Smoke and Mirrors

In four short years, the Kyoto Protocol will expire, laying bare the ineffectiveness of Canada’s six successive climate-change plans.

The numbers already tell the tale. While Canada committed to reduce greenhouse gas emissions to six per cent below 1990 levels by 2012, the reality is that we’re more than 30 per cent above that benchmark. And thanks to the oil sands projects in northern Alberta, our emissions continue to rise. During last November’s climate change summit in Bali, the European Union signalled it is looking for a successor to Kyoto that would reduce greenhouse gas emissions by as much as 40 per cent (from 1990 levels) by 2020. For Canada, that would mean cutting our current emissions by more than half.

Canada’s dismal record illustrates the failure of voluntary programs and clean energy subsidies. Under both the Liberals and now the Conservatives, Ottawa has sought to reduce emissions using consumer incentives (for fuel efficient cars and home improvements), research grants, and subsidies for transit and renewable energy projects, such as wind farms. Evidently, this strategy has failed to make a dent. “The problem with the current policies is that they’re all out in the future,” says University of Toronto economics professor Don Dewees. “That’s a mistake because we wind up doing nothing.”

Pointing to Canada’s backsliding, climate change experts increasingly stress the need for a more assertive approach. Some politicians are taking heed. Earlier this year, British Columbia became the first jurisdiction in North America to impose a genuine carbon tax. Until recently, such moves seemed to lack grassroots support. But Dewees has been taken aback by how quickly public opinion is shifting. A poll conducted in February found that three out of four British Columbians support a carbon tax. “A year ago, I would have said, ‘Let’s not talk about a carbon tax because it’s politically hopeless.’ But that’s changing,” says Dewees.

As Canada heads toward the next round of climate talks, slated for December in Poland, we asked several U of T experts to propose an effective climate change strategy that will get us on track to meet our Kyoto commitments – without hobbling the economy.

Establish a national carbon tax
According to Dewees, Canada must move quickly to enact a national $15/tonne carbon tax rather than continue to put off effective change. “A good plan will impose costs everyone will feel within a year,” he says.

The premise behind the carbon tax comes directly out of Economics 101. The earth’s atmosphere has a limited capacity to absorb carbon dioxide (and the five other major greenhouse gases), so this capacity must be treated as a resource with a tangible economic value. “Putting a price on the atmosphere is critical,” says Mark Jaccard, an economist at Simon Fraser University and co-author, with Globe and Mail columnist Jeffrey Simpson, of Hot Air. “The abatement of greenhouse gas emissions will not occur without it.”

But what is the right price? B.C.’s new $10/tonne levy on carbon emissions will add less than three cents to the cost of a litre of gasoline and heating oil, although the tax will rise to $30/tonne by 2012 – a ramp-up Dewees describes as “aggressive but possible.” Some proponents argue that Ottawa should set a national carbon tax at $30/tonne of emissions, and raise the rate at regular intervals to $100 by 2030. Dewees believes a target of $50 by 2020 is more realistic.

Then there is the question of what the government should do with the extra revenue. Some environmental groups, such as the Pembina Institute, argue that governments should use the carbon tax windfall to fund transit and renewable energy projects. But Dewees disagrees, arguing that the money should be returned to taxpayers either in the form of a rebate or lower income, corporate or sales taxes. He points to the quid pro quo at the heart of B.C.’s new carbon tax; alongside the new levy, the government said it would give every citizen a $100 rebate. In other words, the government won’t suck additional tax dollars out of the economy. “Without that linkage,” says Dewees, “I think this will be a really tough sell [for voters].”

Another critical element of a national carbon tax is its simplicity. While B.C. imposed the tax at the consumer level (you pay when you buy gas, for example), Dewees argues in favour of applying the tax at the point of production: the refinery or the coal mine. “Because there are many small sources of carbon dioxide (gas furnaces, motor vehicles), imposing the tax at the point of emission is much more costly than imposing it upstream at the level of wholesaler or even producer or importer.” Ultimately, consumers will feel the impact as producers pass along the extra cost of paying the tax.

The final piece of an effective national carbon tax plan involves public information. Ottawa must inform consumers and businesses about future increases in the levy well in advance, says Dewees. If the long-term schedule of carbon tax hikes is well known and then adhered to, consumers and companies can make long-term decisions that anticipate the rising cost of fossil fuels. In other words, if a car buyer or a homeowner shopping for a new furnace knows that, three years from now, fuel prices will rise due to an increase in the carbon tax, they will be better positioned to calculate the long-term financial benefit of purchasing a more energy-efficient product.

