environmental policy cap and trade

8/9/2019 Environmental Policy Cap and Trade

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ENVIRONMENTAL POLICY

CANADAS CAP & TRADE SYSTEM


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TABLE OF CONTENTS

I. INTRODUCTION..................................................3

II. THESIS STATEMENT............................................3

III. RATIONALE AND SUPPORTING EVIDENCE.............4

IV. DISCUSSION OF NORMATIVE APPROACH...............5

V. DISCUSSION OF POSITIVE APPROACH....................6

VI. ECONOMIC ANALYSIS........................................9

VII. IMPACT ON CANADAIN BUSINESSES..................12

VIII. CONCLUSION AND RECOMMENDATIONS...........14

REFERENCES.......................................................16

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I. INTRODUCTION

For this next session of parliament; as Minister for Environment, my cabinet proposes

developing an environmental policy and legislation on a national cap and trade system whic

involves a great deal of research, consultation, analysis and time depending on the

complexity of the issues and the impact it has on the ministrys stakeholders.

he federal government should assume more of its constitutional !urisdiction over the

environment and create a more integrated federal"provincial framework to deal with

environmental issues in an increasingly globali#ed world. $ecause the environment is such

broad and di%use issue area, many actors are involved in the policy process with varying

interests. &ndustry and the private sector provide employment and seek to maximi#e pro'ts

while environmental ()*s privilege environmental protection over economic growth

+ederwall - )rebovic, /001.

2owever, even with provincial opposition there are prospects for implementation.

3egally, it is possible for two regimes with overlapping rules to function, albeit with less

e4ciency than one integrated system. 5hether the two levels of government choose to

cooperate or simply create two overlapping and potentially redundant bureaucracies will

have large implications for the transaction costs and resources that go into meeting

anadas )2) targets +6llan - $aylis, //71.

6fter substantive economic analysis, a recommendation from my cabinet has been

identi'ed in preparation for the next session of parliament, along with implementation, cos

options, and timelines " to introduce a anadian cap and trade emissions system, spurring

reengagement with individual provinces to come on board and combat climate change.

II. THESIS STATEMENT

anada is currently facing some ma!or environmental concerns like global climate

change which is creating a harmful environmental as well as political impact for anada;

therefore the federal government must focus on 'nding actionable and concrete solutions i

properly designing a cap and trade system to control carbon emissions country"wide.

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IV. DISCUSSION OF NORMATIVE APPROACH

From a normative approach, the cap and trade system de'nes the fundamental mark

failureto be addressed, namely that if carbon emissions are left unregulated can lead to ep

proportions of global warming and especially the failure to eliminate greenhouse gas

emissions will devastate future generations whose prospects grow dimmer with each passin

day.

arbon emissions are currently a negative externalitybecause the costs of the dama

caused by these emissions are not 'gured into the price of polluting. 6llowances must be

distributed in some way to the various entities in order to establish the number of credits o

the market and to determine the starting point from which carbon emission reductions will

occur +?it#e, /001.

ap and trade is a tested and proven system for reducing pollution. $ut for maximum

eectiveness, eciency, and fairnessfor consumers, it re9uires 've basic characteristics

+@urning, Fahey, Alace, - 5illiams"@erry, // 18

0.1 omprehensive in scope " Excluding any ma!or sector would make the cap vastly

less e%ective and put an undue burden on the sources that are included..1Aoint of regulation is mainly upstream " he system operates where fossil fuels

enter the economy, meaning that less than one"tenth of one percent of businesses

has any direct interaction with the system.

B.1 Aermits are allocated by auction " o prevent unfair windfall pro'ts for big energycompanies at the expense of consumers, pollution permits should be sold at public

auctions, not given away for free. Aroceeds can be invested in communities and

families. 6uctioning prevents windfall pro'ts for energy companies, allows the

proceeds of the auctions to serve thepublic interest, and prevents market

manipulation and


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also be invested in community bene'ts like !ob training, energy e4ciency, and

renewable energy production, putting the nation at a competitive advantage in the

growing clean"energy economy.

