Tough Decisions in B.C.: Carbon Taxes and Cap-and-trade

While my Pembina colleagues and I were at our annual retreat last week, Mark Jaccard and Hadi Dowlatabadi, two well-respected climate policy researchers, outlined six reasons  for British Columbia to delay joining California and Quebec in a cap-and-trade program. Given that cap-and-trade is often described as one of our best bets in dealing with climate change, here at the Pembina Institute we were surprised to hear this perspective from people with a solid record of supporting effective climate policy.

Jaccard and Dowlatabadi believe that B.C.'s carbon tax is a more effective tool to reduce greenhouse gas pollution than the cap-and-trade proposal currently on the table. B.C. negotiated that proposal as part of the Western Climate Initiative, and the province is intending to apply cap-and-trade to large industry in B.C. While they raise a number of valid points that need to be considered as B.C. takes the next steps, I'm not convinced that the correct decision is to delay implementation.

Does B.C. matter?

One reason I'm not convinced that delay is the right choice is that it is hard to predict the degree to which B.C.'s actions will influence other jurisdictions. For example, if B.C. were to choose not to join California and Quebec in the cap-and-trade system, those jurisdictions may decide not to move ahead with cap-and-trade. If B.C. waits to participate, there may not be a system to join a couple of years down the road.

Jaccard and Dowlatabadi suggest that B.C. won't have much influence in the design of the system's rules. I agree that it seems unlikely B.C. would have a huge impact on California's climate policy decisions, but it is plausible that B.C. could influence Quebec's plans for 2012, or Ontario's for 2013, when that province has signaled it will join the cap-and-trade system.

Linking to the carbon tax

But even if you're convinced that B.C.'s participation in cap-and-trade is critical for the momentum in jurisdictions like Quebec and Ontario, the concerns Jaccard and Dowlatabadi raise are still very relevant to the implementation of a cap-and-trade system.

B.C. can set cap-and-trade rules that build on the success of the carbon tax and minimize risk.

Based on the numbers, Jaccard and Dowlatabadi are on solid ground. The Western Climate Initiative hasmodelled  the likely impacts of its cap-and-trade system. The results show that the system's carbon price would likely reach $33 per tonne by 2020 — while B.C.'s carbon tax will reach $30 per tonne on July 1, 2012.

This difference is important, because the degree to which carbon taxes and cap-and-trade systems are effective depends largely on the price they apply to greenhouse gas pollution. Lower prices mean less investment in clean energy solutions like energy efficient buildings or electric vehicles.

Any shift from the carbon tax to cap-and-trade would also have financial implications for B.C. In 2012, the province is counting on over $400 million in carbon tax revenue from the industries that are proposed for inclusion in cap-and-trade . Depending on the final cap-and-trade rules, that revenue could be significantly lower — or even non-existent — if the carbon tax were no longer to be collected. Given the challenges B.C. is facing to balance its budget, any potential loss in revenue shouldn't be taken lightly.

What should B.C. do?

If the choices were limited to the current carbon tax and the basic cap-and-trade proposal that Jaccard and Dowlatabadi critiqued, staying with the carbon tax may very well be the better option. But limiting ourselves to those two choices unnecessarily constrains our options and excludes some potentially better options.

Assuming the B.C. government decides there's an important role for the province in cap-and-trade from the start, there are some ways B.C. can set the cap-and-trade rules to build on the success of the carbon tax and minimize the risks.

For example, B.C. could maintain the carbon tax for at least the first compliance period of the cap-and-trade system. If the cost of a pollution permit in a cap-and-trade system is lower than the carbon tax, the carbon tax would ensure a minimum price, creating a "price floor" for industry. If the cost of a pollution permit is higher than the carbon tax, companies would only pay the cap-and-trade costs. (See our recommendations  to the B.C. government for more detail on this approach.)

This approach would allow the province to avoid a scenario where large industries would be getting a free ride relative to the families and small businesses paying the carbon tax. Of course, having the two systems operating together would admittedly be more complicated than the carbon tax alone.

B.C. has built a foundation of leadership with its carbon tax, and pursuing cap-and-trade without taking steps to build on the foundation provided by the carbon tax would be a risk for climate action in the province. Thankfully, B.C. has plenty of good options available to avoid that outcome.