Course:ECON371/UBCO2009WT1/GROUP6/Article6

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Group 6: Carbon Tax in Canada

Article 6: CBC - Campbell Defends Carbon Tax In Wake Of National Report

Cited Reading:

Summary

Prior to the recent provincial election in British Columbia, a report from the National Round Table on the Environment and the Economy (NRTEE) forced the Premier and BC Liberal Party Leader Gordon Campbell to defend his government's carbon tax. Though the report praised the province's carbon tax for its certainty and flexibility, it suggested that a cap and trade system is to be preferred over an emissions tax. The NDP and its BC Leader Carole James used the opportunity to further its campaign against the Liberals, emphasizing that the carbon tax is taking money away from Canadians, as much as $1.8 billion over the next 2 1/2 years. If elected James issued a promise to scrap the carbon tax in favor of a cap and trade system, and impose a tax on gas-flaring, a tax she pointed out that exists in Alberta and Texas. Gordon Campbell defended the carbon tax against the NRTEE opinion by suggesting that BC has a more lofty goal and thus requires more than just a system of cap and trade to reduce emissions. He also added that a tax on gas-flaring would hurt the oil industry, though he also promised that by 2016 the practice would be eliminated in BC.

Analysis

The BC NDP Leader addressed the issue of equity, when it comes to a carbon tax. "His plan hits families struggling to make ends meet and businesses trying to make a profit in the recession," Carole James said of Campbell's platform. She is evidently implying that an emissions tax policy is regressive, that is the tax burden proportionately falls more on low income businesses and households. Her declaration is correct, as noted in the Canadian Centre for Policy Alternatives paper, Is BC's Carbon Tax Fair?,unfortunately she is only addressing the burden on those earning lower incomes, and James fails to mention the net benefits that they may later accrue.

Campbell promises to use the carbon tax revenue to cut income taxes. If this cut is not a fixed amount, applied equally to all British Columbians, and instead is applied proportionally to income, the net effects of the tax could become equitable. If the tax cuts are applied progressively, such that those people with lower incomes receive a larger decrease in income taxes, than those with higher earnings, than the regressive effects of tax costs may be nullified (This is assuming that lower-income families have a large enough income that they would benefit significantly from income tax cuts. It is possible that a family's income is so low that they don't have much, if any, taxable income; in such a case, lowering their income tax would have little, to no effect at all, and they would still be hurt by the carbon tax). The economic costs of such a decision can be seen in terms of opportunity costs, that is the best alternative uses of that tax revenue.

The alternatives to poorer households receiving large tax cuts would be the increased cuts that other consumers or businesses may have received. While depriving other consumers or businesses of these potential tax cuts may not be the most efficient, it could be the best option to achieve overall equity, and therefore gain public acceptance of a policy, allowing desired emissions targets to be met. This goal is emphasized on page 38 of the National Round Table on the Environment and the Economy report, "A broadly based level of acceptability will enhance the ability of governments to proceed with the carbon pricing policy and maintain its durability of application over the long-term vision that climate mitigation requires." A carbon tax can achieve a progressive benefit distribution by countering an intial regressive cost distribution.

A cap and trade system has related economic costs. There are evidently costs associated with lowering the amount of carbon that is allowed to be emitted, and the firms bare a large sum of these costs. Since a set number of permits is chosen, this initial decrease in emissions is inflexible. Because the MAC curves of individual firms are difficult to obtain, there is no way to guarantee that this initial allocation is at an efficient level, or if the division of permits is the correct allocation. The economic costs associated with an inefficient total level of emissions being chosen, can be seen as a deadweight loss. The success of the initial allocation of permits is largely dependent on the cooperation of the firms, and trades between firms to reallocate permits. This reallocation results in economic costs because money is initially lost due to poor division of permits which resulted in firms not producing at their efficient levels, and incurring deadweight losses.

The NRTEE Report

As stated in the CBC article, Campbell Defends Carbon Tax In Wake Of National Report, the NRTEE's report stirred contension in the days leading up to a pivotal election in British Columbia. The importance of the election was due in part to the NDP promising that if elected the carbon tax would be 'axed'. Therefore the result of the election had a large impact on the current state and future of environmental policy in the province. In proceeding with an analysis of the CBC article much attention will be drawn to the instigating factor of the story, which is the NRTEE's report itself.