Likewise, when energy companies invest in new equipment, their planning horizon is often 15 to 20 years. “We’re caught in the dilemma of industry wanting some certainty about the future,” says Dewees. If firms understand how the regulated price of carbon will change over the long run, they will be able to plan their capital expenditures accordingly.

Beware of “cap-and-trad” loopholes
Under a “cap-and-trade” system, large emitters of greenhouse gases are granted emissions permits, up to a limit. If they can’t meet their target, they have to buy permits from companies that have reduced their emissions below the limit. These permits trade on an exchange. Governments can push industries to improve their overall performance by lowering the limits over time.

In 2005, the European Union established an emissions trading scheme as part of its Kyoto commitment. In Canada, Alberta and the federal government are now developing emissions trading policies for large industrial polluters. Critics predict that these two Canadian trading ventures will fail to make a meaningful dent in emissions, however, because they aim to cut emissions intensity – the proportion of greenhouse gases emitted per unit of production – rather than achieve an absolute reduction, as required by Kyoto.

While he favours the predictability and simplicity of an across-the-board carbon tax, Dewees says the Harper government could press ahead with a “hybrid” climate change plan – one that imposes a carbon tax on small emitters (vehicles, homes, small businesses) and creates an emissions trading system for large industrial companies (cement plants, oil and gas refineries, mines). But economists such as Dewees and Jaccard and many environmentalists warn that cap-and-trade schemes are both administratively complex and vulnerable to compromises that reduce their impact. “A cap-and-trade system involves the very difficult business of deciding who gets what [emission] allowances,” says Dewees. “There’s a lot of lobbying because the government is giving away the right to pollute.”

Cap-and-trade also works better in industries where the emissions-control technology – scrubbers to remove nitrous oxides from smokestacks, for example – is well developed, which is not the case with greenhouse gases. Where there’s a well-established technology, a company can plan to invest in emissions-reducing equipment and thus reduce its need to purchase permits. With greenhouse gases, however, technological solutions, such as pumping carbon dioxide underground and into spent gas wells, remain experimental at best. “Without the control technology,” says Dewees, “the price of the emission allowances will skyrocket.”

Create Sustainable Trade Policies
In a country dependent on trade, a national climate-change policy should be designed to make sure that imports are priced to reflect the true cost of greenhouse gas emissions while our exports aren’t rendered uncompetitive by domestic carbon taxes.

On the export side, Dewees says that if the federal government adopts a carbon tax, it must also provide a credit to the exporter that’s equal to the value of the carbon tax on goods that leave the country. He cites the example of cement, a commodity that creates heavy greenhouse gas emissions while it is being manufactured. Under a carbon tax system, cement produced in Canada might not be able to compete with cement produced in a country without a carbon tax. An export credit solves the problem: the domestic production of a Canadian cement plant will continue to be subject to a carbon tax, but the shipments leaving the country will not.

The question of imports is trickier: if Canada is to adopt a tough-minded climate change plan that will deliver real results, part of the equation must involve looking at the carbon footprint of imports. After all, our contribution to reducing global climate change will be meaningless if we continue to bring in goods produced in countries that ignore their Kyoto obligations.

Faculty of law professor Andrew Green points to a measure that has gained increasing attention in the past year: socalled “border tax adjustments.” The U.K. is studying such a tariff and France has said it supports this kind of duty on imports. The idea is that products imported from countries that are not Kyoto signatories or fail to comply with their Kyoto obligations will be slapped with a tariff that brings their prices up to the levels of goods produced in countries with carbon taxes. The French have threatened to use the border tax adjustment against American imports. Green says Canada is also “in a difficult spot” because of our dismal performance on reducing greenhouse gases. “France is saying that they’ll put taxes at the border against U.S. [goods] because the U.S. is not part of Kyoto,” he says. “We’re [also] vulnerable.”

As Canada and the rest of the world heads into the next climate change summit, Green argues that Ottawa “should try to get trade measures into the next agreement.” The adjustments, he says, must be tough enough to encourage importers to lower their own carbon footprint, but not so high as to become trade barriers. By way of precedent, he cites the Montreal protocol on ozone-depleting substances, which included bans on the trade of goods that use aerosols and other chemicals that destroy the ozone layer. “There must be some sort of sanctioning mechanism in the next [climate change deal].”

