consumes, the more they are taxed. This gives all individuals incentive to consume less, and consequently pollute less.
Different Plans And Policies
The five plans compared in Sustainable Prosperity's report have similarities and differences, which when compared, help to illustrate advantages and disadvantages of different approaches to achieving environmental sustainability. While some advocate the use of Transferable Discharge Permits (TDPs) to emit CO2, others advocate the application of direct taxes on Carbon. In goals too the plans differ, some choosing intensity-based targets, some choosing absolute, and some choosing none at all.
The Federal Government's Future Transferable Discharge Permit System And Present Competition
The federal government, Alberta, and the Western Climate Initiative all include plans for Transferable Discharge Permits, while BC and Quebec have chosen to impose a levy on Carbon. The federal TDP plan though it is only mentioned as an eventuality, as it depends on our closest neighbour, is because of that point easier to evaluate environmentally. It is on that same line that Sustainable Prosperity rightly penalized the federal authority's score for its failure to commit to a TDP system. The hesitance to create a market for carbon federally is found on page 21 of the The federal government's plan federal platform,it states:
"...Any decision in Canada on the transition to a fixed-cap regime for greenhouse emissions would take into account developments occurring in other countries, especially the United States, with the aim of establishing a North American emissions trading system once the United States implements a greenhouse gas regulatory system."
A possible argument to justify the postponement of the creation of a TDP system in Canada, until the U.S. creates one of its own, is that in doing so competition is secured and even enhanced. First if a North American carbon market is created, Canadian and American firms, would face the same increase in costs, such as buying permits and purchasing offsets, and thus with equal application, the same level of competitiveness that would have existed otherwise remains. Competition is enhanced with such a continental policy because the trading of carbon permits would not just be restricted to the dominion of Canada but would also cross the 49th parrallel. Just as trade of apples between two countries is beneficial to both, so to is the trade of carbon permits; trade does make everyone better off. Bi-lateral or multi-lateral carbon trading can also be seen as a necessity to the the very idea of a carbon market. In one country there may be a few firms within an industry, with the introduction of a carbon market problems could occur, from collusion on permit prices to using discharge permits to gain economic control. A North American TDP system could ensure competition by including more firms into the market.
The first part of the competition argument does have validity but only in the immediate short-run. If only Canada was to enact a TDP system, Canadian industrial emitters of CO2 would most likely have to raise their prices, however with time, as equilibrium prices and quantities are determined through exchange of permits and money, technology innovation could lead to an equal level of productivity, if not greater than American firms. Greater benefit to Canadians could also result in cleaner air and less environmental degradation, which could translate into lower health expenditures and increase pleasure in outdoor activities. The second part of the competition argument, a TDP system benefits from a larger market, is much stronger, however the size of an optimal market is debateable.
What the above argument fails to address, and what the federal government seems to put a lower value on than pure competition is environmental quality. For if one was to assume a carbon market must include Canada and the United States, and that competition is worth waiting years for; than that value of competition must be seen as outweighing the environmental damage that is being done due to the unchecked CO2 emissions that are in the meantime occurring.
Alberta's Completed Incomplete Plan
Alberta unlike the federal government has created a TDP system, however it is justifiably critiqued in the Sustainable Prosperity's report for being too soft and too narrow. One problem highlighted was that the Albertan TDPs only apply to large industrial CO2 emmitting industries, thus other large sources of emissions such as vehicles and buildings go unabated. Those large firms then may have a price for carbon, however others do not. That means only a few participants in the market are paying at least some portion of the real cost of emitting carbon, and the end result is that a market failure still exists, not only affecting Albertans but to every corner of the globe their carbon travels.
Besides being too narrow, Alberta's plan is also quite soft in its pricing of carbon. Firstly in freely allocating the property right entailed by the TDPs, most CO2 emitters do not pay for their emissions ( Sustainable Prosperity's report, Pg 9). For the minority of those that do, the cost of additional permits are contributed into the Climate Change and Emissions Management Fund.
In addition to the fact that there weren't many industries affected by Alberta's TDP system to begin with and the fact most emitters produce within the restrictions of their free discharge permit, the price for those who exceed their permits is relatively low. The highest price per tonne of carbon is $15 dollars, this level is termed the 'safety valve mechanism'. The valve was created to protect against extreme prices, but in reality only limits environmental effectiveness.
It is of interest to note that Alberta thought it was necessary to create a safety valve, an effective price ceiling for the ability to emit carbon. The ceiling, at $15 a tonne, isn't even that high, BC for example currently pays $25 a tonne. Perhaps more troubling than the low price put on CO2, is that the ceiling in effect gives the few large emitting firms benefits at the expense of society's benefit. Through Alberta's TDP system, a market, albeit an imperfect market, was set up for carbon, the result of this safety valve acting as a price ceiling is that deadweight losses are being generated. These losses reduce social net benefit, and suggest that the benefit to those firms is outweighed by the cost to society.
