Regulating Carbon Emissions in Canada – Options

The amount of emissions actually reduced would depend on how payments in lieu of emission reductions, one compliance pathway that is being contemplated, are spent. Ideally, payments would be oriented to some mix of short-term emission reductions and long-term technology investments.

To achieve reductions while minimizing costs and hence competitiveness impacts, notes the report, the ideal policy is one that has the highest marginal cost to reduce the intensity of production and has the lowest average cost to dampen competitiveness impacts.  If the objective is to slow new oil sands development, however, then a higher average cost matters more. But dividing the cost to the policy across all emissions and calling it a weak incentive to abate emissions is flat out wrong, notes the report.

Scenario 3, the 40/40 proposal is also in step with industry expectations on future carbon exposure (Sustainable Prosperity, 2013), according to the IISD assessment, which notes that industry project hurdle rates, which set “go” or “no-go” investment decisions, already account for a $40 marginal cost.

[stextbox id=”custom” float=”true” width=”200″ bcolor=”add3d5″ bgcolor=”add3d5″ image=”null”]”Industry, the federal government and Alberta need to shake hands and finally get on with it, or we let our trading partners put a price on carbon for us.”[/stextbox]

Sawyer notes “We cannot therefore say that formalizing this $40 cost will significantly affect project economics and therefore investment decisions. Formalizing this shadow cost will certainly hit sector profits, but that seems unlikely to cast a long shadow of doom over industry investment. Indeed, the average cost of all the proposals is certainly well below one dollar per barrel produced nationally, even before tax and royalty interactions reduce the impact further.”

Also notes the report, the 40/40 proposal sets an incentive to abate comparable-to or well-above world-leading GHG policies such as British Columbia’s carbon tax at $30, California’s carbon permits at $13 (California Air Protection Agency, 2013) and European Union permits trading at $3.75 (as of April 18, 2013).

What does this all mean?

In conclusion, Sawyer says the various proposals aren’t far apart in terms of their ambition, and a compromise is possible. “While setting a national GHG policy aligned with Alberta’s 40/40 proposal won’t please everyone, it strikes a good balance,” he argues.

Taken together, the proposals on the table provide a legitimate basis to deliver emission reductions at reasonable costs, in effect balancing environmental performance and competiveness, concludes the report.

The IISD Report is available here.

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