V. DISCUSSION OF POSITIVE APPROACH

From a positive approach, the cap and trade system introduced by policy"makers will

explain why this government seeks to understand how current policies have come about an

in doing so will try to predict future directions in environmental policies. he policies chosen

are in e%ect to reduce the harmful e%ects of excessive amounts of greenhouse gas +)2)1

emissions into the environment.

Even experts agree that a policy that puts a price on emissions broadly across the

economy must be at the heart of any governments )2) reduction plan; this


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:o the 'rst ma!or external inIuences on policy"makers arevoters!&n our democracies

votersdo not decide most issues directly +3emieux, //C1. &n some instances, they vote for

representatives who reach decisions in parliamentary assemblies or committees +3emieux,

//C1. &n other instances, they elect representatives who hire bureaucrats to make decision

+3emieux, //C1. he complexity of the system and the incentives of its policy"makers do n

necessarily make collective choices more representatives of the citi#ens preferences

+3emieux, //C1.

ltimately, citi#ens of this country will elect their representativesthat best represent

their set of morals and social values. here are good reasons for this. &n the 'rst place, it

would be impractical, if not impossible, to have citi#ens vote directly on most policies

+$rander, //71. :econd, representatives can make use of expert opinion and presumably

make better decisions as a result, especially on technical matters +$rander, //71. 3astly,

most citi#ens would be incapable of making an informed !udgement without taking enormou

amounts of time and e%ort +$rander, //71. &nstead, we elect representatives whom we tru

to make good decisions on our behalf in accordance with general ob!ectives that we elect

them to pursue +$rander, //71.

he second ma!or external inIuence on policy"makers is lobbying by specialinterest

groups. 5hile the inIuence of voting on policy is obvious and relatively uncontroversial, the

inIuence of interest groupsis both subtle and a cause of concern +$rander, //71. &t is wor

distinguishing between two types of special interest groups8 those concerned primarily with

their own economic self"interest, and those trying to promote particular moral or social

values; we will refer to these as economic interest groups and social interest groups

+$rander, //71.

:ometimes a single interest groupwill undertake both kinds of activities, i.e. the

5estern limate &nitiative +5&1 is one such group that is a non"pro't corporation that

provides administrative and technical services to support the implementation of state and

provincial greenhouse gas emissions trading programs +5estern limate &nitiative, //L1.

$asically, the 5& is a collaboration of independent !urisdictions working together to identif

evaluate, and implement emissions trading policies to tackle climate change at a regional

level. +5estern limate &nitiative, //L1.

he 5& began in February //L when the )overnors of 6ri#ona, alifornia, (ew

Mexico, *regon, and 5ashington signed an agreement directing their respective states to

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he argument, in this case, is over what type of economic incentive is mostpreferred

2owever, those policyanalysts who are wary of the Iexibility provided by economic

incentives prefer a more normative approach, which can provide the greatest certainty ove

emissions andOor technologies in particular industry sectors +5ashington :tate @epartment

of Ecology, //G1.

6 cap and trade system, for example, will work best when +01 there is a known overal

goal +an emissions target1 and +1 there exist signi'cant cost di%erences among the

regulated community, so that it is important to provide an incentive for reducing emissions

while at the same time providing Iexibility to the regulated community in how muchKand b

what meansKemissions are reduced +5ashington :tate @epartment of Ecology, //G1.

&s there an economic incentive to cap and tradeJ &t provides an incentive to industries

with Iexibility over how much, and by what means, to reduce emissions +5ashington :tate

@epartment of Ecology, //G1. &t operates by placing a price on carbon"emitting activities,

and by using the market to transmit that price up"and"down the production"sales chain

+5ashington :tate @epartment of Ecology, //G1.

he cap and trade system places a uniform price per ton of * +or other )2), if

included1 +5ashington :tate @epartment of Ecology, //G1. $y placing the same price per

ton throughout the economy, these market"based systems +theoretically1 result in e4cient,

low"cost emissions reductions +5ashington :tate @epartment of Ecology, //G1. his low"

cost property results from the Iexibility emitters have over how much they reduce emission

and what technologies they choose to use; because the aggregate number of allowances is

'xed, however, overall environmental goals are met +5ashington :tate @epartment of

Ecology, //G1.

