December 3, 2007

Low-carb(on) diet means no free emissions, says CD Howe paper

Climate change policies and greenhouse gas (GHG) emission reduction targets set by successive Canadian governments over the past two decades have had little effect as emissions have continued to rise, along with public concern.

In "Designing Canada's Low-Carb Diet: Options for Effective Climate Policy," a paper released by the CD Howe Institute, Mark Jaccard, a professor at Simon Fraser University's School of Resource and Environmental Management, attributes the failure of the various policies to the assumption that voluntary policies (comprising mainly information programs and subsidies) are a substitute for compulsory policies (specifically regulations and financial penalties).

Having concluded that policy interventions for GHG reduction are warranted, Jaccard examines policy options for achieving this goal, and discusses how the economy might respond to different public policies (using models developed by himself and his colleagues at SFU).

He notes that the GHG problem is referred to by economists as a "negative externality market failure." This means that the unfettered market leads to an overproduction of GHG emissions because the costs of their damage are not reflected in the prices of the goods and services that caused them. In the absence of policy, says Jaccard, the atmosphere is a free waste receptable for GHGs.

As early as 1920, it was suggested that a tax on emissions would be the most economically efficient response to this type of market failure, and by the 1960s economists were proposing cap-and-trade systems. These two responses, and various hybrids of them, have been the focus of debate ever since, notes Jaccard.

The 1980s and 1990s saw a rise in the promotion of voluntary initiatives to protect the environment as governments sought to reduce their intervention in the economy in order to foster growth. In keeping with this policy, says the paper, early Canadian GHG reduction efforts focused on the provision of information and subsidies-which did not yield the predicted declines in emissions.

Currently, says Jaccard, support is growing among business leaders, politicians and even environmentalists for the earlier policies involving carbon taxes and/or emissions trading systems. In designing a policy for GHG reduction, he points out that there are a number of criteria that require consideration such as administrative feasibility, political acceptability, co-ordination with the rate of investment in new equipment, buildings and infrastructure, and international co-ordination (i.e. with the policies of other countries).

Ultimately, however, Jaccard argues that Canada will have to impose a cost on GHG emissions. As long as current policies continue to allow free dumping of emissions into the atmosphere from current and future sources, significant reductions will not be achieved, he states.

Moreover, policymakers are serious about minimizing the economic impacts of GHG reduction, they should adopt an economy-wide carbon tax. Experiences with carbon taxes in other countries have shown that with careful design, negative impacts on the economy can be minimized.

This tax, Jaccard, continues, should be implemented immediately, albeit at a modest level that would ramp up at a rate consistent with the success of international negotiations toward a broad international effort at global emissions reduction.

Regulating the price of GHG emissions, will likely be more effective than regulating their quantity, since it is administratively easier to ensure that every emitter faces the same cost than it is to apply a cap on many small emitters. In addition, the emissions cost should be applied to all forms of GHG emissions, not just carbon dioxide, and it should be applied as directly as possible to emissions at their source (e.g. industrial plants, buildings and vehicles) to minimize the risk of creating a disincentive to use energy or fossil fuels when the objective is to reduce emissions from fossil fuel use.

In the absence of the political will in Canada to implement a carbon tax, policies should be modified to ensure that they approximate the effectiveness and economic efficiency of such a tax, says Jaccard.

For example, cap-and-trade schemes applied to only part of the economy would be only partially effective. And flexibility provisions in such cap-and-trade systems allowing subsidies to flow from regulated to unregulated parts of the economy would not be effective.

Jaccard says evidence suggests that well-designed policies could keep costs over the coming decades to a level that most Canadians would be willing to accept as a necessary burden for reducing the climate change risk - provided this was part of a global effort with a good probability of success.

Author Mark Jaccard is a Research Fellow at the CD Howe Institute and a member of the National Roundtable on the Environment and the Economy. The Designing Canada's Low-Carb Diet paper is part of the Benefactors Lecture 2007 series, sponsored by Bennett Jones LLP. It may be viewed on the CD Howe Web site, www.cdhowe.org.

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