Friday, 10 February 2017

Getting Carbon Pricing Right

I've been doing a fair bit of writing which ends up elsewhere than this blog... I saw something today in i-Politics that matched up with a column I did on carbon pricing and agriculture. Here are both:

Getting Carbon Pricing Right

We’ve all heard this one: "If a tree falls in a forest and no one is around to hear it, does it make a sound?"  Don’t think too hard about this, it will make your head hurt, but consider this:  “Can a tree left standing, rather than cut, generate some income?”  This is the more important question now as we wrestle with climate change, and the first steps  of raising the cost of burning carbon.

All Canadian provinces (three are resisting)  have been told by the   Federal Government to start pricing carbon no later than  next year.   PEI is joining the majority of provinces and implementing a carbon tax,  while Quebec and Ontario, are using what’s called a cap and trade system. Both approaches have their strengths and weaknesses.  I think that PEI should do more with carbon trading.  

Most economists like a tax. It’s simple. There’s just the question of how much,  who pays, and how to spend the newly raised money.  The policy goal is straightforward, make burning carbon more expensive, and people will use less of it.   A cap and trade system is certainly more complicated.  Governments set pollution limits for different sectors, and then from that,  individual companies are given mandates. Those that produce too much greenhouse gasses have to buy credits.  Over time governments can lower industry thresholds  to meet policy goals. Many complain this allows big companies to carry on business as usual and just buy their way out of doing anything.  They can,  but eventually competitors would gain market share with lower costs and prices.   I’d like to focus on the other side of the ledger. Those that produce less carbon than allowed clearly benefit, but there could be more to this.  In many jurisdictions enterprises that capture carbon, or remove it from the atmosphere,  are also rewarded.  That’s where that tree in the forest comes into play.   

There are carbon trading systems in countries like Australia (they’re as controversial there as anywhere else) that pay landowners to maintain forests to capture carbon as they grow. The rules are strict, forests must stand for decades, up to a century, and people are paid based on the types of trees.  About 50% of the dry weight of  tree roots, trunks, branches and leaves is carbon.   Australian farmers can also benefit from establishing permanent pastures, grasses and forages that capture carbon while growing, and lock it up underground until the soil is disturbed again.  Research ( ) shows these grasslands capture CO2 at a rate of 20 tons per hectare.  Carbon credits for these programs are then sold to big emitters like power companies.  

Farmers across Canada are now coming to terms with carbon pricing including here on PEI.  Last week potato growers were given a broad outline of the impact of climate change, and how carbon pricing will work.  The head of the Climate Change Secretariat Todd Dupuis said, like other provinces,  marked gas used on farms will not be included, but that didn’t stop farmers from asking questions. Many said marked fuel is just a small part of their input costs.  Transportation costs will increase, bulk trucks used to move produce, and so on will now all cost more.  Farmers have good evidence that they can’t pass on these extra costs to consumers, but for a trading province like PEI there are more worries.  With Donald Trump, and a Republican controlled Congress there is little concern or interest in the United States now to tackle climate change, and certainly no chance of a carbon tax. Supermarket prices are generally determined by U.S. markets, so there’s a real risk that Canadian farmers will be uncompetitive with their American counterparts.  A low Canadian dollar will certainly help, but price spreads could increase over time as the carbon tax increases, and the Canadian dollar recovers.   This will offer some protection to consumers, but could severely impact Canadian farmers.  

And consumers enjoy something else,  choice. We’re now supposed to think twice about buying a pick-up truck rather than a four cylinder station wagon, turning on the air conditioner in the summer.  Farmers on the other hand are generally facing fixed costs that can’t be avoided, but if we added carbon credits to the mix then at least landowners who leave trees standing,  or put sloping land into permanent pasture are rewarded rather than made to feel like bad managers.

Todd Dupuis did tell farmers that the government is considering these kinds of carbon credits. Could it be included with a carbon tax? Would PEI join Quebec, Ontario,  and California in a larger carbon trading system?  Manitoba had also been part of this mix, but its new Conservative government says it will do something different.

