California beckons with new market for emissions offsets. Will we join soon?
Acid rain was sterilizing lakes across Canada and the northern U.S. during the early 1990s, until the Americans put a dollar price on the pollution that was causing the problem. By 2002, sulphur dioxide emissions from coal-fired power plants were 40 per cent lower than they had been in 1980, as new life crept back into the continent’s dead-zone lakes.
Why not apply this same approach to the carbon emissions causing climate change?
Driven by frustration over the laggard climate change policies of North American federal governments, the WCI led by California envisioned a “cap and trade” system setting strict limits on the emissions of the biggest polluters.
From the beginning, this regional cap and trade scheme was intended to lay the foundation for a continent-wide system including the U.S., Canada and Mexico — an ambition that did not seem so far-fetched back in 2007. But nearly five years after the WCI was conceived, the can-do optimism of many of the participating states and provinces has waned. Today, just California and Quebec are sure to be there when a test-run begins in January.
British Columbia — the only North American jurisdiction to have imposed a relatively serious price on carbon to date — has already completed most of the upfront work needed to participate; all that is lacking is the political decision to move forward. So which way will the B.C. political winds blow on cap and trade?
“We’re staying the course in terms of our negotiations and collaborative work with California on a cap and trade system, but we still haven’t made a decision,” says B.C.’s Environment Minister Terry Lake, a former Kamloops mayor appointed by Premier Christy Clark last spring. Lake notes that Quebec is moving forward with a noncompliance year in 2012 — a sort of test run of the system — with full participation by 2013. “That is certainly a consideration for us.”
So if this consideration strengthens into resolve to participate, what are the risks and benefits to British Columbia of joining this small, California-led coalition of the willing? And how would such a system have to be designed to actually work?
How it works (in theory)
Historically, it has cost nothing to treat the atmosphere as a giant waste receptacle. Carbon pricing schemes, like carbon taxes and cap and trade, provide a disincentive to do this by forcing polluters to pay for the carbon they dump. A cap-and-trade system sets a limit or “cap” on the overall amount of carbon pollution from industry (and sometimes other sectors) and reduces that cap year after year, with a goal of hitting a pollution reduction target over time.
Tradable “allowances” in a quantity equal to the overall cap are distributed to participants. They in turn must quantify and report their emissions, eventually surrendering an allowance credit for every tonne of greenhouse gas they produce during a set compliance period. Polluters who do not reduce their emissions enough have two options: buy emission allowances from other polluters who have met their emission limits and have a surplus to sell, or invest in low-carbon projects as “offsets” — which are then credited as a reduction against their own emissions.
Over time, the system-wide cap on emissions is ratcheted ever downward, forcing participants to progressively lower their emissions.
How it needs to work
That, at any rate, is how cap and trade works in theory. In practice, there is enormous leeway for participants to shape and amend the rules — and therein lies both the strength and weakness of the approach, says David Suzuki Foundation climate change campaigner Ian Bruce. There are, however, ways to ensure the “environmental integrity” of a cap and trade system, he says.
“The most important thing is the cap on emissions and the target you use to ratchet down emissions year after year,” says Bruce. For example, B.C. already has a legislated target to reduce emissions by one-third over 10 years, so if we joined the WCI system, the province would need to ensure our overall cap aligns with that legislated target. Anything less would water down our existing commitment to reduce greenhouse gases.
Another key to a cap and trade system with integrity concerns those carbon ‘offsets’. According to the Pembina Institute’s climate change director Matt Horne (who has made cap and trade design recommendations to both B.C. and Quebec), they represent a loophole that must be either severely limited or closed altogether. “One analysis after another on offset systems is showing that they are not producing the emission reductions we are counting on them for,” he says.
Emission allowances as a commodity
Operating since 2005, the European Union’s cap and trade system is the largest multinational emissions trading scheme in the world. It offers important lessons about how such systems work in the real world.
When the EU system was first set up, participating companies received emission allowances for free or very little. But since participants who sufficiently reduce their emissions can sell their surplus allowances for cash, the permits acquired financial value. Giving them away for nothing ultimately resulted in windfall profits for some European companies: public wealth went straight to the private bottom line.
Bruce and Horne agree that if B.C.’s carbon market does launch, its participants must pay for their allowances from the outset — most practically, through auctions.
Volatile markets with wild swings in the price of credits is another concern, particularly in the early stages of a cap and trade system. A Massachusetts Institute of Technology study that evaluated the growing pains of the EU system details how, a little more than a year into the cap and trade trial period, allowance prices plummeted.
“The uncertainty concerning the demand for allowances is especially large at the beginning of any program,” the MIT study found, “because it reflects not only the usual unpredictable variables of economic activity, weather, and energy prices, but also, and perhaps most importantly, the amount of abatement that will take place in response to the new price on emissions.
It’s important to note that the same report considered the growing pains minor compared to the importance of creating a carbon price for Europe. “The initial challenge is simply to establish a system that will demonstrate the societal decision that GHG emissions shall have a price, and to provide the signal of what constitutes appropriate short-term and long-term measures to limit GHG emissions,” the study concluded.
