WCI carbon quantification, price remain unclear, but cap-and-trade scheme might work for Canada

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.

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12 years ago

Well, it wont work, neither Cap and Trade, nor Tax. Cap and Trade wont work because no one knows what to trade for. Suppose I build a really dirty factory, and decide to give money to a wind farm (owned by my cousin’s niece) in some far away place. Well both my dirty factory and the wind farm make the global heating problem worse. Nothing gained there. Suppose I build a dirty factory and decide to give money to a nuclear reactor. The Cap and Trade rules wont allow this (the enviro-alarmists wrote the rules). As we all writhe in the heat, the bureaucrats will look out of their cubicles in amazement, thinking is was not supposed to happen that way. The Tax problem is similar – the rules will be written to advance some ahead of others, not to make the world a better place to live in.

So what should be done? I think governments should put up web sites like your “Energy Power Statistics” site. These sites should track parameters associated with living standards (ie life expectancy, fertility rates) and governments should do things to make these parameters improve. This is the boring old quality improvement process. What this will show is that there are things that the government cannot influence (ie the amount of carbon dioxide in the world’s atmosphere) and there is no value in trying to move these immovable objects. The government could then concentrate of feasible initiatives – eg education and immigration, things that really do make us all significantly richer.

12 years ago

The key would be to develop cap-and-trade rules that do allow nuclear to qualify. You might be referring to the UN’s Clean Development Mechanism, Randal, under which nuclear projects were made ineligible at the Bonn conference in 2001. You are right, eco-alarmists mounted a successful campaign to have it removed.

Canada lobbied to keep it in, which indicates the chances are good that it would be a feature of any cap-and-trade scheme in this country. It goes without saying that if nuclear power is not eligible in a cap-and-trade scheme, then that scheme would be pretty much worthless.

[…] thing. A cap-and-trade system is more politically acceptable than an outright tax on emissions (see article), precisely because it gives emitters and their home governments the kind of wiggle room that was […]