The report recommended a unified carbon pricing policy for Canada, the purpose of which is to achieve the greatest amount of carbon emission reductions at the least economic cost. The report lists four elements to implement their chosen carbon pricing policy: first, an economy-wide cap-and-trade system to price carbon and to establish real market incentives for technology and behaviour changes; second, complementary regulations and technology policies to improve cost-effectiveness of the Tradeable Discharge Permit (TDP) system; third, international emission markets to increase competition for buyers and sellers of TDPs; and four, governance and implementation strategy, such as the creation of institutions and processes to implement the TDP system.

In its preliminary investigation, the NRTEE listed two factors which helped select the environmental policy to be pursued to achieve a unified carbon price, these factors were certainty and adaptability. Certainty in permit prices is required to motivate necessary investments to be made by firms to further technological innovation. With some assurance that prices of emission permits will not wildly fluctuate, at least for a time, research and development R&D could be profitable to firms. This would occur if these emitters could lower their marginal abatement costs through technological innovation, thus reducing their emissions and allowing them to sell excess permits to cover abatement costs and provide possible profits. Or simply put, some certainty is required in permit prices to allow for firms to have an incentive to invest in R&D, lower emissons and hopefully contribute to an economy-wide reduction of emissions. Adaptability was seen to be required for a smooth transition in the initial implementation of the policy as well as the necessary changes to maintain optimal incentives for emission reductions and technology innovations.

There were two possible policies that offered certainty and adaptability that the Round Table considered, a carbon tax and a cap and trade system. A cap and trade system was found to be preferred over a carbon tax for two reasons; the first is that domestic costs can be reduced through integration with the soon-to-be implemented American TDP system and the second reason is that some provinces have approved, planned, or even implemented TDP systems already making a transition to a federal system easier.

The NRTEE-proposed TDP system is described in detail and though technical, it is no more complex then a possible a carbon tax. The basic idea for the application of the TDP sysyem is that permits would be divided into two different types of emitters, large emitters and the rest. Large emitters make up 51% of all emissions, they are the oil refineries, energy generation plants, and large manufacturers. The emitters not included in the 'large emitters' category are buildings, transportation, and light manufacturing, these make up 36% of emissions. For these smaller emitters a cap would be applied at a point in the fuel distribution chain which would limit trading entities while broadening coverage throughout economy. This point of NRTEE proposal is innovative and addresses how cap and trade can apply to small emitters. The NRTEE also describes how the TDP system would have an expert "Carbon Pricing and Revenue Authority" that would collect auction revenues, set carbon pricing schedules and compliance rules, establish permit allocation rules, and ensure confidence in the long-term robustness of the policy. Revenues from the auctioning of emission permits would be prioritized to be first used for investment in technology and innovation, other economic or societal needs arising from the implementation of the system would be addressed afterwards. An important addition to the system is that there'll be a price ceiling for permit prices to ensure certainty which will provide an upper limit on potential costs; this would be coupled of course with a cap on emissions that allows for quantity certainty.

The Problem of Uncertainty

The National Round Table on the Environment and the Economy made important assumptions about the current situation that provide insight into the viability of a cap aand trade system. Before these assumptions can be discussed it is important to differentiate between the economic terms of risk and uncertainty. Uncertainty occurs when possible outcomes, as well as associated probabilities are unknown. On the other hand, Risk is associated with situations where the probabilities of possible outcomes are known. It is possible to judge the costs and benefits of a policy when risks related to its implementation are known. Knowing the probability of positive effects (benefits) and negative effects (costs) occurring, allows for proper evaluation. If the likelihood of possible outcomes occurring is completely unknown, it is impossible to conclude whether or not a certain policy is worth trying, because its consequences could range anywhere from beneficial to disastrous. When dealing with uncertainty, policy making becomes more and more like guesswork.

The most important assumption that was made in the report is that the United States will adopt and implement a cap and trade system. This is important because this assumption establishes one of the reasons provided for the preferance of a TDP system over a carbon tax. The report suggests that besides the fact that in integrating a Canadian carbon market with our trading partners we ensure Canadian emitting producers are on the same competitive level as their foreign counterparts, an international carbon market contains the domestic cost of abatement. That is, since Canadians have typically higher abatement costs, our firms can purchase permits from other firms that have flatter marginal abatement cost curves, and thus our domestic costs are mitigated. This assumption however, that the US will adopt a TDP system is steeped in uncertainty, not to mention generates accumulating costs due to continued inaction. This is further exacerbated by recent comments made by federal environment minister Jim Prentice, as reported by CBC news,where he admitted that it may take years before such a system is implented. The uncertainty of whether the US will act on a carbon pricing policy is derived from many factors, and this list does not claim to be exhaustive: the US has a slow legislative process; Americans are generally more conservative, yet are also highly polarized; the country is already engaged in a multitude of important debates, such as the continuation of two wars, healthcare reform, economic turmoil, and terrorist trials; and finally there are looming elections in 2010 and 2012 that could drastically change the political landscape. Though the US adopting a TDP system could offer advantages when integrated with a Canadian carbon market, the possibility that the Americans do adopt such a system is ultimately uncertain.