PEI has more to lose as a province than any other from climate change,  both land erosion and the risk to high priced real estate and waste treatment facilities.  We will do our part by starting to price carbon. We could do even more with a carbon credit scheme.   

Want fair carbon pricing? Embrace carbon trading

Paul Boothe Published Friday, February 10th, 2017

Yesterday in this space, I used B.C. Premier Christy Clark’s call for carbon pricing “fairness” across provinces as a springboard to talk about what constitutes fairness in carbon pricing. I ended up concluding that, depending on your definition, the quest for ‘fairness’ could result in equalizing carbon prices across the provinces, or equalizing per capita emissions — or neither.
Premier Clark’s argument for equal prices is a simple one: that everyone should face the same carbon price regardless of where in Canada they live, and so, the federal government should require that carbon prices be equalized across the provinces.
In fact, even if your personal definition of fairness requires that everyone face the same carbon price, it doesn’t follow that price equality should be dictated by the federal government. How carbon price equality is achieved can have an important impact on economic growth.
To understand why, it’s worthwhile to go back to the rationale for using carbon pricing as a key tool in our efforts to reduce GHG emissions. Putting a price on carbon emissions creates an incentive for us to reduce them. There are many ways to reduce emissions. For example, we might drive our cars less by planning our trips to the store better, or by walking or cycling for short trips. Or we could take advantage of the latest technology to switch to more fuel-efficient vehicles.
A key benefit of carbon pricing is that it combines the incentive to reduce emissions with flexibility in how we do it. That flexibility allows firms and individuals to find less expensive ways to meet our GHG reduction targets and thus reduces the impact on consumers’ incomes, firms’ profits and economic growth.
This isn’t the end of the story, however. To take full advantage of the flexibility that carbon pricing offers, we need markets. Carbon pricing gives individuals and firms the ability to choose among different actions they can take by themselves. Trading in carbon markets allows them to access to the full range of possible emission-reducing actions in the economy. This added flexibility has the potential to lower the cost of reducing GHGs even further.
A simple example can illustrate the point. Suppose a firm operates in a province where the carbon tax is $30 per tonne. In the course of producing their products they emit one tonne of CO2. The compliance choices they face are to pay the carbon tax or invest in CO2-reducing technology. The option they choose will depend on how much the new technology costs. If it costs more than $30 to eliminate the tonne of carbon they produce, the firm will comply by paying the tax.
If it costs less, the firm will invest and avoid the tax. Let’s assume the new technology reduces emissions at a cost of $20 per tonne and so the firm invests.
But what if the firm had the option to pay a company in another province to reduce emissions by one tonne at a cost of $15? It could then reduce total national emissions by the same amount at a lower cost, thus increasing their profits (and taxes) or investments in growth and jobs by $5.
The downside, from the point of view of that company’s provincial government, is that money may flow to reduce emissions elsewhere rather than into the provincial economy and treasury.
The flexibility to reduce emissions at the lowest available cost is exactly what carbon trading allows. Indeed, the ability to trade reductions with California is why Quebec and Ontario can meet GHG reduction targets that are more ambitious than the national one (both in terms of absolute per capita reductions and per capita levels of emissions) at a lower cost than the national carbon price.
Carbon trading is not only efficient, but it may also help improve the perceptions of relative ‘fairness’ of provincial carbon pricing regimes. For example, individuals and firms in all provinces could participate in a pan-Canadian trading system, and allow the reductions generated from these projects to be counted towards their obligations in both cap-and-trade and carbon tax systems. A pan-Canadian market would provide a degree of linkage between provincial systems to give access to the lowest cost reductions and promote greater equality of carbon prices across jurisdictions.
Both efficiency and fairness are important considerations when designing an emissions-reduction scheme, but there are efficient and inefficient ways to achieve fairness. An inefficient way is to have a common carbon price dictated by government. An efficient way is to let markets provide everyone with access to the lowest-cost options for meeting our GHG targets.
The views, opinions and positions expressed by all iPolitics columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of iPolitics.

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