Comments on “Carbon Pricing and Environmental Federalism”

1. Comments on “Carbon Pricing and Environmental Federalism” Matthew Bramley Director, Climate Change, Pembina Institute Queen’s University, October 17, 2008

2. Topics • Scale of the climate challenge • Roles of federal and provincial governments • Elements of an effective federal plan • Criteria for carbon pricing policy • Carbon leakage and producer/consumer responsibility

3. Scale of the climate challenge • Projected impacts this century include 1m+ sea-level rise, billions of additional people subject to water shortage, 1/3 of species lost • “people have simply no idea how serious this issue is”– http://site.climateletter.org/ • “limit global warming to no more than 2ºC above the pre-industrial temperature”– http://www.ccrc.unsw.edu.au/news/2007/Bali.html/ • Requires global emissions to peak before 2020 • NGOs: • Consider “cost” of impacts is greater than cost of preventing them • Role is to put the science front and centre • Strong evidence that it is technically and economically feasible to come close to science-based targets • But doing so equitably is a formidable challenge

4. Roles of federal and provincial governments • Federal leadership required by public expectation, legal obligation and practical need for level playing-field • In particular, carbon pricing must not be left to provinces alone because of the need for harmonization and for shared control of revenues (which are “recovered subsidies” from a polluter-pays perspective) • Federal powers are extensive • Provincial will to be part of a real solution varies widely • Not realistic to wait for full agreement • Federal government must be prepared to negotiate hard with provinces (without being unnecessarily confrontational) • E.g., “carbon conditionality” of financial transfers

5. Elements of an effective federal plan • Simple, broad carbon price • Plus targeted compensation for (i) regressiveness, (ii) demonstrable carbon leakage • Government purchase of reductions • To reinforce the carbon price in early years in strategic sectors • In agriculture and forestry (difficult to regulate) • From outside Canada (safety valve, international aid) • Regulations (e.g., vehicles, appliances) • To overcome market failures/barriers • Subsidies (e.g., building retrofits) • To overcome market failures/barriers not easily addressed through regulation • Negotiations with provinces • To secure necessary provincial regulations • Investments in public infrastructure (e.g., transit) • Because part of the energy system is publicly owned • Investments in technology R&D • To overcome “non-appropriability” market failure • Legislated national GHG targets, with mandatory annual review mechanism • Needed for international negotiations, domestic public accountability, determining stringency of individual policies

6. Criteria for carbon pricing policy • Tax vs cap-and-trade is NOT the main question • Both are a (partial) tax, one paid in $, one in carbon currency • Good and bad cap-and-trade proposals can be more dissimilar than good tax and cap-and-trade proposals • Instead, I suggest the key criteria are: • Breadth of coverage • Price (or emissions) trajectory over time • Strictness of limits on offsets (additionality, volume) • Extent of re-investment of revenues in emission reductions • Simplicity (to ensure fast implementation, clear signals and accountability) • Compensation for regressiveness • Prevention of international carbon leakage • Avoidance of unjustified exemptions from polluter-pays (=subsidies)

7. Carbon leakage and producer/consumer responsibility • Only matters if some emissions are not priced (costs cannot be passed on) • Otherwise, incidence of costs doesn’t depend on point of imposition • Negotiation of national GHG targets can take into account producer/consumer issue • Problems with border carbon adjustments: • “Pure” version likely has insurmountable data problems • Look like a “big stick” to poorer countries; reduce chances of new global climate agreement, especially if not accompanied by very substantial aid • Because they don’t consider actual likelihood of carbon leakage, they will result in unnecessary subsidies (e.g., do oil sands exporters need a BCA?) • Alternative solution: focus on demonstrable carbon leakage • Independently assess each sector’s profitability, the size of its GHG-related costs relative to profits, the extent to which foreign competitors are subject to carbon pricing, and the ease with which production can relocate • Provide targeted production subsidy to relevant sectors, in a transparent manner