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GHG Cap & Trade

This is a guest blog post written by Whitehorse-based economist, Luigi Zanasi.  Please feel free to comment.  Also, please note that this was written before Marc’s blog post of Jan. 14 re: BC’s carbon tax.

Towards a fair cap & trade system for GHG emissions

In the last two federal elections, the NDP quite rightly rejected the idea of a carbon tax for greenhouse gas emissions. The party did the same in the past BC election, a position that probably lost it the election because of the outraged Greens. Jack Layton and now Tom Mulcair argue for a cap-and-trade system, despite the dishonest attempts by Harper to portray it as a carbon tax.

What’s wrong with a carbon tax? There are two things wrong. First, like any other indirect tax (e.g. the GST or sales taxes), it is unfair to low and middle income people because they end up paying a much larger portion of their income than richer people – the technical term is that it is regressive tax. Second, we don’t know how much of a carbon tax we would need to reduce carbon emission to an acceptable level. Taxes, like price increases, work slowly, just look at how little of a reduction in gasoline and fuel oil consumption has occurred in Canada over the last couple of years despite the substantial increase in prices. And a carbon tax would be greatly and quite justifiably unpopular. Just ask Gordon Campbell or Christy Clark.

So what are the alternatives? When I was teaching economics at Yukon College, I explained that there were four different ways of dealing with pollution in addition to a pollution tax, which is what a carbon tax would be:

1. Regulation specifying maximum emissions, and let the polluters bear the costs.

2. Subsidies for pollution control equipment

3. Create property rights

4. Pollution permits

5. Tradable emission permits

The only one that would work for Greenhouse gas emissions is number 5: tradable emission permits. In other words, a cap-and-trade system. We cap the amount of GHGs that are emitted, someone gets the right to emit them and others who don’t have the rights have to buy them from those who do.

The question is how can we make such as system work. There are a whole slew of issues: who initially gets the credits? The companies who have been emitting GHGs and who have earned the right to do so? The government? Do companies get credits for sequestering gas? For planting trees?  Etc., etc. Attempts to make that kind of system work have not done very well in Europe. There has been considerable discussion especially in the UK on personal carbon trading, which is prima facie much more equitable than other allocations. But if we are going to give credits to individuals, how do we set up a scheme where they have to use their credits every time they buy fuel, electricity, beef and dairy from flatulent cattle, or methane-inducing beans? It can get really complicated.

I would like to propose to cut that Gordian knot with a new relatively simple scheme. Briefly, every citizen would get credits for the same number of tonnes of GHG which they could then sell. All producers of fossil fuels and importers of goods would be required to purchase credits before they could sell any of their stuff. That’s it. You get the GHG producers at the first point of sale.

On the selling side, initially, the government could auction off credits on a monthly basis and send everyone a cheque (or deposit directly in people’s accounts as is done with numerous social insurance schemes and for income tax refunds). Eventually, brokers would show up and people should be able to sell their credits through brokers. We could also require the banks to allow selling credits using ATMs and directly deposit the proceeds into bank accounts (with no fee of course), say with a chip-enabled social insurance card. Once the traders are in place, people could elect to sell their credits when they wanted. It probably would be best that people would get monthly credits which would expire in twelve months. So individuals who want to do more than their share could simply not sell their credits, reducing GHG emissions by even more than the cap implies.

On the purchasing side, any producer of fossil fuels (gas, oil, coal) would have to purchase credits to get a permit to sell it. Similarly, any importer of goods would have to purchase credits that reflect the carbon content of the goods they are selling, to avoid penalizing Canadian manufacturers. The calculation of the number of credits could be based on assigning a certain energy value for the production of each commodity in the Standard Commodity Classification (which is currently used to assess the amount of import duty). Then a carbon amount would be calculated based on the country of origin’s proportion of fossil fuels in its energy mix and the fossil fuel used for transportation. This is not a complicated exercise: I probably could do it in less than a month. I am sure the customs brokers would welcome the additional work.

We could also consider giving exporters of manufactured goods credits on the same basis as importers would have to buy so that they are not at a competitive disadvantage.

I think this is a fairly simple workable system. It avoids the complications of other trading schemes and is fundamentally equitable and egalitarian. Politically, getting a cheque is a lot more palatable than a new tax, or than increased prices without any offsetting compensation. Most importantly, it would make it relatively easy to meet emission targets.

Finally, it has not escaped my attention that this system could be extended to other countries, especially in the third world and could result in much more equality as credits are purchased by GHG emitting countries from citizens of poorer countries. Of course this would assume that every human has the right to the same number of credits.