British Columbia's Carbon Tax: Setting Sun, Setting Value
Unlike the federal government, Alberta, and the WCI, British Columbia does not offer a Transferrable Discharge Permit system, but instead offers a carbon tax. One of the reasons why Sustainable Prosperity ranked BC's tax so high is because it is much more comprehensive than the previous plans. The carbon tax applies to practically all Greenhouse Gases (GHGs) emitted from energy use. This makes sense considering that since all CO2 causes harm to the environment and that harm can be monetized then those that emit noticable levels of CO2 should be taxed in all circumstances. This is a strength of a carbon tax that TDP systems lack.
A difference pointed out by the report between BC's carbon tax and all the other plans is that the tax is revenue neutral. Where the federal and Albertan plans would require all those firms that exceeded their allowable emissions to either buy offsets or contribute to approved investment funds, and Quebec uses revenue from its tax to invest directly into environmental programs, BC returns all collected revenue from this tax back in the form of income tax cuts to taxpayers. This is not only noval, but has numerous benefits. The first and most obvious is that the carbon tax creates a disincentive to emit carbon; the second as less income is taxed, it creates an incentive to work more, thus allowing Canadians to spend and save more while increasing productivity; a third benefit is the carbon tax actually reduces deadweight losses.
Simply put our environment was and still is being overconsumed by CO2 emissions. This is directly attributable to the fact that there was no market for GHGs. With no market price the negative externality of pollution was overproduced, and environmental damage resulted.However with the implementation of the carbon tax and its subsequent increases, CO2, though still supplied above its equilibrium level, has been reduced, which has increased the efficiency of the market. In the process the carbon tax has shown itself to have a negative marginal excess tax burden (METB), that is it increases efficiency and social benefit. The revenue collected from the carbon tax goes to reduce other taxes, which helps to reduce the excess burden of those taxes. To put it another way, when other taxes are reduced by using carbon tax revenue, those taxes deadweight losses are decreased, and social benefit increases. It is said that the social cost of raising a dollar by a tax is usually more than a dollar, with the carbon tax reducing those taxes, there is less social cost and more social benefit.
Quebec
In 2007 Quebec was the first province to put a price on carbon; it's levy, is called Green Fund Duty. The duty is quite small, on gasoline, it being just a cent a litre; translating to no more than $3 a tonne. The Sustainable Prosperity report chastized the plan on its pricing, arguing that the tax sets no effective price signal on carbon at all.
Though the Green Fund Duty is similar to the BC carbon tax, it is different, as already mentioned. Where the revenue generated from the carbon tax goes to decrease other taxes, Quebec uses revenue from its duty to finance complimentary measures, like vehicle efficiency standards, green building, and technology research.
Lastly one important note is that Quebec sets its Green Fund Duty annually which does cause price viotility.
Carbon-Intensity Versus Absolute Targets
One theme within Sustainable Prosperity's report card is that intensity targets are not the preferred method of measurement; instead the group recommends absolute targets. Though there was no overt explanation given, the most prevelant reason for preferring absolute targets over intensity targets is the belief that intensity targets are not true indicators of carbon emissions. As carbon intensity is the ratio of CO2 emissions produced to GDP, the ratio is affected by both the quantity of the effleunt andItalic text economic change. The resulting problem is that intensity can be said to decrease even when carbon emissions increase. This is possible as long as the increase in GDP is greater than the increase in emissions.
Of the five plans reviewed, only Alberta and the federal government have decided to use intensity targets in long term goal projections. The selection of intensity targets is most likely due to consideration of the benefit of reducing emissions and the corresponding cost. On average as GDP increases annually, having intensity targets allows for emissions to still increase, even though by a smaller degree, and thus not restrict carbon emitters with a static and even declining absolute emissions goal.
While BC has made absolute target reductions in emissions that are enshrined in legislation, a 33% cut by 2020 and an % cut by 2050 (Sustainable Prosperity's report, pg10); Quebec on the other hand has not made any target, intensity-based or absolute.
Prof's Comments
Clearly a lot of research went into this. The METB gain by reducing income taxes is partly lost because the carbon tax is a tax. It does involve an administrative cost. However, where the DWL in the labour market is reduced by reducing income tax, the DWL in the polluting industry is also reduced. This is sometimes called the double dividend. Some of the principles could also be examined in terms of their economic justification. Predictability is important, as firms make long term investments, and don't want to face regulatory risk, for example.