Many of you have likely heard the phrase May you live in interesting times.' It has long been thought to be an Ancient Chinese curse meaning May you experience much disorder and trouble in your life.' Apparently, it is neither Chinese nor ancient in origin but that's not up for debate here.

It does, however bring me to the issue of carbon tax and cap-and-trade. The interesting times' that we are heading into in my home province of Ontario are because we have recently entered into a cap-and-trade agreement with the province of Quebec and the state of California. Canada's federal government has thus far paid little more than lip service to the problem of climate change and the country remains one of the few in the world that is not part of the Kyoto Protocol. The government insists that any type of tax would be a job and economy killer. Interesting.

According to the Environmental Protection Agency (EPA):¹

Cap and trade is a market-based policy approach designed to protect human health and the environment by controlling large amounts of emissions from a group of sources. The policy first sets an aggressive cap, or maximum limit, on emissions. Sources covered by the program then receive authorizations to emit in the form of emissions allowances, with the total amount of allowances limited by the cap. Each emitting source can design its own compliance strategy in order to meet the overall reduction requirement, including the sale or purchase of allowances, installations of pollution controls, and implementation of efficiency measures, among other options. Individual control requirements are not specified under the programme, but each emission source must surrender allowances equal to its actual emissions in order to comply. Sources must also completely and accurately measure and report all emissions in a timely manner to guarantee that the overall cap is achieved.

The EPA goes on to say that a well-designed cap and trade program delivers:

In an ideal world, cap-and-trade programmes require no prior approval, allowing sources to respond quickly to market conditions and government regulators.

Cap-and-trade has been used successfully in the U.S. to reduce emissions of sulphur dioxide and nitrous oxide, two key ingredients responsible for acid rain. Existing programmes include the Acid Rain Program and the NOx Budget Program - both have the force of federal and state standards behind them. Since the early 1980s, this policy has served to cut down acid rain-forming emissions by nearly half. The net result is a much healthier environment. The European Union has had the same system in place since 2005 to reduce greenhouse gas (GHG) emissions from approximately 10,000 industrial emitters. Tokyo, a city with a carbon footprint larger than many industrialized nations, set in motion its own cap-and-trade policy in 2010. The initiative applies to its most energy and carbon intensive organizations and aims to reduce emissions to 25 percent below levels by the year 2020.

The David Suzuki Foundation states that either cap-and-trade or a carbon tax would work. With respect to a carbon tax, the foundation explains:²

Pricing through a carbon tax is a powerful incentive. Governments have to encourage countries and households to pollute less by investing in cleaner technologies and adopting greener practices. The tax itself is a fee placed on GHG pollution mainly from burning fossil fuels. The tax puts a monetary price on the real costs imposed on our economy, our communities, and our planet by GHG emissions and the global warming they cause.

Under this system, the price to pollute sets the strength of the economic signal and determines the extent to which green choices are encouraged. For example, a stronger price on emissions will lead to more investment in cleaner energy sources such as solar and wind power. And although a carbon fee or tax makes polluting activities more expensive, it makes green technologies more affordable as the price signal increases over time. Most importantly, a carbon tax gets green solutions into use.

Many industrialized countries have used carbon taxes to discourage fossil fuel emissions and promote clean energy. For example, Sweden has been able to reduce GHG emissions since 1991. Although a suite of other policies has also been used, the Swedish Ministry of Environment estimated the carbon tax has cut emissions by an additional 20 percent (as opposed to relying on regulations), enabling the country to achieve its 2012 target under the Kyoto Protocol. Sweden's policy tax has been credited with spurring the innovation and use of green heating technologies that have significantly phased out the burning of oil.

Sweden's carbon tax is $140 per tonne of carbon pollution. Since the policy was introduced, Sweden's economy has grown by more that 100 percent and the country recently ranked fourth in the world on economic competitiveness.

In Canada, British Columbia and Quebec currently use carbon taxes as part of their strategies to reduce emissions and encourage investments in energy-efficiency and renewable energy.