The first step in the creation of the WCI regional carbon market is for participating jurisdictions to adopt their own cap and trade regulation — which California did in late October. (Quebec plans to follow later this fall.) Each participant ultimately creates their own local cap and trade system, which over time will be tweaked and harmonized to fit with the others. It’s an approach that allows fence-sitters to join the system at a later date.
When it comes into full compliance in 2013, California will set its overall emissions cap at two per cent below the state’s forecast total emissions for 2012. Industrial facilities will get 90 per cent of their “California Carbon Allowances” for free in the initial years of the program.
California will also allow at least 600 industrial emitters across the state to use offsets to satisfy up to eight per cent of their compliance obligation. For the moment, those offsets are restricted to investments in four sectors: forestry, urban forestry, “dairy digesters” and the destruction of ozone-depleting substances. (The latter targets the destruction of a wide range of waste refrigerants and air conditioning substances — which not only deplete ozone, but have profound global warming potential impacts, ranging between 100 and 11,000 times the greenhouse gas potency of carbon dioxide.)
Assuming a company gets 90 per cent of its allowances for free, and can meet eight per cent of its remaining commitment through offsets, it could meet its compliance obligation either by a minimal two per cent reduction in its emissions, or the purchase of an equivalent number of allowances.
And at the outset, only U.S.-based offset projects will be eligible for purchase by California participants, even though California’s only partner in the system is Quebec, and the closest jurisdictions to joining are B.C., Ontario and Manitoba.
“It is absolutely not a problem that California’s actual regulation restricts the emission of offset credits to the U.S.,” says Hélène Simard of Quebec’s Ministère du Développement Durable, de l’Environnement et des Parcs. “Technical work has to be done on California’s offset protocols to adapt them to Canada. This work will be done in the upcoming months.”
The case for waiting
One expert who believes that B.C. has more to lose than gain by rushing off the bench to join the California-led scheme is Mark Jaccard, a Simon Fraser University economist best known as a member of the Nobel Prize winning UN Intergovernmental Panel on Climate Change.
First of all, he argues, joining too soon could unravel B.C.’s carbon tax. If allowance prices for industry suddenly crashed to something like $5 dollars per tonne, while the rest of British Columbians were stuck paying $30 per tonne through the carbon tax, Jaccard says, political pressure to axe the tax could become overwhelming. (Thomson Reuters has projected a WCI carbon price of $30 per tonne for 2013-20 — exactly the dollar figure that B.C.’s carbon tax is scheduled to hit next July.)
Then there is the juggernaut California economy. Even if no other jurisdiction signs up, California’s cap and trade system alone will be the second largest on the planet, covering about 400,000 tons of annual CO2 (by 2015) and 350 businesses — representing 85 per cent of the state’s greenhouse gas emissions. (Initially the program will cover just electric utilities and large industrial facilities; by 2015 distributors of transportation, natural gas and other fuels will also participate)
Jock Finlayson, executive vice president for policy at the Business Council of B.C. (representing many of B.C.’s biggest companies), says some of his members in aluminum and concrete production see advantages in cap and trade versus carbon taxes, but too many questions remain unanswered. “Will the eventual rules for such a scheme be largely set by California, whose economy is 10 per cent larger than all of Canada and 10 times bigger than B.C.’s?” (B.C. mining giant Teck, Shell Canada and aluminum producer Rio Tinto Alcan declined comment when contacted for this story.)
Jaccard says two things need to happen before B.C. considers joining cap and trade: more jurisdictions must be part of it, forming a critical mass to counteract California’s dominance, and a “floor” must be imposed on the carbon price to ensure it never dips below the value of our carbon tax.
A new realm of enterprise
Despite the uncertainty of design and growing pains, there are significant advantages to the cap and trade approach — which B.C. might reap if it participates.
Unlike carbon taxes, cap and trade actually sets a hard limit on emissions that must be achieved over the short and longer term. The private sector is then set loose to innovate any way it sees fit, freeing government from dictating the winning and losing technologies. Compared to a carbon tax imposed from above, this approach appeals to the enterprising spirit of the private sector, personified by the likes of Shell Oil Company president Marvin Odum, who in 2009 expressed his company’s preference for a market approach.
“There’s an argument often that a carbon tax is more simple, it’s more direct, more predictable,” Odum said, “but the question has to be, do you get the environmental result that you’re really looking for?”
Even the complexities of developing and administering the system, often cited as a negative, have a silver lining. Creation of such a system in B.C. would grow a vast new bureaucracy of brokers, analysts, pundits and auditors. But is this a bad thing? Aren’t these the “green collar jobs” we’ve all heard so much about, which will accompany the leap to a low carbon economy?
What’s more, cap and trade may be the world’s best hope in putting a global price on carbon pollution. China has already announced plans for a nation-wide emissions trading system by 2015; India plans to set emission levels for its 563 biggest polluters by 2014. And Australia’s daring new carbon tax will transform into a “market-set carbon price” within four years.
In North America, the most promising attribute of cap and trade is that it is not a tax, and thus not instantly anathema to most of us from the outset. (This did not stop the Republican Party from misrepresenting — and ultimately derailing — U.S. President Obama’s 2009 effort to launch a national cap and trade system there as a “cap and tax,” but the point stands.)
The cap and trade devil may reside in the details, but as the creeping recovery of once-sterilized North American acid lakes testifies, we already know it can work.