A Carbon Tax Is Inevitable

Canadian Politics, Climate Change

Canadians emit an average of 19 tons of CO2 per person per year compared to 8 in the UK and even less in Scandinavia. A cap and trade system will limit the growth of CO2 emissions but it will not really help diminish them very quickly.

Cap & Trade

This is because all cap & trade systems are based on limiting growth in emissions above their current level – forcing companies to become more emission efficient if they are to grow. If a company cannot reduce emissions faster than they intend on growing, then it must trade to get credits that another company is able to generate via “excess” reductions in their reduction program.  The idea is to progressively lower the cap over time, and this clearly takes a while to bring emissions down.  For example the European Union has had a cap & trade system in place for nearly 30 years but only 2 of 25 countries actually have cap limits below historical levels!

Since a cap & trade system is based on limiting the quantity of emissions, the value of the credits is largely determined by how fast the cap is reduced.  If the rate of quantity reduction is too high, not enough credits can be generated to be traded and the cost of compliance soars.  On the other hand if the rate of cap reduction is too slow, then the value of the credits are too low to be worth obtaining.

It is well known and widely accepted that current levels are too high. In fact Kyoto is all about reducing emissions by 6% below the 1990 level. Without effective government leadership, Canada is now running 22% above our 1990 level – a full 28% off target.

Carbon Tax

The main alternative to a cap & trade system is a carbon tax.  This essentially fixes the price of compliance at a known level and corporate environmental impact planning is significantly clearer.  The downside is that companies could choose to absorb the tax as a cost of doing business if it is not high enough – thereby resulting in insufficient reduction in emissions.

It is inevitable that Canada and the USA will impose a carbon tax since it is the only proven way to make any real progress on diminishing CO2 emissions. It has worked in other countries (without killing their economies) and it can work here.  For example, the European Energy Agency estimates that the EU-15 has spent approx 1-2% of its GDP annually on environmental protection measures since 2001 and all those countries realized GDP growth rates equal to or higher than Canada and the USA during this decade.

Inevitability

The fallacy of so-called “intensity-based” targets is evident in any chart that shows whether progress is being made or not relative to Kyoto commitments. Since the USA did not sign Kyoto, only Canadian data is available from official sources as illustrated below:

United Nations Data

So if intensity-based targets are meaningless, and if we have to do something about this intolerable situation sooner rather than later, we need a real mechanism for reduction.  Carbon taxes can work and can also be used in combination with a cap & trade system.  In fact in Europe, more and more countries are adding some form of carbon tax into their national policy for emission reductions as a means of accelerating compliance under the EU-wide cap & trade system.

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1 Comment

1 Comment

  1. mitch  •  Nov 8, 2008 @11:12 am

    A carbon tax seems like a good idea from a logical & environmental perspective, but the weak link will be the administrators of the tax – the government. Regardless of color (red, blue, or orange) governments are very inefficient at managing resources. They are also reactive and not strategic. Unless there’s a process for properly managing the C&T program, it will result in as little carbon reduction as an intensity program.

    A recent Ottawa example: the federal govt grants Ottawa millions in infrastructure grants. Instead of spending it on sewer (environmental) improvements, they throw the money at a budget shortfall. Don’t trust governments with money!

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