Another assumption made by the NRTEE report, albeit less important, is also undermined by the uncertainty involved. This assumption is that Carbon Capture and Storage(CCS) is a good method for controlling emissions. With large emitters not being charged for the carbon content of the fuel they use but rather the emissions they let out into the atmosphere, these emitters are given the incentive to capture their emissions before they are released and store them. However as the process itself is relatively new it is uncertain what possible problems it may cause; possible problems range from potential leakages from storage to possibly harming the geological structures underground. There is also the common complaint against CCS, that if it is cheaper than other abatement measures, large emitters can continue emitting close to or at previous levels, while possibly doing nothing to reduce their emissions.

NRTEE: Political Reality For Cap-And-Trade

On October 8 2008 the Conservative Party of Canada released it's Election Platform,six months before the National Round Table on the Environment and the Economy concluded that a continental cap-and-trade system is to be preferred over a carbon tax. The following exert from page 32 of the platform bares striking resemblance to the NRTEE's findings:

A re-elected Conservative Government led by Stephen Harper will implement our Turning the Corner action plan to reduce Canada's greenhouse gas emissions in absolute terms by 20 per cent over 2006 levels by 2020. We will work with the provinces and territories and our NAFTA trading partners in the United States and Mexico, at both the national and state

levels, to develop and implement a North America-wide cap and trade system for greenhouse gases and air pollution, with implementation to occur between 2012 and 2015.

Both the Conservative Party and the NRTEE found that not only is a cap-and-trade system the best method to reconcile economic prosperity and environment sustainability, but that such a system must integrate with our trading partners. This point by itself does not prove the NRTEE was influenced by the governing party and that the report lacks credibility, however there are other factors, such as the rationale given against a carbon tax and the politicial leanings of NRTEE members, which contribute to that growing doubt.

One prominent reason the Round Table gave in ruling against a carbon tax is that since the federal Liberals had proposed the measure in 2008 during the election and lost, the tax therefore must of been found to be unacceptable by Canadian voters. However this point is a fallacy of the highest magnitude on two points. The first point is that such a claim would mean no other issue was considered by voters; that party affiliations, local candidates, leaders of respective parties, inter-party politics, scandals, and even the weather, among other things had no effect on how or if Canadians voted. Just by how many factors alone existed that could have influenced the 2008 election it is erroneous by any means to suggest the Liberal carbon tax was the one and only policy that voters considered. This issued is furthered when one considers whether voters were even informed enough to lay judgment and for that judgment to have validity. The second point that illustrates a logical fallacy on the part of the NRTEE is that the Liberals not only proposed a carbon tax but a cap and trade system as well, so if a carbon tax is to be abandoned because of voter rejection so too must a cap and trade system; this implication however cannot be sustained and thus shows undeniably refutes the Round Table's claim.

Environment And Politics

The National Round Table on the Environment and the Economy is supposed to be independent from the federal government, allowing the body to hold an objective perspective, free from partisanship; this however does not appear to be the case. Of the NRTEE's 19 members at the time of the report, 11 held strong associations with the Conservative Party (Eight had been conservative candidates or advisors and three had made donations to the Party). Two of the other members had weaker asociations with conservatism; Robert Slater, though he had worked under Trudeau, Mulroney, and Chretien, he had a substantially larger role under Mulroney, while Elizabeth Brubaker has wriiten a substantial amount on conservative environmentalism. When considering each NRTEE member's political ideology, the entity can be seen to have been composed by an overwelming majority of Conservative partisan appointments thus creating doubt on the report's conclusion, a conclusion that just so happens to coincide with the federal government's environmental policy.