Each emitter chooses to reduce emissions to the point where the cost of emitting

another unitKthe price of an allowance that must be purchasedKe9uals the cost of adoptin

a lower"emitting technology or reducing output in order to reduce emissions further

+5ashington :tate @epartment of Ecology, //G1.



options, and timelines" to introduce a anadian cap and trade emissions system, spurring

reengagement with individual provinces to come on board and combat climate change.

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0.1 $mplementation" Environment anada and Foreign 6%airs and &nternational rade

anada +@F6&1 are the key implementation centres. Environment anada will manage the

cap and trade system and lead anada in domestic and international climate change

negotiations, re9uiring greater personnel and resources. he cap and trade emissions syste

should use the (ational oundtable on the Environment and the Economys comprehensive

planning reports as a design framework to achieve measurable )2) reductions while

ensuring economic growth +ederwall - )rebovic, /001.

.1 Cost 'ptions ap and trade will reduce anadas )2) emissions, portray a

positive image to the world, and provide anada with a renewed voice in global climate

negotiations, but some 'nancial costs at least in the short"term will be incurred. hese cost

will be minimal in relation to anadas )@A. @F6& will advance anadas international e%or

by providing operational support in negotiations, leading in international dispute resolution

where necessary, and communicating anadian policies to foreign governments and

interlocutors abroad +ederwall - )rebovic, /001.

6 cap and trade system is less politically onerous to achieve than a carbon tax given

widespread lingering opposition from our own federal government and from oil producing

provinces, may continue to oppose the policy. he system should be open to future

harmoni#ation if the .:. develops an e%ective cap and trade plan, but anada must act no

if it is to meet its climate change targets +ederwall - )rebovic, /001.

egional anada".:. cross"border groupings between anadian provinces and .:.

states, most notably the 5& and the onference of (ew England )overnors and anadian

Aremiers, can work in con!unction with a national cap and trade approach by continuing to

advance cooperation, best practices, and policy innovation. ap and trade, as a market"

based approach, is more economically"bene'cial than command"and"control government

regulations for individual industries that do not put a price on carbon and allow emissions

trades +ederwall - )rebovic, /001.

B.1 (imeline" &ntroduction of cap and trade system legislation by Nune of /0 and

implementation one year later, with escalating carbon prices being phased in gradually to

allow industries to adapt +ederwall - )rebovic, /001.

&t appears likely that from an economic analysis, at some point in the next coming

years; federal environment policy legislation must be passed that creates a national )2) c

and trade system. 3ayering federal )2) legislation on top of existing provincial trading

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programs, such as the 5&, and other regional"level policies and measures may have a

variety of implications for anada as an early mover on cutting down its carbon emissions.

he architecture of the cap and trade system that my o4ce is proposing for Aarliame

to implement in /0 would be fully compatible with 5&, thus facilitating future linking if

appropriate. he 5& recommendations provide the Iexibility for anada to demonstrate

best practice in the form of broad"as"practical coverage, 0//H auctioning and avoidance of

o%sets +or tight limits on their use1. $y implementing a simple and highly e%ective system

with these characteristics in /0, anada would set the standard by which other systems

proposed in (orth 6merica K including those of other 5& !urisdictions K would be

measured. his would place anada in a strong position to advocate for greater stringency

and environmental integrity in those systems +$ramley, //1.

VII. IMPACT ON CANADAIN BUSINESSES

5hat kind of an impact will the cap and trade system have on businessJ &s it good or

bad for businessJ &n the simplest terms, cap and trade is a market"based solution to an

environmental problem. he government puts a cap on pollution +greenhouse gas emission

in this case1 and allows businesses to 'gure out the most cost"e%ective way of keeping the

combined pollution under the cap. 2owever, within this broad framework, many details nee

to be worked out, and the costs and bene'ts to businesses will depend on how the

government tackles these 'ner points +2orne, /001.

