Defining the Issues and Options
Policies to Reduce Greenhouse Gas Emissions in Canada

Issue

What are the best policies for Canada to reduce its greenhouse gas emissions in the long term?

Assumptions:

1. The conclusion of the world's scientists that the earth is warming and greenhouse gas emissions from humans are the primary cause.
2. All countries in the world need to reduce emissions of greenhouse gases, the sooner the better.
3. Canada has decided to significantly reduce its greenhouse gas emissions in the long term.
4. The planet will not run out of oil, gas and coal in the near term, so the problem presented by oil, gas and coal emissions will not miraculously solve itself.
5. Some oil, gas and coal will need to be left in the ground.
6. Renewable energy resources can meet the energy of needs of Canada, and probably many other countries.
7. Voluntary emission reductions are unlikely to solve greenhouse gas emission problems. While some individuals are voluntarily reduced their emissions, more is needed.
8. Canada has attempted government-encouraged voluntary initiatives such as the one tonne challenge and information programs on energy consumption. While these initiatives may have influenced the behaviour of some Canadians, they were not sufficiently powerful to induce the necessary transformation of Canada's economy. Nevertheless, one anticipates that voluntary initiatives will continue, based on modest government support. As such, they are not included here as a new policy option.
9. Canada has also tried to reduce greenhouse gas emissions through government expenditures on research, carbon capture and storage pilot projects and other demonstration initiatives, home retrofit programs, etc. These programs are now included in government fiscal frameworks, and are expected to continue. As such, they are not included here as a new option.
10. Canada's climate change policies need to take into consideration a number of developments that will occur over the next few decades that will occur independently of whatever policies Canada chooses to pursue. These deveoopments include:
    1. In the long term, the economic well-being of Canadians relative to those in other societies will be determined primarily by factors such as the extent to which the Canadian society is organized productively, the quality of education, the innovation, and willingness to work hard and invest in Canadian production, and not so much by climate change policies.
    2. In the long term, in an absolute sense, Canadians will collectively be better off than today. The benefits from the digital economy, the accumulation of infrastructure, accumulated learning and easy access to the world's knowledge in health, production, etc. will far outweigh any impacts related to addressing climate change.
    3. A world economy geared to climate change will have significant effects on globalization. Knowledge, services and capital will flow more freely through new technologies. Goods and people will move less readily. Ocean and air travel will suffer significantly, as there are no "viable solutions" to their emission issues in the foreseeable future. This will enhance hemispheric and significantly reduce transoceanic trade and the movement of people. This will be bad news for Canadian resource industries and grain producers that currently function globally and bring production closer to final demand (good news for Canadian manufacturers). There will be greater trade relations with the United States and perhaps Central and South America and less with China, India and other Asia and European countries.
    4. No other major country will have Canada's potential access to non-fossil fuel energy per capita. This potential is based on a vast country, a relatively small population, uranium resources and a sophisticated developed economy.

