Wednesday, October 8, 2008

A tale of two climate change policies

In their rush to climb over each other, the five major political parties rarely find themselves agreeing on anything, but addressing reductions in greenhouse gas emissions has found the five parties lining up on two sides. And the parties that line up are not the ones you think they may be.

The media, awash with the words ‘carbon tax’ have neglected to discuss its only real alternative for emissions reductions: the cap-and-trade system. So while the Liberals are the ones getting all the heat for their greenhouse gas reduction policy – mostly because they are touting it as a keystone issue – there is little, if any, comparison of the two major approaches to greenhouse gas reductions.

The biggest difference between the two is how direct they are in reducing emissions. The cap-and-trade system – championed by three strange bedfellows: the Conservatives, the NDP and the Bloq – limits emissions directly by placing a limit on them. Industries exceeding these limits have to either pay fines or purchase carbon credits from industries that are below the limits. This direct approach is generally favoured by environmental groups because it sets exact targets on emissions. Some economists, on the other hand, dislike this approach because it is difficult to calculate the exact economic impact of reaching specific targets which, they say, may create volatile energy prices

The carbon tax – the strategy of choice of the Liberals and Green Party – aims to reduce emissions in an indirect fashion by making the cost of emitting carbon more expensive. For example, in British Columbia, where a tax of $10 per tonne of carbon emitted was levied on July 1 of this year, drivers will have to pay an extra 2.4 cents per litre of gasoline. This means that a person driving a hybrid car will have to pay an extra $10 in tax for every 8500 kilometers they drive, the distance required to emit a tonne of carbon. People with less fuel efficient SUV’s would have to pay over $30 extra to cover the same distance. The tax covers any fuel that emits carbon such as heating oil, natural gas and propane. The Liberals’ plan, however, exempts gasoline from their carbon tax judging it to be already sufficiently taxed.

Because the price is fixed for every tonne of carbon emitted by both consumers and industry, a carbon tax’s impact on the economy and energy prices is easier to predict than for the cap-and-trade system. It is, however, more difficult to predict emissions reductions because they are dependent on how consumers react to higher carbon taxes.

An important criticism of the carbon tax is that it will have a larger impact on lower income Canadians for whom energy costs represent a bigger part of their budget. Supporters of the carbon tax address this issue by making the tax revenue-neutral which is just a fancy way of saying that the government isn’t making any money off it. It redistributes all revenue from the tax back to consumers in the form of income tax cuts and interest free loans for people retrofitting their home to be more energy efficient. Both the Liberal and Green address this issue in their party platforms by giving bigger tax breaks and tax credits to low income families affected by this tax. The cap-and-trade system doesn’t have a direct cost to consumers but industries having to implement expensive measures to reduce emissions will no doubt pass some of the costs down to the consumers. None of the cap-and-trade supporting parties have really addressed this issue in their platforms.

A carbon tax, of the nature being discussed in Canada, is not uncharted waters either nationally or internationally. In fact, we Quebeckers already pay a 0.8 cent carbon tax on every litre of gasoline ($3.30 per tonne). Internationally, there is an even longer history of carbon taxation particularly in Scandinavian countries which put carbon taxes in place in the early 1990’s, years before the Kyoto Protocol came into existence. Denmark and Sweden are proof that the tax system can produce emissions reductions without economic hardship. Even after nearly two decades of high taxes on carbon ($150 per tonne of carbon in Sweden’s case), Denmark and Sweden still manage to enjoy higher GDP’s per capita than Canadians according to the World Bank.

Cap-and-trade systems can also be found on the international scene. British Columbia, Quebec, Ontario and Quebec have joined 11 Americ2an states in an agreement that will see all participants cap emissions on certain industries and trade carbon credits amongst themselves. Currently, the biggest cap-and-trade system in the world is the European Union Emissions Trading Scheme which includes 18 countries and went into effect in 2005. The European carbon credit trading suffered severe drawbacks because the targets were voluntary for the first phase. The second phase started in 2008.

Both the cap-and-trade and carbon tax systems have positive and negative aspects and both provide incentives for greenhouse gas emissions reductions in distinctly different ways. While the media continue to portray Dion’s carbon tax in negative light, it is clear that cap-and-trade system is not necessarily an improvement over it. When Canadians hit the polls, they should keep in mind that any way you wish to reduce greenhouse gas emissions, there will be an impact on everyone. The carbon tax may sound like a bad idea because we have a natural dislike for taxes, but it has a proven track record and its economic impacts are easier to predict. The cap-and-trade system, on the other hand, can also be an effective way of reducing emissions though it may have higher economic risks for more ambitious targets. In the end, it’s Canadians who will decide.

As seen in the October 1, 2008 issue of the Brome County News

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