The New Currency of Carbon Tonnes: Hints at $100+
July 28, 2009
Lisa M. Asbreuk
The National Round Table on the Environment and the Economy (NRTEE), a federal Crown corporation, recently released a report entitled Achieving 2050: A Carbon Pricing Guide for Canada, concluding that "Canada must act decisively now if we are to achieve our 2050 emission-reduction targets." The NRTEE recommends carbon prices, representing the cost of purchasing permits, allowances or offsets for emitting greenhouse gases (GHGs), in the $100 to $200 per tonne range. The NRTEE characterizes such prices as "the least economic cost" by which the federal GHGs targets of 20 per cent below 2006 levels by 2020, and 65 per cent below 2006 levels by 2050 can be met. Without complementary regulations and other measures recommended in the report, the NRTEE estimates that national carbon prices upwards of $300 per tonne would be required post-2025.
Achieving 2050 emphasizes absolute rather than intensity-based targets, and recommends the development of a uniform, national, economy-wide cap-and-trade system no later than 2015. Under a cap-and-trade system, the government would set limits on the amount of GHGs that regulated facilities can emit. Emitters who are able to reduce their emissions below the limits would receive credits for the surplus, which they in turn could sell to other emitters or use to offset future emissions.
The NRTEE recommends transitioning from initial allocations of emission permits to a full auction by 2015 (with the exception of the electricity sector where a full auction is recommended immediately because permit costs can be passed through to customers). A hard cap is recommended by 2015, a full auction by 2020, and full carbon market trading beyond 2020. The NRTEE recommends that an auction initially be phased in and output-based allocations limited, but suggests that sectors particularly exposed to trade and cost challenges be able to obtain output-based allocations.
According to the NRTEE, the sort of hybrid cap-tax system recommended should include carbon taxation elements for price certainty and cap-and-trade elements for reduction certainty.
National Regime: All Jurisdictions, All Emissions
The NRTEE recommends unifying existing provincial efforts into a national scheme covering all jurisdictions and all emissions as soon as possible in order to realize necessary economic efficiencies and reinforce Canada’s engagement in international markets. Regional and sector-specific disproportionate impacts are recommended to be targeted through "income support" rather than a fundamental dilution of the carbon price.
The NRTEE recommends that a national cap apply to large final emitters (including fugitive and process emissions) as well as to buildings, households, transportation, and light manufacturing sectors, which for certain sectors should include regulations or taxation based on the carbon content of the fuel purchased by such users.
Achieving 2050 suggested that domestic offsets created from sectors not covered by the cap-and-trade regime should initially be allowed, but phased out "rapidly" within the first few years.
The NRTEE recommends that Canadian participation in international frameworks be increased and that Canadian businesses be permitted to seek real and verifiable reductions outside Canada for domestic compliance purposes. Even at $100 to $200 per tonne, NRTEE modelling suggests that sufficient reductions will not be achieved within Canada, and that affordable, credible, and sustainable foreign opportunities must be included.
According to the report, without international trading, domestic prices could rise to $300 per tonne by 2030. With 30 per cent international credits allowed, however, prices could remain below $200 over the same period. International linkages could be through U.N. frameworks or directly to US or European schemes and should move towards a unified global carbon price.
Along with the cap-and-trade regime, the NRTEE also recommends complementary regulations, particularly in the upstream oil and gas, pipelines, transportation, buildings, landfills, and agricultural sectors, which could mandate changes to certain practices, vehicle standards, public transportation programs, building codes, or fuel content, for example. The NRTEE estimates that complementary regulations could contribute almost half of the necessary reductions by 2020 and almost a fifth by 2050, and would effectively reduce the highest costs of abatement and help reduce the national carbon price.
Overall, Achieving 2050 strongly recommends that there be no further delay in federal policy development and indicates that "fast and deep" reductions are needed prior to 2015 to avoid more expensive reduction costs in future years. The NRTEE recommends that early auction revenues be invested in technology and economic impact mitigation. Overall, the NRTEE sees three key policy wedges necessary for Canada to achieve its targets:
- a national cap-and-trade system,
- complementary regulations and technology policies specifically directed at hard-to-reach emissions, and
- international carbon-abatement opportunities to help align domestic prices with those of our major trading partners.
Achieving 2050 estimates annual compliance costs of $3.4 billion by 2020, and indicates that 2020 auction revenues for the 570 mega-tonnes (Mt) available may approach $18 billion. Distribution of this value will be important and auction design will require careful consideration. In terms of macro-economic impacts, Achieving 2050 assumes that under a "business-as-usual" scenario, Canada’s economy would grow in the order of 40 per cent by 2020 and 150 per cent by 2050, and implementation of the recommended carbon policy would shrink such national economy by one to three per cent in 2020 and three to five per cent in 2050.
A more detailed description of the NRTEE report is available.
McCarthy Tétrault Notes:
After the NRTEE report came out, the federal government announced "Canada's Offset System for Greenhouse Gases" and published a revised overview of the proposed offset system, describing the principles underlying the system’s design, setting out the requirements for offset credits, and outlining the intended use of the credits in a carbon market.
Under the system, companies will be able to apply to the federal Minister of the Environment to register domestic offset projects that will result in "real, incremental, quantifiable, verifiable and unique" GHG reduction or removals. Once the GHG reductions are verified, offset credits may be issued and may thereafter be banked, traded or used for compliance purposes.
As part of this initiative, the federal government also released two draft guides for public comment: Program Rules and Guidance for Project Proponents and Program Rules for Verification and Guidance for Verification Bodies. These documents set out rules and guidance on the requirements and processes to create offset credits and verify a registered project’s GHG reductions or removals. The government expects final versions of the guides to be published in the fall of 2009.
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