Options

1. Tax Driven Market Incentives: These options impose a tax on emissions, making it more costly to emit. The increased cost of emissions are expected to reduce activities by corporations and individuals that cause emissions. Any tax on emissions must be revenue neutral i.e. replaces existing taxes (e.g. the Goods and Services Tax, import duties, provincial sales taxes, the Harmonized Sales Taxes in several provinces, personal income taxes, and corporate income taxes) rather than imposes new ones. An emissions tax should in theory cover key greenhouse gas emissions (carbon dioxide, methane, nitrous oxide, and chlorofluorocarbons). Given problems related to measuring and monitoring emissions other than carbon dioxide, the initial target would be fossil fuel emissions.
   In 2006, Canada's governments raised $318.5 billion through the goods and services tax, harmonized sales taxes, provincial sales taxes, other consumption taxes other than gasoline and motive fuels, and income taxes. From 2003 to 2005, Canada's greenhouse gas emissions from the energy sector average 610 million tonnes of carbon dioxide equivalents. Replacing Canada's various taxes with a revenue neutral carbon tax would require an initial carbon tax rate of $522.13 per tonne of emissions, or $0.52 per kilogram of carbon dioxide equivalents, or $1.25 per litre of gasoline (2.4 carbon dioxide equivalents per litre), or $1.01 per cubic metre of natural gas (1.932 carbon dioxide equivalents per cubic metre).
   1. Fossil Fuel Tax on the Canadian Consumption of World Wide Emissions: Canadian consumers would pay the tax on fossil fuels combusted in Canada whether the fossil fuels were produced in Canada or imported, as well as on the combustion of fossil fuels embedded in products imported into Canada and their shipping costs.
   2. Fossil Fuel Tax on Emissions in Canada: Canadian producers would pay the tax on fossil fuels produced for combustion, even when the products they produce are exported. Imports of fossil fuels would not be taxed. The tax is in essence a tax on the production of emissions in Canada. The option is in line with the Kyoto Protocol, which focuses on emissions produced within national borders.
2. Industry Regulatory Controls: These options seek to influence the behaviour of corporations through direct controls. The combination of legislation and regulations either dictate behaviours, or prohibit behaviours, and include compliance monitoring, enforcement and penalties for non-compliance. The most obvious regulatory control are emission controls. Other types of controls would cover processes used (on the assumption that process controls would lead to reduced emissions) and product controls, which would restrict the types of products available and essentially ban products that cause emissions or reduce emissions from classes of products.
   1. Fossil Fuel Emission Controls: This options attempts to reduce emissions through industrial regulatory controls, including prohibition of emissions from certain activities as well as allowing but controlling emissions below the level that would otherwise occur.
      1. Prohibit Emissions: This option makes emissions, or certain types of emissions, illegal. While prohibition may make sense in some situations (e.g. frivolous emissions), in most cases, an outright prohibition on greenhouse gas emissions would be impractical.
      2. Cap But Allow Emissions: This approach allows emissions, but puts a limit on them. Over time, the limit would decrease and Canadian emissions would fall. The approach requires that the government would be able and willing (1) to set a sensible and fair cap on specific entities, (2) to reduce the cap over time on a sensible basis (and presumably allowing for growth), (3) to monitor emissions from regulated entities to ensure compliance with the cap, and (4) to take enforcement action where their is non-compliance. This approach carried out over the entire economy would be practically impossible, so the option implicitly assumes some limit on entities subject to the cap. The federal government appears initially interested in limiting the entities to facilities (not individuals or corporations) with emissions over 50,000 tonnes CO2 per year (a.k.a. "large emitters"). Canada's large emitters would be at a significant disadvantage to their international competitors if they were subject to emission caps, while their international competitors were not. To mitigate this problem, the option normally entails an "international" solution involving at least Canada's principle trading partner, the United States. There are a variety of ways to implement this cap. Options include (1) setting varying caps by line of business of the facility versus setting one cap for all lines of business, (2) applying regular cap reductions on a pre-set formula basis versus trying to establish annual cap reductions presumably based on consultations, negotiations and/or analysis, (3) allowing regulated entities to have appeal mechanisms related to their caps versus no appeal mechanisms, (4) imposing stiff penalties versus weak penalties for non compliance.
         1. No Trade in Emission Savings Below the Cap: A regulated facility is given a cap. The regulatory regime provides no regulatory advantage in emitting below its cap. However, if it has commercial or other non-regulatory reasons for doing so, it may go below its cap.
         2. Carbon Trading: This option includes two sub-options. One involves the sale of carbon emissions by facilities that have beaten their caps in a particular time period, presumably to companies that will not beaten their caps. The other expands carbon emission trading to include other projects that have the ultimate effect of reducing emissions.
            1. Trade in Emission Savings Below the Cap: Where a regulated facility can reduce emissions below its cap, the facility can get a reward "cap space" to another entity. The expectation is that a market would develop in tradeable carbon emissions.
            2. Trade in Emission Savings Below the Cap Plus Offsets: Apart from facilities subject to emission cap regulations, there are other entities that are carrying out, or could carry out, activities that reduce greenhouse gases in the atmosphere. These entities could be planting trees that remove carbon dioxide from the atmosphere, developing emission reduction technologies, developing renewable resource power sources, and the like. This option allows those facilities that cannot meet their emission caps to invest in these other entities and their emission reduction projects. In essence, an entity that cannot meet its emission targets can escape penalty by investing in other projects that reduce emissions or in paying facilities with emission cap space for their unused allowable emissions.
   2. Process Controls: Process controls affect the way particular activities are carried out, on the premise that some production processes cause more emissions than others and should be either limited or banned. Processes potentially subject to control include the combustion of fossil fuels from stationary sources for energy production, industrial processes that are not related to the combustion of fossil fuels (e.g. making cement or electronic components), the production of oil and gas (specifically venting and flaring), the handling of manure from the livestock industry, the management of waste sites on land, and the feeding of beef cattle (which produce methane).
   3. Product Controls: Product controls seek to reduce emissions indirectly by prohibiting particular products that emit greenhouse gases (gas furnaces, gas barbecues), or reducing the emissions from classes of products that emit greenhouse gases (e.g. smaller and lighter passenger vehicles, or increased percentage of electric vehicles sold by manufacturers).
3. Diminishing Fossil Fuel Supplies: This option uses a combination of Canadian production and import restrictions to reduce the amount of fossil fuels available in Canada. Restrictions on the available fossil fuels would lead to emission reductions related to the combustion of fossil fuels. Since it would make little sense for Canada to reduce the production of fossil fuels intended for Canadians and then allow their export, this option would normally include export controls. Reducing the short-term supply of fossil fuels below market demand would normally put up prices, and create windfalls to the oil and gas industry. Governments would consider measures to prevent this, including income and other taxes on the oil and gas companies, direct investment in fossil fuel distribution, rice controls and allocation regimes to prevent the oil and gas industry from getting windfalls combined with efforts to suppress the inevitable black markets. Reducing fossil fuels available to Canadians in the long term could be achieved by stopping investment in exploration, tar sand development, distribution and refining fossil fuels, as well as import restrictions.

