Earlier this month, on January 7, 2008, the National Round Table on the Environment and the Economy (NRTEE) released its advisory report titled “Getting to 2050: Canada’s Transition to a Low-emission Future.” Prepared at the request of the federal government, the report advises on how Canada can achieve long-term reductions of greenhouse gases (GHGs) and other air pollutants. In particular, it recommends ways for Canada to reduce its GHG emissions by 65% below 2006 levels by 2050, the aggressive end of the target range proposed as part of the government’s Regulatory Framework for Air Emissions (the Framework).
To meet this target, the report recommends that Canada (i) cooperate with the world in setting emissions reductions targets; (ii) provide long-term certainty on its emissions reductions policies; (iii) facilitate the wide deployment of low-emission technologies; (iv) adopt an integrated approach to mitigating the emissions of GHGs and other air pollutants; and (v) establish an economy-wide price of carbon as soon as possible. With these enabling conditions in place, says the NRTEE, “attaining deep GHG emission reduction targets will have a minor effect on the long-term growth prospects for the economy,” assuming Canada’s major trading partners implement comparable policies within a reasonable time frame.
The report focuses on the NRTEE’s suggestion that the government adopt a market-based policy that would eventually set a price per tonne of carbon dioxide equivalent (CO2e) in the range of $190 to $240 (in 2003 Canadian dollars). Assuming an average annual growth rate of about 2% in Canadian GDP between now and 2050, the report concludes that only one of the next 43 years of growth would likely be lost in order to achieve the targeted 65% reduction, escalating to two years if the government is slow to implement emissions reductions measures.
The NRTEE proposes three market-based policies that could send the necessary price signal:
1. An emissions tax on importers, producers and distributors of fossil fuels, requiring them to pay a fixed fee on the CO2e contained in fuel they sell; and/or an emissions tax on CO2e emitters, requiring them to pay a fixed fee on their actual emissions.
2. A downstream cap-and-trade system (DCT), whereby the government limits the volume of GHG emissions from certain emitters, distributes permits for allowable emissions and enables firms to buy and sell these permits after the initial distribution.
3. An upstream cap-and-trade system (UCT), which differs from a downstream system insofar as the cap does not limit GHG emissions but rather the carbon content in the fossil fuels that energy importers, producers and distributors sell.
The report describes various advantages of an emissions tax over a cap-and-trade regime; for example, it can cover a wider breadth of the economy, be easier to implement, provide greater price certainty and involve lower transaction costs. It also provides a revenue that government can return to emitters or other segments of society that are disproportionately affected by the tax or require support to achieve further reductions. The report notes, however, that an emissions tax, unlike a cap-and-trade system, does not provide certainty in achieving a given reduction target (as emitters have the flexibility either to reduce emissions or to simply pay the tax).
According to the NRTEE, UCTs tend to affect all carbon intensive sectors proportionately and, as a result, can achieve emissions reductions equivalent to those achieved by an emissions tax. A DCT, meanwhile, can achieve comparable reductions too, but only if it differs from that proposed by the Conservative’s Framework in two fundamental ways: first, it must place absolute limits on GHG emissions, not limits on emissions intensity and, second, it must limit its use of offset markets. Adding a broad offset market to a DCT could so significantly decrease its effectiveness that, according to the NRTEE, if this were done in Canada, the domestic emissions would continue to rise and only be slightly lower than business-as-usual predictions (which have 2050 emissions at around 65% higher than 1990 levels). “While offsets seem to be a feasible short-term strategy,” states the NRTEE, “their use in the longer term does not align with our observation that an economy-wide price signal is necessary to ensure a successful transition.”
The report therefore suggests that the most effective market-based emissions reduction policies are either (i) a DCT coupled with a carbon tax or (ii) a UCT. And while these market-based policies would form the core of an effective strategy, the report also recommends complementary policies to tackle emissions from agriculture and forestry, which may not be directly affected by a price signal, or from transportation and building, which might not respond predictably to a price signal. Research, development and technology deployment will also be critical to achieving reduction targets.
Moreover, the NRTEE found that any delay in implementing an abatement strategy would result in higher cumulative GHG emissions, a failure to meet Canada’s 2020 and 2050 targets and higher costs to achieve future reductions. The report views a domestic emissions trading regime with intensity caps, like the Framework, as a short-term step that must be replaced by a UCT or supplemented by an emissions tax in the near future. Without this progression, in the NRTEE’s view, a price signal will flounder, and businesses currently making long-term capital decisions may choose not to install lower-emissions technology when their current equipment reaches the end of its useful life.
The NRTEE is now preparing a report, expected later this year, on how Canada can adapt to climate change. For more information on its current report, please see www.nrtee-trnee.ca/eng/publications/getting-to- 2050/intro-page-getting-to-2050-eng.html.