Cap-and-Trade Works; Carbon Taxes, Regulation and Voluntary Measures Do Not
By Gregory D. Morrow

It is imperative that Canada reduce its greenhouse gases, and given that 80% of the human production of said gases are due to CO2, that means first capping, then, second, reducing CO2 levels. Doing nothing — such as the Conservatives head-in-the-sand approach, or conversely, simply touting Kyoto targets without a credible plan to achieve them — will ensure that greenhouse gases continue to rise. And, therein lies the problem. We can all agree that reducing CO2 emissions is important (if you take the Tories on face value), but we disagree on how to do it. Typically, those on the left want to regulate emissions; those on the right want voluntary reductions. So far, neither approach has produced results.

But neither will Michael Ignatieff’s naive call for a carbon tax. And he should know better, based on what his adopted country — the U.S. — tried to do several years ago with its BTU tax. Bill Clinton tried a carbon tax and it didn’t get off the ground because of political opposition. Neither will Ignatieff’s carbon tax proposal. It’s dead on arrival. Already, you see the Conservatives pouncing on Ignatieff in parliament, likening it to the loathsome National Energy Program of 1980 (introduced by Pierre Trudeau). Ignatieff — already in hot water with the Liberal membership over his embrace of Stephen Harper’s sham Afghanistan vote — has done himself no favours by proposing such a controversial and untenable proposition as a carbon tax.

There is, however, a middle ground option that combines regulation and market measures that other Liberal candidates should give serious consideration — cap-and-trade. It’s what we’ve used to gain control of acid rain (remember the crisis back in the 1980s?), so it has the advantage of being tried, tested, and successful. Each side of debate today — the pro-regulation and pro-voluntary measures camps — must be willing to compromise in the interests of getting results. Rhetoric may buy votes, but all the while, our greenhouse gases continue to rise.

So how is cap-and-trade different from a carbon tax? And how does it work? I asked Jan Mazurek, director of the Progressive Policy Institute’s Energy & Environment Project, about the difference between a cap-and-trade approach vs. a carbon tax. Just to be crystal clear, she says: “A cap-and-trade system is definitely 100% distinct from a carbon tax. Two completely different policy approaches.”

Basically, a carbon tax simply taxes anything that produces carbon, thereby raising the cost of production — it makes it more costly to produce CO2, but doesn’t necessarily mean a reduction in emissions. A cap-and-trade system, by contrast, caps the total amount of CO2 produced (which is what Kyoto proponents are trying to achieve through regulation) but the mechanism by which it is implemented is not regulation but rather by allowing cleaner companies to benefit economically from investments that reduce CO2. As Mazurek explains:

“Firms and other entities that emit greenhouse gases receive trading allowances that are proportional to their historic emissions, which add up to the total, national cap. Emitters that are able to reduce their greenhouse gases below their allowance are free to sell excess allowances to those who find controls more costly. The whole theory turns on the notion that different firms have different marginal control costs of greenhouse gases. An old, dirty coal plant will likely find it much more costly to reduce greenhouse gases than a more modern coal facility.”

In effect, what this does is create an incentive for firms to lower emissions — not through government regulation, but by hurting their bottom line if they choose not to reduce emissions. If a firm decides not to make investments to lower its emissions, it can do so, but it means its production costs are higher, which invariably are passed on to the consumer (which tends to decrease demand for its products). By contrast, firms that produce lower emissions get the additional benefit of income from sold allowances, thereby reducing their production costs, resulting in lower prices for consumers (thus increasing demand for its products). This is a stark contrast to a carbon tax, which punishes all producers (while lower producers are taxed less, their production costs still go up relative to now, which has the unfortunate effect of punishing cleaner-burning producers). A cap-and-trade system, by contrast, rewards clean-burning producers, and only punishes those that *choose* not to make investments to lower their greenhouse gases. It’s a brilliant solution. If Canadians were looking for an alternative approach — a so-called “Made-in-Canada” approach — this is it. Canadian businesses — especially those that produce less than their individual allowances — should be all over this. It gives them a competitive advantage over their American counterparts. So, too, should Kyoto proponents, because it achieves their goal — that is, an overall cap (and eventual reduction) of Canadian greenhouse gas emissions.

I strongly encourage other Liberal candidates to take a look at it. It is a classical Liberal policy — and stands in stark contrast the the Conservatives pure-voluntary approach, and the NDP’s pure-regulation approach. It’s a program that rewards good behaviour and gives Canadian companies an economic advantage over their competitors. It is a common-sense and practical, centrist solution to a real problem. Forget Ignatieff’s carbon tax – it’s unfair. A cap-and-trade emissions trading system, like the one we used to combat acid rain, is the Made-in-Canada solution we have been looking for. Liberals should be all over this.