Members With Strong Conservative Associations:

The NRTEE & Conservative Election Financing: Financial Contributions made by the NRTEE's Robert Page and CEO Tim Haig's Biox Company to Conservative Party candidates

Members With Some Conservative Association:

Members With No Conservative Alignment:

  • Janet L.R. Benjamin - President of Vireo Technologies, a company in the plug-in hybrid car industry, and Past President of Association of Professional Engineers and Geoscientists of BC.
  • Angus Bruneau - Former Petro Canada director, former professor, and a member of many sustainable energy groups.
  • Francine Dorion - Completed a 27 year career at Abitibi-Consolidated, a pulp and paper company, and Dorion has also been a member of various forestry management groups.
  • Wishart Robson - Previously worked for Nexens, a large oil company in Alberta.
  • Mark Jaccard - Professor at Simon Fraser University
  • David Chernushenko - Former deputy leader of the Green Party of Canada.

Recently added members:

It was not just with this Conservative government that the NRTEE has appeared to be a partisan entity. Under previous Liberal governments the Round Table had its political appointments such as with Liberals David McGuinty and Glen Murray; however no evidence can be found that the Liberals came close in number to the Conservative political appointments to this body.

Conservatives And BC Liberals

The Federal Conservative government is against a carbon tax and instead for a cap-and-trade system; the BC Liberals on the otherhand are for an emission reduction system that utilizes both. It must be noted that the federal Conservative Party and the BC Liberal Party have important ideological similarites. The BC Liberals disassociated themselves with the Federal Liberal Party in the late 1980s, and within recent years have openly expressed support for many important Conservative policies federally. It is because of this mutually beneficial reciprocal relationship that both do not want to appear to be degrading each other. Thus though the NRTEE report may have said a cap and trade system is to be preferred, it still commented on the positives of the carbon tax. Gordon Campbell also engaged in this reciprocity by not criticizing the report, and made similar comments to those in the report by saying that the carbon tax in BC is just adding to the recommended federal policy of a cap and trade system.

If the federal Conservatives and the BC Liberals are similar, why then do they differ in environmental policy? This is simple, while Canadians differ across our country, British Columbians share a more pronounced consciousness of the environment. Though this is not seen in the Green Party share of the vote, as most recently it was only 8%; it is seen in the adaptation of the other political parties to woo voters. The BC Liberals in proposing and implementing a carbon tax stole a page directly from the Green Party's platform. In appealing to a more green citizenry, the difference in environmental policy between the Conservatives and the BC Liberals is simply because of a difference in electorates.

Carbon Tax and Cap-And-Trade: What Is The Best Carbon Pricing Policy For Canada?

Regardless of whether the National Round Table's report was motivated by partisan interests it did highlight important advantages of a cap and trade system that make a comparitive evaluation between it and a carbon tax worthwhile. First and foremost is that a cap and trade policy would contain domestic costs with the integration of Canadian, American, and other TDP systems; this is of course assuming other countries will adopt a similar system. With an international carbon market, by including foreign firms with cheaper abatement costs, permit prices would be reduced, and thus domestic costs in emission reduction would likewise be reduced. Though costs would be lessened, this feature of a possible TDP system is problematic. As Canadian firms that have high abatement costs would be given the incentive to merely purchase cheap permits from other foreign firms, overall emission levels in Canada would possibly not reduce by an ideal amount. Canada could limit how many permits are traded internationally, such as described by the NRTEE on page 45, "international purchases would account for 20% of the targeted reductions in 2020 and less than 10% in 2050." However, no matter the limits imposed, the problem that Canadian firms on average have higher MAC's and thus may not reduce emissions but merely purchase permits from foreign firms remains. Canadian integration into any international carbon market makes this problem likely to occur, and as such, with a smaller reduction in Canadian emissions, localized effects of carbon emissions, like health damages may go unmitigated.

An additional problem with an international carbon market may occur through the interaction of multiple sovereign entities. As this TDP system would be between independent nations there would be the problem of conflict resolution. This difficulty would be similar to that found with NAFTA, which though was an important treaty between Canada and the United States, disagreement in its application has led to problems where parties have felt either intimidated, unfairly treated, or even targeted. An international carbon market in requiring cooperation in permit auctioning, emission monitoring, and enforcement, would not appear to avoid such problems. Furthermore when one considers that the more political actors are involved the more diluted the law, further concerns are warranted.

