An industry perspective on carbon emission pricing

Carbon Pricing and Environmental Federalism Conference

Queen’s University, October 17-18, 2008

Rick Hyndman

Senior Policy Advisor, CAPP

Canada’s GHG 2020 & 2050 Emission Objectives

2050 Target

2006 2020 Target

BEFORE AFTER

P set directly

“CarbonTax”

“Cap &Trade”

Free Allocation to emitters

0

Acc

ess

to O

ffse

ts

No

Complex Issue, Confusing Labels

P set via Q

Freeallocation

100%

Access to Offsets

Setting policy price

directly or via Q

Yes

100%of target

AlbertaCap &Trade

Phase 1of WCI

Phase 3

of WCI

Warner Lieberman

RGGI

Cdn Federal cap & trade

US SO2

BC Carbon tax2008

Confusing labels: carbon tax label is dead

Carbon TaxBorn 2008Died 2008

RIP

CarbonTax

Complex issue: Emission pricing design IS rocket science

Image:Calabi-Yau.png, Wikipedia

Artistic depiction of String Theory’s Multiple Dimensions

And yet ……

At its heart,emission pricing

isvery simple

Emission pricing is taxation

CANADAUne/One

Tonne CO2e

GHG Policy Compliance Certificate 1En

viro

nm

ent

Can

ad

a

The $/tonne price is set DIRECTLY,

if the tax is levied in

Canadian $

The $/tonne price is set

INDIRECTLY,if the tax is

levied inGovt- issued

emission permits

Currency of the tax is either $ or an emission permit

The P v. Q issue is: Do we set the policy price of CO2:

$/tonne

Time

Directly

Orderly, simple, clear and predictable way

Indirectly

Volatile, complex, costly and unpredictable way

or

Setting the price indirectly via a permits market is separate from emission trading

Alberta cap & trade system has:

a directly set (default) price of CO2

AND

Emission trading among covered facilities and ability to use offsets for compliance

Allocation

Facility targets: emissions taxed if above target, credits if below target

Free distribution of permits

Recycling of revenue

Design First, Bundle Later

Break design into single policy elements

Emission pricing element: using price system to drive decentralized decisions

Income and wealth effects based on the incidence of pricing

4 categories of emissions with different patterns of incidence of emission pricing

1. Upstream oil and gas production emissions (and other industries with resource rent) Prices are set internationally independent of Canadian

costs

Carbon costs on production emissions not covered by border adjustments are ultimately borne by resource owner through reduced resource rent

2. Trade-exposed industry with significant life-cycle emissions Requires border adjustment to allow incidence to flow to

consumers

3. Electricity Costs passed through to consumers, incidence varies

regionally with energy supply patterns

4. Other, end use consumption emissions Roughly common patterns of consumption across regions,

though heating energy is a question

ALLOCATIONis about

INCIDENCE

Competitivenessis an

incidence question

Border adjustments can shift incidence to end users

-25

0

25

50

75

100

125

High Seas Import Domestic Export

$/

un

it

Price net of carbon cost Border adjustmentCarbon cost

Without Border Adjustments, need to address incidence via allocation

Intensity targets for emission intensive, trade-exposed sectors

Might be possible in some sectors to accomplish via international performance benchmarks

For other emission sources, recycling should address differences in regional and sectoral incidence

Key differences:

Electricity generation

Resource industries

Recycling methods:

Federal income tax reductions

Replacement of GST

Per capita grants

Won’tdo it

Mixed federal – provincial policy

Provincial

Electricity

Resource industries

Energy intensive industry unless covered by border adjustments

Federal

Transportation

Broad energy use

THE KEY POLICY & EMISSION PRICING ISSUE

$/tonne CO2

Emissions mT CO2e

$15

$100

8002020 BAU

2020 Emissions Objective

576 7212006 Actual

Uncertain emission cost curve= Choice of emissions & costs

Where the govt says it wants to be

What the public currently supports