September 5-12, 2005

Legislators should offer diverse fiscal tools to promote long-term carbon emission cuts, says NRTEE

Federal and provincial governments should consider a range of fiscal instruments, embodied in a co-ordinated overall strategy, to promote long-term reductions in carbon emissions, says the National Round Table on the Environment and the Economy (NRTEE).

Its State of the Debate paper, titled "Economic Instruments for Long-term Reductions in Energy-based Carbon Emissions," proposes a constructive and effective approach combining both broad-based and targeted measures, including subsidies, credits, user fees and taxes, to encourage reductions in the long-term of greenhouse gases and the promotion of key energy technologies.

The report was written in the context of the NRTEE's Ecological Fiscal Reform (EFR) and Energy program, whose stated purpose is "to develop and promote fiscal policy that consistently and systematically reduces energy-based carbon emissions in Canada...without increasing other pollutants." EFR - defined as an integrated strategy to redirect taxes and government spending to encourage a shift toward sustainable development - is based on the understanding that how the government taxes and spends has a tremendous effect on the way the economy works.

Typically, however, the government does not take consistent, strategic advantage of the inherent power of fiscal policy to promote objectives with simultaneous environmental and economic benefits. Efforts to date, such as using taxation and tax credits to support wind power and encourage greater use of ethanol as a transportation fuel, have been piecemeal, says the report.

The NRTEE points out that while long-term reductions in carbon emissions should be assigned a higher priority in energy policy, climate change mitigation alone is not enough to ensure success. The goal of reducing emissions should not be pursued in isolation from other social priorities such as quality jobs, energy security, productivity and community development. If the opportunities and benefits associated with long-term emission reductions can be shown to align comfortably with these other priorities, there will be increased interest and greater gains, says the report.

Among the benefits to be obtained from long-term carbon emissions reduction are energy security, cleaner air and improved quality of life, reduced health care costs, new jobs and regional development, enhanced industrial capacity in new environmental technologies, greater presence in growing export markets and better ability to compete in international markets.

The NRTEE's EFR and Energy program has adopted a 25-year perspective, based on the belief that the Kyoto timetable would not allow enough time for the orderly development and implementation of mitigation and adjustment strategies and policies enabling the shift to sustainable development.

Based on both consultations and analysis (including three case studies of emission reduction technologies at differing stages), the study concludes that economic instruments can make a significant contribution to achieving long-term reductions in energy-based carbon emissions. Their full potential will only be realized under certain circumstances, however.

The government must clearly restate its sustained commitment to long-term carbon emission reductions, then develop fiscal policy in a coherent, consistent way in order to support this commitment. Federal action must be closely co-ordinated with provincial strategies for achieving the same objectives. The introduction and application of economic instruments must be accorded adequate time and a degree of predictability so that efficient, effective investment decisions can be made and implemented. And emission reduction technologies being addressed by economic instruments must be assessed for their life-cyle potential for reducing carbon emissions.

The report further states that there is no contradiction between promoting long-term carbon emission reductions through EFR initiatives and pursuing other important social objectives such as energy security and economic development. What is needed, however, is a framework that clearly describes the opportunities that exist for achieving these objectives and the actions needed to do so.

The analysis also concludes that promoting energy technology development through EFR initiatives does not necessarily equate to long-term emissions reduction. Accordingly, carbon emission objectives need to be integrated with technology development policies.

Finally, the report says economic instruments designed to promote long-term carbon emission reductions through technology need to reflect both the market and the technological maturity of the technology in question. For mature carbon emission reduction technologies (represented by the case study on industrial energy efficiency), economic instruments should focus on facilitating the adoption of existing technologies and supporting the development of new energy efficiency technologies, particularly those offering major energy efficiency benefits (e.g. through new production processes).

For emerging carbon-efficient energy technologies (represented in the emerging renewables case study), economic instruments should focus on bridging the price gap between emerging and mature technologies. This assumes that the gap will narrow with increasing market penetration and progressively favourable economies of scale.

For longer-term emission reduction technologies (represented by the hydrogen case study), the focus should be on promoting research and development to address critical technical and economic barriers.

The NRTEE's report follows on the heels of the federal government's proposals for a domestic carbon credit trading system (ELW August 22-29, 2005) and will help outline other methods that can be implemented to meet Kyoto obligations. The report may be viewed on the NRTEE Web site, www.nrtee-trnee.gc.ca.

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