Issues

1. EffectivenessThe goal of emissions reduction options is to reduce emissions. Effectiveness is a measure of how well each option fulfills this goal. Overall effectiveness in turn is based on three considerations.
   1. Emission reduction coverage : This refers to the percentage of Canada's emissions covered by the option. Coverage percentages are based on Canada's emissions over the period 2003 to 2005. Note that no option addresses all of Canada's emissions, and some options address more emissions than others. Because of this, a truly effective strategy to reduce emissions will need to include a combination of policy options.
   2. Emission reduction efficiency within the emission coverage. This means the efficiency of the option in reducing or eliminating the emissions covered by the option. Not all options are equally effective.
   3. Implementation timing. Some options can be implemented by Canada almost immediately upon creation of the appropriate legislative and regulatory framework. Other options require actions in concert with the United States and perhaps other countries. With regard to the United States, it is uncertain when, if ever, the required actions will occur. As climate change requires immediate action, options that take a long time to initiate are less effective than options that can be initiated in the near future, and should be discounted appropriately.
2. Economy: The long-term effects of Canada's climate change policies have been addressed in the assumptions. The medium term effects are addressed here.
   1. Competitiveness in International Markets
   2. Competitiveness in Canadian Markets
   3. Energy Industry
3. Fairness: Fairness is based on the principal of equal treatment. Fairness is relevant in terms of acceptability of a policy option by the Canadian public. It is also relevant when it comes to compliance with the policy option. Canadians generally and regulated entities within Canada may not comply with measures perceived as unfair.
4. Administrative Cost: These are the costs to government of establishing a policy, setting or negotiating behavioural standards if necessary, making regulated parties aware of the policy and standards, monitoring the policy for non-compliance, and taking enforcement action when there is non-compliance.

The Analytical Table

To see the analytical table, click Table; Table With Fixed Header; PDF