Ontario announced Friday it will join the Western Climate Initiative (WCI). This brings WCI’s membership to 11 provinces and U.S. states, making it one jurisdiction bigger than the Regional Greenhouse Gas Initiative (RGGI). The move has been generally hailed as progressive, though few have asked why Ontario is joining WCI, which is a long way from establishing rules governing its cap-and-trade approach to reducing carbon emissions, and not RGGI, which is much further ahead in that regard. RGGI’s inaugural carbon permit auction is scheduled for September 10, 2008, and it recently published the design elements for auctions within the participating states.
Moreover, RGGI involves U.S. states that are geographically contiguous to Ontario and some of whom trade electricity with the province. I have advocated the RGGI approach (see article) because it seems the most focused of the cap-and-trade schemes in North America. But who knows. Ontario’s involvement with WCI might not preclude joining RGGI.
Why cap-and-trade? I support cap and trade, for two reasons. First, it appears popular among those in the centre and on the left who call for action on climate change. While I disagree with many if not most of this crowd’s assertions, it is important, politically, to have them onside. Many of them would rather see carbon emissions taxed but will settle for cap-and-trade: better something than nothing.
At the same time, cap-and-trade is less offensive to those on the fiscally conservative right than an outright tax (see article). A tax would send conservatives into a foaming paroxysm, but like their colleagues on the left they would accept cap and trade with less complaint: better a watered-down costing approach than something with real teeth.
Second, the chief value in any carbon-costing approach, whether cap-and-trade or an outright tax, is to raise money to implement the technologies that will reduce emissions. (Most proponents think that its main value is to increase the cost of energy, thereby forcing consumers to alter consumption behavior. With an inelastic commodity like electricity, this line of thinking is a mistake.) A tax would give emitting companies certainty regarding costs, and therefore a basis for planning scenarios that envision alliances or M&A activity with low- or non-emitters in similar industries. But at this point it appears politically non-salable, so I’ll go with the second-best solution.
How could Canada’s federal government work with the provinces to harmonize the rules? An opt-out approach is an obvious sine qua non, since Alberta and Saskatchewan would want to think about it before joining, and may never join in any case. To allow for non-mandatory Alberta and Saskatchewan participation, offset rules should be developed that allow companies in these two provinces to buy down emissions with investments in low- or non-emitting technologies in other provinces.
For example, SaskPower and Alberta’s merchant generating companies should be allowed to buy down their emissions by investing in, say, Ontario or Quebec or New Brunswick nuclear plant construction projects. British Columbian gas-fired generators should be allowed to buy offset permits from future generation at, say, an Alberta nuclear power plant.
For this to work, it would help to have an idea of what these carbon permits would actually be worth. Should there be a government-mandated price? If the market sets the rules, how tough should the cap be? As has become clear from the European Emission Trading Scheme (ETS), the cap’s strictness is a major factor in determining the market price of emission permits.
The short history of the ETS (see article) suggests a Canadian cap-and-trade scheme would, initially at least, feature similarly lax permit allocation plans. As I have pointed out, this will drive the price of carbon so low that it becomes virtually irrelevant. This is as it should be, since it eases companies, consumers, and governments into accepting a price on carbon. But this carries the risk that the entire approach becomes discredited, and could force the pendulum to swing toward a draconian, punitive tax.