If you’ve been following the carbon pricing discussion in the media, you may have the impression that there’s a battle raging in Canada between “cap-and-trade” systems and carbon taxes, with political parties and media pundits choosing one side or the other.

From our perspective, this “battle” is more a question of rhetoric than reality, because the two options are actually quite similar. Either approach can work well if it’s well-designed, and both can fail if they’re not. In fact, some jurisdictions (Norway and British Columbia are two examples) plan to implement both carbon taxes and cap-and-trade systems, combining the two in an effective and complimentary hybrid approach.

Pembina’s backgrounder Carbon Taxes: Key Issues, Key Questions [pubs.pembina.org/reports/carbontaxfactsheetv2.pdf] provides an accessible summary of the “tax or trade” question.

In a nutshell, our conclusion is the environmental and economic effects of a carbon price depend on the emissions price, the sectors it covers, and the way that any revenues the system generates are used. Arguably, those questions matter much more than the choice of cap-and-trade or carbon taxes.

You may have already come across a few myths about carbon pricing. For example, it is sometimes said that a carbon tax is “for consumers”, because it applies to fuels like gasoline and home heating fuel, while cap-and-trade is “for industry”. But that’s not necessarily the case. Consider British Columbia’s carbon tax: as of July 2008, British Columbians will pay a tax on emissions from burning fossil fuels that starts at $10/tonne and rises to $30/tonne by 2012. The BC tax will apply to 70% of the province’s total greenhouse gas pollution, including emissions from industrial facilities, buildings, homes, cars and trucks. And consumers are likely to be involved even if governments opt for a cap-and-trade system that applies only to heavy industry: experience in Europe has shown that some industrial sectors are able to pass cost increases from cap-and-trade on to consumers.

Another questionable assumption is that “polluters can just buy their way” out of a carbon tax. That’s true, but polluters can also “buy their way out” under a cap-and-trade system by paying for emission allowances rather than cutting emissions in their own operations. What matters more is that, in both cases, polluters have a direct incentive to take all available actions to cut emissions wherever these actions cost less than the price on emissions.

Our view
Based on the best currently-available economic analysis, we believe that Canada needs a price on emissions of at least $30/tonne immediately, at least $50/tonne by 2015 and at least $75/tonne by 2020 to do its part in reducing greenhouse gas pollution [pubs.pembina.org/reports/GBC-CarbonPricing.pdf] [www.tomorrowtodaycanada.ca/]. This price should be applied broadly in the Canadian economy, either through a carbon tax, a cap-and-trade system, or a combination of the two. Where cap-and-trade is used, we support the auctioning of all allowances.
For more information, please see our primer on carbon pricing at pubs.pembina.org/reports/carbon-pricing-Canada.pdf.
Marlo Raynolds

Executive Director, Pembina Institute

www.pembina.org