Enjoy and share:


Comment from Darwin O’Connor
Time: January 21, 2013, 11:34 am

There are fairness problems with both cap and trade and a carbon tax.

Your suggestion of a complex parallel currency I think would likely result in more effort being put into carbon credit specualtion and trying to rip off individuals then into reducing carbon emissions.

A simple fix for a carbon tax is to return much of the money to individals in a progressive manner, something that you plan also does in a more complex way.

Both the BC carbon tax and the Liberal’s Green Shift carbon tax did this, although not always in an idea way.

Comment from GHG
Time: January 21, 2013, 1:06 pm

For what it’s worth, George Monbiot, an early advocate of individual carbon quotas, now rejects them, in particular because of their complexity.

Comment from Purple Library Guy
Time: January 22, 2013, 4:27 pm

It sounds an awful lot like saying “Why don’t we trust the free market to take care of the problem?”
The obvious answer being “Yeah, right, because it’s been so trustworthy up to now!”

Comment from Bronwen Cunningham
Time: January 24, 2013, 10:59 am

Purple library guy has it right. Lots of folks are lining up to make lots of money off trading carbon credits. Al Gore, for instance.

Any time you have a bank or a broker involved, you can add profit-making to the scheme. Lots of money is also to be made off carbon emissions trade derivatives. Hmm. That sounds like a recipe for failure, at least on the carbon reductions side. So what is this idea really all about? Do we really want money to be made off betting that efforts to mitigate climate change are going to fail?

Comment from Purple Library Guy
Time: January 24, 2013, 1:59 pm

It seems to me that both carbon taxes and cap-and-trade are based on the idea that if you set broad incentives just right, everyone will do what’s wanted. This is, if not explicitly an “efficient markets” approach, at least implicitly accepts a number of the same assumptions.

Problem is, many of those assumptions are false. I think that ultimately, just as to get a productive economy you need to deal in nitty-gritty industrial policies, sweating the details, rather than thinking you can wave a wand and get an economy by slashing corporate taxes, similarly to get a green economy you need to do the grunt-work. Identify the sources of greenhouse gases, and do combinations of regulation, tailored incentives and subsidies, and direct government action (e.g. going in directly to retrofit buildings, simply building wind, solar etc. energy production, fund university research, large scale funding to transit, working with municipalities on frameworks for how zoning to reduce transportation needs can be put in place) to solve the problem piece by piece. There is no economic-shorthand substitute for tackling the problem as you would tackle a normal large problem: Break it down into smaller pieces, solve them bit by bit while keeping an eye on how the pieces fit together . . . actually, in short, do the work of solving the problem.

Comment from Roy McPhail
Time: January 24, 2013, 5:16 pm

As an engineer, I understand how simple incentives can lead to reasonably predictable changes in behaviour. Tax what you want less of, and reward what you want more of. Yes, carbon emission wrt cost would appear to be inelastic, but then again, it would seem that our planet may turn out to be inelastic as well.

Comment from John W. Warnock
Time: January 25, 2013, 9:44 am

There are different kinds of carbon taxes. The Australian Green Party, which is to the left of Labor, has advocated implementing a carbon tax and then using all the proceeds from this to make an equal annual payment to all citizens. They argue that this makes the carbon tax a form of income redistribution. For SK a carbon tax would be tricky as the largest GHG emitter is Sask Power.

Comment from Purple Library Guy
Time: January 26, 2013, 7:26 pm

“As an engineer, I understand how simple incentives can lead to reasonably predictable changes in behaviour.”
I can see why you might say something like that, but the more I look at it, the more it looks the same as someone saying “As a psychologist, I understand how repressed insecurities can lead to a bridge collapsing”.
Really, what would being an engineer have to do with predicting human behaviour? Humans are not structural materials.

Comment from Mark Bigland-Pritchard
Time: January 31, 2013, 2:19 pm

Cap & trade has been at best unpredictable and at worst a failure in Europe. The version suggested above may get around some of the difficulties, but it is still fraught with complexity and therefore also with opportunites for banksters to play their little games of chance at the expense of the climate. See Annie Leonard’s take on this: .
A carbon tax is a much more straightforward option – less bureaucracy, less complexity, fewer opportunities for gaming the system. Contrary to John Warnock’s assumption in his comments above, I suggest that it be charged at the point of extraction or import. How the tax is then redistributed is a matter of political choice – the overall effect can be strongly progressive.
(And the BC carbon tax appears to have been a vote-winner, not a vote-loser. Why otherwise would a climate-apathetic provincial NDP be planning to keep it?)

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