Thursday, January 10, 2008

Carbon tax vs. Cap and Trade vs. Baird's Beer Belly

It is pretty well understood, and accepted, that Canadians have to lower our collective emissions of greenhouse gases (GHG), at least, it is understood by all the opposition parties, and the vast majority of voters.

What is less well understood is how are we going to do it? The two common methods are cap and trade system and a carbon tax. So, how do they work, which one is better, which should Canada implement, and why aren't we doing it already?

Carbon Tax. This is pretty simple. The government requires all producers of GHG to monitor and report there emissions. Then they pay a fee for each tonne equivalent of CO2 they emit. Would this raise prices? Yes. Prices of any product that has associated emissions would go up. Would the cost of living go up? Not necessarily. If the government offset the carbon tax with income tax cuts (which are much better for the structure of the economy than GST cuts) the cost of living could stay the same. The whole point is to get consumers and companies to use less of the things that emit the most GHG. The issue is then how high should the fees per tonne of CO2 be? It has to be high enough to provide a significant incentive to reduce emissions, but not so high it crushes the economy.

Cap and Trade System. This is a much more difficult to understand system, but it avoids the unpalatable term "tax". The Government sets the total amount of emissions the country is allowed for the year. The Government creates formulas to assign each business a certain amount of GHG credits for that year. If the business is over their credits, they must purchase credits from a carbon credit trading market. If a business is under their credits they may sell their credits on the market. This system penalizes the heavy polluters, and rewards those making reductions. The end effect is the same as a Carbon Tax. Because the government sets who gets how many credits, it allows the government to direct the economy. I don't think this is a good idea. Managed economies have not had a track record of doing as well as the free market.

I prefer the Carbon Tax. It is simple. It penalizes the worst emitters and rewards those that reduce their emissions. It pushes the economy towards less emitting industries, but does it while allowing the market to decide what is best. I have a lot more faith in the market than bureaucracy.

Why don't we have a Carbon Tax now? Europe has had a cap and trade system for years. Even the US has a carbon market before they have regulations. The Harper government thinks that Canadians do not want to do anything about climate change. Everything was in place to have a carbon tax three years ago and has been left to languish with child care, poverty reduction, and infrastructure investment. I would gladly support a 30% income tax reduction traded for the equivalent Carbon Tax. If we can't have a Carbon Tax, I would support a cap and trade system too, as long as the credit assignment process was open and transparent.

Either is wishful thinking under the current government.




FredM said...

"Would the cost of living go up? Not necessarily. If the government offset the carbon tax with income tax cuts"

Thats a nice assumption but what if they dont lower income taxes?

Like so many other articles on this topic, this one also fails to show me how actaul GHG numbers will be lowered by Canadians using these 2 methods. Its amazing how much interest liberals show with the enviroment. Maybe if they would have shown this much interest while they where in power we wouldnt have the problems we have now. The more we read about how we need to fix the enviroment the more we remember how the liberals dropped the ball and "didnt get it done".

Why keep reminding us?

Jake Gray said...

A couple of things:
1. Blaming others does nothing to make up for actively derailing international efforts to reduce GHG's now. Example, Baird in Bali. The Liberals were actively developing binding reduction targets for large polluters, and building a carbon tax package. The interest, and action was there. The media and public interest was not there. Remember the Montreal Conference? Every government blames the one before it for there shortcomings. I want action, not excuses.

2. Any government that brings in a large tax that doesn't offset somewhere people feel and notice it, is a government that wont last very long. Any one remember the Progressive Conservatives? It is very clear and simple how these methods work. They apply a price to GHG emissions. People like money. If they save money or make money by emitting less, they will. The market is surprisingly efficient when the right price signals are in place.