March 29 - April 5, 2004

Sector-specific market-oriented regs dominate proposed GHG reduction policies

The Morning After - Optimal Greenhouse Gas Policies for Canada's Kyoto Obligations and Beyond, a new paper released by the CD Howe Institute, contends that while it is still too soon to assess fully Canada's approach to GHG emission reduction, mounting evidence indicates that this approach is environmentally ineffective and economically inefficient.

"There is strong evidence . . . that the current GHG policy strategy in Canada - dominated as it is by voluntarism and modest subsidies - will fail to spur the technological change required for substantial GHG reductions," state authors Mark Jaccard (a professor in the School of Resource and Environmental Management at Simon Fraser University), Nic Rivers (a research associate at SFU) and Matt Horne (a researcher at the Pembina Institute).

The study evaluates the leading current policies in terms of effectiveness, economic efficiency, administrative feasibility and political acceptance. These include command-and-control; financial disincentives; financial incentives; voluntary and information; ecological fiscal reform; emissions caps and tradable permits (ECTP); and sector-specific market regulations. While no single approach is optimal for all criteria, more recent approaches perform better on average and avoid a strong negative assessment against any single criterion.

Their study proposes an alternative policy package which blends some command-and control regulations (e.g. modest efficiency standards), with a continuation of some voluntary initiatives. The dominant element of their plan, however, is sector-specific, market-oriented regulations.

These are technology-forcing regulations requiring a minimum market share for low-emission technologies (e.g. vehicle drivetrains) and energy forms (electricity generation), or a maximum level of emissions from economic sectors (i.e. major industries), while allowing time and flexibility for reaching these objectives.

This policy orientation, say the authors, would stimulate privately-funded research, development and commercialization of new technologies without triggering politically unacceptable increases in production costs and energy prices in the short term, and without assigning government the risky task of picking technological winners and losers.

Five specific policies making up the proposed package focus on changing only a small part of the market initially.

*A large industry ECTP would affect electricity generation as well as large industry. This market-oriented regulation would involve switching to lower-GHG fuels and more efficiency equipment, leading to reduced demand for electricity.

*A sector-specific market-oriented regulation would stipulate a renewable portfolio standard for electricity, entailing a switch to renewable energy sources for electricity generation.

*Another sector-specific market-oriented regulation would affect personal transportation, setting vehicle emission standards and leading to a switch to lower-emission vehicles.

*A third sector-specific market-oriented regulation requiring carbon capture and storage would target upstream oil and gas, entailing geological sequestration of carbon from fossil fuel use.

*Finally, command-and-control regulations for building and equipment energy efficiency standards would affect the residential and commercial sectors, prompting a switch to high-efficiency appliances, buildings and equipment.

Jaccard, Rivers and Horne state that "our policy package is designed to have a minimal short-term impact on the economic welfare of individual Canadians or the competitiveness of Canadian industry, which gives it excellent prospects for achieving political acceptability.

"Because our policies are consistent with those already implemented in major regions of the U.S. and are growing in popularity internationally, they mitigate competitive risks to Canada from the U.S. decision not to ratify Kyoto, or from the possible collapse of the entire protocol. In any case, government subsidies and wishful thinking are not the answer," they conclude.

The report may be viewed on the CD Howe Institute's Web site, www.cdhowe.org.

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