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.
- Trudeau, Carbon Pricing, Regional Politics, and Technology Policy (January 23rd, 2015)
- The case against a revenue-neutral carbon tax (January 15th, 2015)
- Low Oil Prices, Good or Bad for Canada? (January 14th, 2015)
- The Ecofiscal Commission and Polluter Pay (December 8th, 2014)
- CGE models and carbon tax incidence (November 24th, 2014)