6t the core of a cap and trade system is the pollution permit +often called an

allowance1, which is essentially a commodity created by governments in recognition that th

atmosphere cannot be treated as a free dumping ground. $usinesses regulated by cap and

trade are re9uired to own one tonnes worth of pollution permits for every tonne of pollution

they produce +2orne, /001.

&f pollution permits are costly, businesses will choose to reduce their pollution so they

need fewer permits. 3ike a carbon tax, this approach strengthens the economic case for

investing in clean energy +2orne, /001.

he amount a business needs to spend on pollution permits depends on how much

pollution it produces and three other factors. he 'rst is the amount of pollution allowed

under the cap. &f the cap is relatively lax and there are plenty of permits to go around, they

will not be worth much. &f the cap is tight, there will be fewer permits available, and those

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permits will end up being worth a lot because they will be in greater demand. he downside

of a lax cap is that it minimi#es the environmental bene'ts +2orne, /001.

he second factor is the number of o%sets allowed. *%sets are pro!ects that reduce

pollution in sectors of the economy not covered by a cap. 6n o%set pro!ect costs money, so

has a value, !ust like pollution permits. he potential advantage of o%sets is that they can b

cheaper for businesses than reducing pollution or buying permits. he downside is that eve

the best e%orts to verify their legitimacy will accredit some o%sets that will not e%ectively

reduce pollution +2orne, /001.

he third factor in determining the cost of pollution permits is how governments deci

to allocate them8 they can give them away free or auction them. &f permits are given away,

the businesses given permits will have lower costs. &f permits are auctioned, governments

collect the full value from businesses. &n addition to providing governments with revenue,

auctioning simpli'es the rules by eliminating any need to decide which businesses get

permits and which do not +2orne, /001.

Many businesses 9uestion what cap and trade will do to their competitive advantage,

or to anada, for that matter. For businesses providing products and services that help

reduce pollution, like a wind farm for example, cap and trade will create market opportuniti

+2orne, /001.

For businesses that have to buy permits, at least two other aspects of cap and trade

can help maintain or improve competitiveness. First, cap and trade systems typically includmultiple !urisdictions, so they provide a level playing 'eld for all businesses in the system.

:econd, governments have Iexibility to decide how best to use any auction revenue they

collect, and there are plenty of ways money can be invested to improve the economy +2orn

/001.

anadas approach of using carbon tax revenue to reduce other taxes is an example

that should be used towards generating a revenue"neutral system to promote technologica

and process innovations that reduce pollution down to or beyond re9uired levels. he bottoline is that a well"designed cap and trade system can be part of a climate change solution

that is good for the environment and good for the economy +businesses1 nation"wide +2orne

/001.

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VIII. CONCLUSION AND RECOMMENDATIONS

herefore, in conclusion, we see from our thesis statement8 anada is currently facing

some ma!or environmental concerns like global climate change which is creating a harmful

environmental as well as political impact for anada; therefore the federal government mus

focus on 'nding actionable and concrete solutions in properly designing a cap and trade

system to control carbon emissions country"wide.

he rationale and supporting evidenceshow us that there are multiple alternatives

available to anada to solve the critical problems that a%ect environmental a%airs. :ome

alternatives favour environmental protection, while others privilege economic growth

instead. he key is to move away from a #ero"sum framework and 'nd problem solutions

through the nexus of sustainable development. Each alternative presents di%erential

constraints and expected impacts +ederwall - )rebovic, /001.

From a normative approach, the cap and trade system de'nes the fundamental mark

failureto be addressed, namely that if carbon emissions are left unregulated can lead to ep

proportions of global warming and especially the failure to eliminate greenhouse gas

emissions will devastate future generations and sustainability.