Use road pricing to reduce driving
Almost half of Canada’s population is concentrated in six large urban regions, all of which rely increasingly on federal funds for the construction of major transit and transportation projects. If Ottawa wants to meet its climate change goals, it will have to use its clout to persuade the residents of big cities to drive less.

Fossil fuels burned for transportation accounted for 200 megatonnes of greenhouse gas emissions in 2005, or just over a quarter of Canada’s total. Last year, the Harper government announced it would press the auto industry to invest in more energy-efficient vehicles as a means of reducing transportation-related emissions.

Yet this problem isn’t just about the tailpipe and the engine. Most economists believe that when drivers don’t have to pay to use roads and highways, they overuse them, thus increasing emissions. “When I’m driving on a crowded highway, I’m slowing everyone else down but I’m not paying for it,” says Matthew Turner, a U of T professor of economics whose work focuses on urban sprawl and land use. “There’s a case to be made that people drive too much because access to roads doesn’t cost them anything.”

He says road pricing – in the form of highway tolls, congestion fees for driving downtown and higher parking rates – achieves multiple goals: it reduces the sort of congestion that undermines productivity in sprawling urban areas and cuts transportation-related emissions. Turner also believes that road pricing is more effective in altering driver behaviour than carbon taxes, which add only a few cents to the price of a litre of gas. Because both gas guzzlers and hybrid cars will have to pay tolls or congestion charges, such measures will encourage more people to walk, ride bicycles or use transit.

While tolls have existed on U.S. interstates and many European highways for decades, they face considerable political resistance in Canada. But, as with the carbon tax, government tentativeness may be waning. London and Stockholm have congestion charges, while both New York and Greater Toronto are studying them. John Miron, chair of the department of social sciences at U of T Scarborough, points out that the world’s most effective road pricing system can be found in Singapore, which has used a combination of very high vehicle registration fees (over US$100,000) and tolls to limit driving and encourage transit use. While he admits that Singapore’s autocratic form of government and its island status make it a poor model for Canadian cities, the lesson is that moderate road pricing may fail to achieve real change.

As with the carbon tax, the advent of road pricing also raises the question of how the revenues will be used. In London, the congestion charge is earmarked for public transit and bicycle lanes. But Dewees argues against dedicating government revenues to a particular form of spending, such as transit improvements. Miron adds that cities with road pricing must recognize that tolls and congestion charges tend to disadvantage lower-income residents, so some of the revenues should be directed back to them.

Economists such as Turner also note that governments will get the most leverage from their road pricing revenues by investing in cheaper modes of transit, such as buses rather than subways or even light rail. With Canada’s big-city mayors calling on the federal government to establish a national transit strategy, Turner’s research shows that buses represent the most cost-effective investment in terms of providing transportation alternatives to growing urban regions.

The bottom line
No one wants to pay more taxes, but it’s becoming increasingly difficult to ignore the fact that reversing climate change will involve major changes in our fiscal arrangements. Much of the opposition to the carbon tax emanates from fossil-fuel companies, which will experience declining demand for their products if governments impose such levies. Yet Dewees points out that energy firms will migrate into more sustainable business lines, such as wind and solar, or even nuclear power and clean coal, both of which become more financially viable with an assertive national carbon reduction plan.

What’s more, naysayers and lobbyists must contend with the fact that such policies haven’t caused economic havoc elsewhere. Congestion charges in London and Singapore didn’t produce an exodus of commercial activity. As for a national carbon tax, the experience of many European jurisdictions suggests that economic growth and tough climate change policies do co-exist.

Jaccard points to the case of Norway, which introduced a carbon tax in 1991, at $30/tonne. For Canadian policymakers, there are strong comparisons to Norway, which has experienced a boom in offshore oil drilling. The Scandinavian nation has seen a 40 per cent increase in economic growth per capita since the early 1990s, even though the lion’s share of its multibillion-dollar oil and gas revenues end up in a trust fund. Norway’s per-capita emissions have remained flat since 1991, while Canada’s have risen six per cent. Norway has a carbon tax. We don’t. Moral: Growth in the economy isn’t necessarily coupled to growth in emissions. As Jaccard notes, “Evidence suggests that a $100/tonne carbon tax will stimulate substantial reduction in greenhouse gases without devastating the economy.”

John Lorinc (BSc 1987) is a Toronto journalist. His most recent book is The New City (Penguin Canada).