And though there are downsides to an international carbon market, there are benefits. With its implementation, Canadian firms would not be rendered uncompetitive in relation to foreign firms. Also, if international cooperation was achieved, in offering affecting a global reduction in emissions, Canada would necessarily benefit. The international viability of a cap and trade system is an advantage that must be considered, especially since an international carbon tax, at least right now, does not appear to be on the horizon.

Another advantage of a TDP system is that in differentiating large emitters from smaller emitters, the policy would be more politically acceptable to not just those large emitters, but to provinces which depend on such industries such as Alberta and Saskatchewan. It should be noted however that a carbon tax could work in the same way, instead of levying a tax on the carbon content of fuels, levy a tax on emissions that are released. Both policies would require the same level of monitoring.

A price ceiling on permits in giving greater price certainty does allow for stronger incentives for firms to invest in R&D within a TDP system. On the otherhand, a carbon tax, as it is legislated, enshrines its rate in acts of parliament, therefore offers even greater certainty and just as strong if not stronger incentives for R&D investment.

In comapring both carbon pricing policies it is obvious that there isn't one right policy for Canada.

BC Has It Right

It's not just one policy, as Gordon Campbell said in the article, the best method for reducing emissions while achieving cost-effectiveness is using both cap and trade and a carbon tax. While a carbon tax guarentees the price of emissions, a TDP system guarentees the quantity of emissions; it utilizing both, we can achieve greater benefits than either policy in isolation. Even the TDP policy proposed by the NRTEE in its price ceiling made some movement along the carbon pricing mechanism spectrum towards the price certainty associated with a carbon tax.

In Pricing Carbon, Saving Greenthe Suzuki Foundation concludes that there is actually little difference between a well-designed cap and trade system and a carbon tax. As a cap and trade introduces an absolute limit on emissions, a carbon tax would also "cap" emissions as the carbon price is adjusted to achieve the desired level of emissions. The Suzuki paper concludes that regardless of the carbon policy implemented it is just important that one be implemented as soon as possible to put a price on carbon and, eventually through passing down through the supply chain, to let consumers know through a price signal that carbon has an actual cost. Since the implementation of a cap and trade system appears to be dependent on international agreements and years away, this imperative to act as soon as possible to price carbon justifies imposing an immediate carbon tax.

It would be recommended that federally Canada should adopt a cap and trade system, but in conjunction with a carbon tax. A cap and trade system can be applied to large emitters and the market can be linked internationally to achieve appropriate levels in competition of permits. This would be politically palletable to Alberta and Saskatchewan. A carbon tax could be applied to the rest of the economy, similar to BC where the carbon content of fuel is taxed. And though there are plans already underway to implement a cap and trade system in numerous provinces, there is no reason why a carbon tax cannot be similarily adopted. Just as BC currently has a carbon tax and will soon participate in a carbon market, so too can other provinces participate in a carbon market and impose a carbon tax. With a coordinated carbon tax federally and a cap and trade system for large emitters internationally, Canada would truly contribute to solving a global problem.

Though a combination of carbon pricing policies would work best to satisfy large and small emitters while reducing emissions, there would be significant political obstacles to overcome. The largest of these hurdles is the public understanding and familiarity with carbon pricing mechanisms. As mentioned above the federal Liberals in 2008 had proposed the Green Shift, an environment platform that sought to introduce a carbon tax with a cap and trade system. The Liberal defeat was not solely a result of the Green Shift, but it was a factor, most likely because of its both new and complex aspects. A carbon pricing scheme similar to the Green Shift most likely would only be enacted federally if the parliament was in the same situation as the BC legislature was when the carbon tax and cap-and-trade legislation was passed, that is with one party holding a majority of seats.

With the emission reduction goals of the BC government, in utilizing a carbon tax and a cap and trade system, the province has it right, and serves as an example for environmental stewardship, nationally and internationally.

Prof's Comments

Two things you didn't emphasize. One is that the NRTEE recommendation for small emitters, a cap somewhere up the fuel chain , is essentially a carbon tax. The difference is that where a tax generates revenue for government and a certain price impact, a cap with a market determined permit price will introduce greater volatility into fuel prices. A second point is that a cap with a price ceiling is not a true cap. The only way to implement a price ceiling is to increase the supply of permits. It is like the EPA program in the US, where firms could buy as many sulfur dioxide permits as they wanted for $1,500 per ton. That is a cap, but so far above the market price that nobody uses the option. Given where the efficient carbon price is supposed to be, the price ceiling is essentially a licence to pollute.

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