From apositive approach, the cap and trade system introduced by policy"makers will

explain why this government seeks to understand how current policies have come about an

in doing so will try to predict future directions in environmental policies. he policies chosen

are in e%ect to maintain economic prosperity through innovations and sustainable

developments that will then reduce the harmful e%ects of excessive amounts of greenhouse

gas +)2)1 emissions into the environment.



options, and timelines!he architecture of the cap and trade system that my o4ce is

proposing for Aarliament to implement in /0 would be fully compatible with 5&, thus

facilitating future linking if appropriate. his would place anada in a strong position to

advocate for greater stringency and environmental integrity with those systems. +$ramley,

//1

Finally, what kind of an impact )ill the cap and trade system have on businessJ &s it

good or bad for businessJ Many businesses 9uestion what cap and trade will do to their

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competitive advantage, or to anada, for that matter. For businesses, providing products an

services that help reduce pollution, cap and trade system for these businesses will create a

thriving market opportunities.

6s for some policy recommendations, a cap and trade system can be a cost"e%ective

means of controlling )2) emissions. 2owever, because of the diversity of emission sources

and the variety of economic agents with some control over emissions, cap and trade canno

be a universal remedy. *ther types of policies and instruments will be needed to reduce

emissions from sources not easily included in the system, to provide incentives for a wide

range of economic agents to take actions that reduce emissions, and to address other

environmental or social goals that may conIict with )2) reductions +5ashington :tate

@epartment of Ecology, //G1.

6 national cap and trade system appears to be closer on the hori#on, it will be

important for all provinces to participate in the debate about creating a national cap and

trade system design. Especially, for industries a%ected by future federal and current

provincial policy programs +including the current 5& mandate and other policy instruments

are not put in an adverse position in the future when the cap and trade system is

implemented nation"wide.

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6llan, ., - $aylis, ?. +//7, February1. #ho ')ns Carbon? &roperty %ights $ssues in a *arket

for +reen ouse +asses!etrieved (ovember 0, /00, from

http8OOeconpapers.repec.orgOarticleOagscafricOC7BG/.htm$ogard, M. +/00, May B1. &ublic Choice (heory!etrieved (ovemeber L, /00, from

Economics8 Arinciples and 6pplications8

http8OOeconomicsprinciplesandapplications.blogspot.comO/00O/DOpublic"choice"theory.html

$ramley, M. +//, :eptember1. -ey .uestions /or 0 Canadian Cap0nd(rade 1ystem!

etrieved (ovember /, /00, from he Aembina &nstitute8 http8OOwww.pembina.orgOpubO/0D

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$rander, N. 6. +//71. )overnment Aolicy oward $usiness. &n N. 6. $rander, +overnment &olicy

(o)ard 2usiness+pp. G, D.01. Mississauga, *(8 Nohn 5iley - :ons anada, 3td.

ederwall, )., - )rebovic, (. +/001. 3nvironment 4 0 Canadian /oreign &olicy %evie)!*ttaw

(orman Aaterson :chool of &nternational 6%airs, arleton niversity.

@urning, 6., Fahey, 6., Alace, E. d., - 5illiams"@erry, . +// , Nune1. Cap and (rade 5657 0

/ederal Climate &olicy &rimer!etrieved (ovember /, /00, from :ightline &nstitute8

http8OOwww.sightline.orgOresearchOenergyOclimate"pricingOArimerH/ExecutiveH/:ummaryH/"

H/formattedH/forH/print.pdf

2orne, M. +/00, Nuly /01. "emystifying Cap and (rade in Canada!etrieved (ovember B/,

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issuesOenvironmentOdemystifying"cap"and"trade"canada

?it#e, . +/00, May1. ap and rade v. ap and @ividend. (orth'eld, Minnesota, nited :tate

3emieux, A. +//C, :eptember1. (he &ublic Choice %evolution!etrieved (ovemeber L, /00

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5ashington :tate @epartment of Ecology. +//G, :eptember 0L1. 3conomic 0nalysis of a Cap

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http8OOwww.ecy.wa.govOclimatechangeO//GdocsOombiningPapPandPradePwithP*therPAolicy.pdf

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