If cap-and-trade is a bust, what then?

As Canadian provincial leaders meet with Prime Minister Justin Trudeau next week to try and hash out some sort of consensus on climate change initiatives and a national carbon price, dark rumblings are beginning to surface about the viability of the so-called Western Climate Initiative (WCI), the joint cap-and-trade enterprise led by California and Quebec, and soon (theoretically) to incorporate Ontario.

As I have explained in more detail in a previous blog post, I have all sorts of reservations about cap-and-trade as a means of limiting greenhouse gas emissions. The latest news just confirms me in my reservations.

Both Quebec and Ontario (if it is in fact to continue with the WCI, which is now in some doubt) would rely heavily on California's carbon market, which is substantially greater than that of the two Canadian provinces combined, in order to meet their aggressive greenhouse gas reduction targets over the coming years. But California is currently embroiled in legal challenges over whether its cap-and-trade program is effectively an illegal tax, and there is much uncertainty over whether it will be able to renew the program after 2020, when the current agreement expires.

Also, demand for carbon allowances in auctions of late has been much weaker than anticipated in both California and Quebec. The two most recent auctions, in May and August, have been woefully undersubscribed, with only 10% of available emissions credits being taken up in May, and about 30% in August. California has only raised a fraction of the hundreds of millions of revenue it initially anticipated from these auctions.

Calculations suggest that if Ontario were forced to go it alone with a cap-and-trade system it would have to set an effective carbon price nearly 9 times as much as it would within the WCI, with a concomitant increase in energy bills. Ontario Environment Minister Glen Murray still seems quite confident that California will remain a mainstay of the WCI, and will provide Ontario with an important source of low-cost emission credits for the foreseeable future. His optimism, however, is starting to look shaky at best.

The Canadian federal government is looking to adopt a minimum carbon price during the provincial environment ministers' meeting next week, although just what that price will be is anyone's guess at this point. Part of the problem is equating two very different mechanisms like a simple carbon tax and the much more complex cap-and-trade system. British Columbia's carbon tax is currently set at $30 per tonne, and for political reasons a national level seems unlikely to be set above that. Ontario's effective carbon rate within the WCI cap-and-trade system would only be around $16-18 per tonne (which is what emission credits in recent California-Quebec cap-and-trade auctions have fetched). Even at $30/tonne, BC's carbon tax only adds about 7¢ to a litre of gas, and its effectiveness as a method of reducing greenhouse gases is beginning to wane. Newfoundland recently doubled its provincial gas tax to 33¢ a litre which, with the existing 10¢ federal tax, gives an effective carbon price of $180 a tonne, which may be more like the level of taxation needed to actually have a noticeable impact on consumer behaviour and on carbon emissions.

A report by the OECD suggests that carbon prices need to be set at at least $45 to offset the damage caused by climate change. And even that will probably not be enough to meet the Paris climate accord goal of holding global temperature increases below 2°C above pre-industrial levels (we are already at 1°C). Furthermore, road transportation is not the only part of the economy that needs to be carbon-priced though, even if it may the easiest and the most visible.

The outlook, then, looks rather grim, and it is difficult to know what can best be done. To do nothing, though, is clearly not an option.

 

UPDATE

Prime Minister Justin Trudeau has definitively announced the federal government's intention to impose a minimum carbon tax on the provinces, starting a just $10 a tonne next year, but rising by $10 a year to a level of $50 a tonne by 2022, a level that would be equivalent to about an 11¢ a litre increase on gas prices. The provinces can fulfill this requirement through their own carbon tax or cap-and-trade systems, but any province that does not fully do so, will have a tax imposed on them by Ottawa to make up the difference (the proceeds of which will be returned to the province).

This tough talk has, predictably enough, ruffled some feathers, and the ministers from Saskatchewan, Nova Scotia and Newfoundland walked out of the meeting (very helpful). Saskatchewan Dinosaur - sorry, Premier - Brad Wall accused Trudeau of a betrayal of the cooperative approach to federal-provincial relations he had promised (as though Wall knows anything about provincial cooperation...), and complained that such a tax would devastate, absolutely devastate, his province's economy (then maybe it's time to rethink your province's economy, Mr. Wall).

The Prime Minster will follow up on the implementation of this climate plan at a first minster's meeting on December 8th. Good luck to him, but it won't be an easy ride.