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Market News

 May 23, 2007
No financial penalties leads to more emissions

 Montreal, Canada (GLOBE-Net) -- In order to achieve cuts in greenhouse gas emissions, Canada must employ strict policies that levy a financial charge on emissions or the use of fossil fuels, says a new study released by the Institute for Research on Public Policy.

According to Dr. Mark Jaccard and PhD. candidate Nic Rivers of Simon Fraser University, successive Canadian government policies that relied on subsidies and information to encourage voluntary actions were ineffective because they did not carry a penalty for increased emissions. Canada faces challenges including environmental jurisdiction between provincial and federal governments, pressure on export-oriented industries (including energy), and a cold climate, so will need a comprehensive and strict approach, they note.

"The only hope for substantially reducing GHG emissions in a market economy is to ensure that the atmosphere can no longer be treated as a free waste receptacle. The atmosphere must be valued," says the study.

The most effective policy options are identified as a 'carbon tax' or other market-oriented regulations, such as an cap-and-trade system, that force reductions in activities which emit GHGs. The economists examine a scenario to reduce Canada's domestic GHG emissions by about 60% from today's level by 2050, a level proposed by the National Roundtable on the Environment and Economy (NRTEE), and an accepted target for rich countries.

The proposed strategy involves three key policies: a carbon tax or cap-and-trade system on large upstream emitters, a vehicle emissions standard, and improved appliance and building regulations.

A greenhouse gas tax is the most environmentally and economically efficient option, but the authors note that this has been suggested in North America for more than a decade with little success. Political concerns make a carbon tax unfeasible, so the researchers suggest a 'carbon management standard' that is essentially an emissions trading system for large emitters, "with a twist".

Jaccard and Rivers propose market-oriented regulations that would require fossil fuel producers and importers to ensure that a growing fraction of the carbon they extract from the earth's crust does not reach the atmosphere, a share that would rise over time to allow time for technology adoption. This means that firms would either have to capture and store the carbon, or reduce it in some other manner.

The standard differs from an upstream cap and trade system proposed by previous governments. Rather than allocating permits to emitters in accordance with a cap, the government would collect certificates from firms that must match their aggregate obligation. At the end of each year, each regulated firm would be required to submit certificates in accordance with its carbon storage/avoidance obligations, with substantial financial penalties for non-compliance.

Firms would be able to buy and sell credits in an established market, and would be able to bank current credits for use in the future or borrow from future time periods for the present. To address a major concern of the oil industry, fossil fuel exporters could receive partial exemptions from the obligation for exported carbon in order to limit the impacts on their international competitiveness.

The system would cause increased investment in carbon capture and storage technologies, and low-carbon uses of fossil fuels. Projects to reduce fugitive emissions from oil and gas wells, and reduce methane emissions from coalmines and the agricultural sector could also be used to earn certificates.

However, as carbon capture and storage and other low-carbon fossil fuel uses are generally more expensive options than nuclear or renewable energy, society will gradually determine that "shifting away from fossil fuels is cheaper than using fossil fuels without emissions", says the study. The shift will likely vary between regions, depending on natural resource endowments.

The authors argue that the system would be effective because it would cover all fossil fuel GHG sources in the economy. It would include measures such as a 'safety valve' to protect the economy, as well as monitoring, and certificate banking and borrowing.

In combination with this system, the study proposes a vehicle emission standard (VES) in the form of an obligation and certificate trading system that requires vehicle manufacturers and importers to sell a minimum number of zero-emission vehicles by a target date as a percentage of total vehicle sales. This market share percentage grows over time, thus creating and expanding an artificial niche market for low or zero-emission vehicles. "Development of zero-emission vehicles is critical for generating deep GHG reductions over a long time period," the authors argue.

Though the carbon management standard would encourage greater efficiency and reduce fossil fuel consumption for buildings, the study notes that those who pay for emissions reducing investments are often not those that benefit from future cost savings. The most cost-effective way to reduce GHG emissions from buildings is in design and construction, so Jaccard and Rivers propose strengthened performance standards, either in terms of energy efficiency or GHG emissions, for all new buildings.

The current myriad of provincial building codes can be quite lax in areas, and implementing new standards would either eliminate the least energy efficient (or GHG intense) new buildings, or be set as an average standard to encourage a shift across the entire market, says the study.

Canada requires such policies to achieve any reductions in GHG emissions, conclude Jaccard and Rivers: "In the absence of a dramatic shift in approach, it is very likely that GHG emissions in Canada will continue to grow quickly, especially as a result of the combined effects of population growth, economic growth, and growth in production of crude oil from Alberta's oil sands."

Read Canadian Policies for Deep Greenhouse Gas Reductions here.