There is much discussion about which system is the best way to put the brakes on GHG pollution. The simple answer is that it depends on how each system is designed thereby determining the environmental and economic efficacy. For example:

1. How strong is the economic incentive (i.e., the carbon price) to reduce emissions and switch to cleaner energy?
2. To which emission sectors does the policy apply?
3. How are the revenues to be used? Are they invested in green infrastructure or corresponding tax breaks?

Experts claim that if both approaches are well-designed, the two options are quite similar and could even be used in tandem. It's paramount that whatever programme or price is selected, it should be applied broadly in that country's economy and that the price on carbon pollution provide an adequate incentive for everyone - from the smallest household to the largest industry. The critical factor in reducing heat-trapping emissions is the strength of the economic signal. A stronger carbon price will jump-start more growth in clean, renewable energy and will encourage adoption of greener practices.

Both cap-and-trade and carbon taxes can work well as long as they are designed to provide a strong economic signal to get on board with cleaner energy. According to the Suzuki Foundation, some differences exist:³

Cap-and-trade has one key environmental advantage over a carbon tax: It provides more certainty about the amount of emissions reductions that will result and little certainty about the price of emissions (which is set by the emissions trading market). A carbon tax provides certainty about the price but little certainty about the amount of emissions reductions.

A carbon tax also has one key advantage: It is easier and quicker for governments to implement. A carbon tax can be very simple. It can rely on existing administrative structures for taxing fuels and can therefore be implemented in just a few months. In theory, the same applies to cap-and-trade systems, but in practice they tend to be much more complex. More time is required to develop the necessary regulations, and they are more susceptible to lobbying and loopholes. Cap-and-trade also requires the establishment of an emissions trading market.

A colleague of mine in the U.S. recently sent me a note concerning California. The state has enacted its landmark climate legislation, AB 32, which requires California to reduce its GHG emissions to 1990 levels by 2020. To achieve this goal, the policy authorized the state's Air Resources Board to enact various mechanisms to reduce emissions: a cap-and-trade programme, a renewable portfolio standard (requiring utilities to get one-third of their electricity from renewable sources by 2020), a low carbon fuel standard, and others.

Under this mandate its economy is growing and carbon emissions are dropping. As of last year, there were 431,800 people employed in advanced energy - more than the entire motion picture, television, and radio industries. California is on track to grow to over 500,000 workers in the energy area this year.

Between 2006 (when AB 32 was signed into law) and 2013, California received more clean technology venture capital investment than all other states combined - USD21 billion versus USD19 billion total for the rest of the U.S. From January 2013 to June 2014 (during the second year of California's cap-and-trade policy) 491,400 jobs were added, a 3.3 percent growth. This outpaced the national average of 2.5 percent during the same period

Funds received from the distribution of emissions allowances as part of AB 32 Cap and Trade programme are deposited in the Greenhouse Gas Reduction Fund (GGRF) and, upon appropriation by the Legislature, must be used to further reduce emissions of GHGs. In 2012, the Legislature passed SB 535 and directed that, 25 percent of the moneys allocated from the GGRF must go to projects that provide a benefit to disadvantaged communities with a minimum of ten percent of the funds being set aside for projects located within disadvantaged communities.

The biggest recipients of GGRF money to date are:

• High Speed Rail Authority (USD250 million)
• Air Resources Board (USD230 million for low-carbon transportation)
• Strategic Growth Council (USD130 million)
• Low-income weatherization program (USD75 million)

The numbers speak for themselves. Good luck to Ontario and Quebec with their cap-and-trade programmes. I only hope our federal government will one day see the light and start acting for the good of all Canadians and, by extension, our planet. Mmm - should be interesting!
 

¹ Cap and Trade. US EPA. http://www.epa.gov/captrade/basic-info.html
² Carbon tax or cap-and-trade. Climate solutions. Climate change.
   http://www.davidsuzuki.org/issues/climate-change/science/climate.
³ Ibid