To carbon tax or not to carbon tax

In January, the National Round Table on the Environment and the Economy, a panel of Canadian experts from environmental groups and the business world, released a report that said Canada could achieve a 65-per-cent reduction in greenhouse gas emissions by 2050 if it put into place a market-based policy, such as an emissions tax, a cap-and-trade system, or a combination of the two, that puts a price on pollution. Despite asking for the panel’s recommendations, federal Environment Minister John Baird quickly dismissed the idea of a national carbon tax as a “Liberal idea,” saying he had already addressed the concerns raised in the report by introducing a new federal green plan that sets a price on carbon emissions.

From a financial point of view, federal Finance Minister Jim Flaherty has already gone on the record to say he’s not in favour of provinces taking patchwork action of any kind, instead preferring a national approach to cutting emissions linked to global warming.

So what kind of approach should be taken? And who will pay for it? Some say Canada might take the same path as the U.S. in pushing for a system of emission permit credits and the trading of those credits to reduce carbon outflow. Is it simply a matter of time before Canada is pulled into the orbit of a North American cap-and-trade system (the trading of emission allowances where the total allowance is strictly limited or “capped”)?

One thing is for sure: it’s a complicated and complex area of law that’s heating up, say experts. “It has really taken on a life of its own,” says Bradley B. Grant, a partner at Stikeman Elliott LLP’s Calgary office whose practice focuses on commercial arrangements, primarily in the petroleum and natural gas and power sectors. He says the issues of carbon taxes and trading show how much environmental issues are driving business these days. “You’ve got a number of lawyers and industry participants elsewhere trying to get up to the curve on greenhouse gas emissions and nobody really knows what they’re getting up the curve on yet,” he says.

“There are not too many files where lawyers are sitting down billing this stuff yet, but everybody, I think, recognizes that it’s going to be very important going forward.”

Environmental lawyer Diane Saxe recently said on her blog about the introduction of the carbon tax: “It is basic economics and good common sense: to discourage something, make it more expensive. And vice versa. So why does Canada put heavy taxes on things we do want (like employment) and no taxes on things we don’t want (like pollution)?”

Harold Anderson, an associate at Stikeman Elliott, says a carbon tax is a tough sell because it’s hard to know where to set the price. “The issue with that is if you set the price too high, it discourages industry and it discourages consumption which affects the economy, for instance, in this case in B.C.” he says. “But if they set the tax too low, it does not encourage people to conserve or to cut their greenhouse gases.”

Grant says a carbon tax looks like a simpler solution on paper, “in the sense that you just throw a tax on there and there’s no need to create this new market. But you’ve got to pick the right number or you’re going to drive the wrong behaviours,” he says. “The only way to really get to that right number is to let the market decide and if you go that route, you really have to have an open-market system.”

Cap-and-trade systems are all over the place, with B.C. and Manitoba signing on to the Western Climate Initiative, a regional cap-and-trade bloc that straddles the Canada-U.S. border. There’s also the Chicago Climate Exchange, the European Climate Exchange, Green Exchange, etc. Alberta launched Canada’s first greenhouse-gas-emission trading market last summer. Under Alberta’s regime, emitters can meet the reduction targets applicable to each of their facilities by:

• improving operational efficiency (with excess improvements generating performance credits that are both bankable and tradable);

• buying offset credits from verified, Alberta-based projects; and/or

• paying $15 per excess tonne of CO2 equivalent, with the proceeds going to Alberta’s Climate Change and Emissions Management Fund.

“If you look at what Alberta’s done to date, we have an inter-Alberta market that we’ve created through our current legislation which has basically said you can use offsets from other facilities within Alberta but you can’t use offsets outside of Alberta to meet your emissions requirements,” says Grant.

Carbon emission trading has the potential to reduce greenhouse gases and possibly become the world’s leading derivatives product, but which exchange should be used? How do you determine the market value? “The more liquid the market, the more efficient the market, and what you’re doing here is that you have all these piecemeal markets popping up, none of which may be entirely efficient,” says Grant. “The larger the market base, probably the more efficient that’s going to be and you’ll have a more efficient transfer of wealth and more efficient market price there.”

Grant says he feels there is widespread support for doing something to curtail greenhouse gas emissions, even if there’s disagreement about which strategy to take. “I think even the companies that are going to be responsible for incurring a cost as a result are largely onboard now. I think everyone recognizes it has to happen and it’s going to happen, they just want to make sure that they all understand the rules they have to play by. It’s really made difficult by the fact you’ve got all these different jurisdictions doing something different and until you see a consensus building as to where you’re headed, it’s going to be confusing to everybody involved.”

Andersen says a happy compromise may be a combination of a carbon tax and cap-and-trade systems. “Is a carbon tax something we’re going to see going forward? It’s a hard thing to imagine,” he says. “I know George Bush has proposed and received a significant amount of criticism on carbon tax in the U.S. but my guess is you’re going to see some combination in some of the different provinces across Canada of a carbon tax and also a cap-and-trade system. I also believe B.C. is also proposing a cap-and-trade system for certain of its large industries.”

However, says Andersen, that still leaves the issue of piecemeal regulation of greenhouse gases across Canada. “You’re going to have different regulations across different provinces and you’re going to have a very difficult time creating a true market price because you will have an Alberta market price and possibly a B.C. or Quebec market price for different greenhouse gas credits, or on a tax basis,” he says.

And, just as there are concerns over carbon tax, there are also problems inherent in implementing a cap-and-trade system, says Andersen. “How do you determine what the level of greenhouse gas emissions, or conversely credits, a facility or a type of activity generates? That’s going to vary across all sorts of industries and all sorts of facilities.

“So you have to get parties to agree on how you measure that and how often you measure that. Then there’s a significant cost component in terms of actually determining what your emissions or credits are going to be on not only an initial basis but on an ongoing basis,” he says. “What those costs are and how you get there are far from clear right now.”