Tuesday, June 9, 2009

expect hard caps re emissions, not "intensity based"

Apparently the Alberta Tories are taking issue with their "Conservative" brethren in Ottawa. Amongst other things, they complain of not being informed about the possibility intensity-based targets for reducing emissions may be scrapped.

Intensity-based targets will have to be scrapped in favour of absolute targets if the strategy is to go with cap and trade, and it looks like Obama wants to go cap and trade (any cap and trade system would have to be continent-wide lest caps be evaded by emitters hopping borders). I looked at the dynamics of developing a carbon market while at Finance Canada and, in a meeting with TSX people from Toronto and Montreal, heard those potential market-platform-providers clearly tell Mark Carney (who happened to be at Finance at the time) that they could not and would not support intensity-based targets. The reason why is straightforward enough: it becomes next to impossible to price credits without hard caps. It is going to be difficult enough to get a market going when the caps are decided by politicians. But if they are furthermore intensity-based, the level of uncertainty is going to enormous. An academic might think it nonetheless doable, but few in industry would think that. If you thought the tranches of a mortgage-backed-security were difficult to price, just try an emissions credit that derives its value from an intensity-based cap.

A cap and trade system with hard caps would, of course, be a vastly greater cost to Alberta than other jurisdictions because of the presence of large emitters here. Had the Stelmach government understood the situation, they would have gotten ahead of this by signing on to a national carbon tax (something I've long advocated, as readers of this blog would know). A carbon tax would be bourne by Canadians in proportion to consumption, and therefore far more regionally equitable than by production. As an aside to those who believe climate change is a hoax, support for a carbon tax does not necessarily mean support for the idea that climate change requires fiscal action. We have to get taxes from somewhere, right? Why not get it by taxing consumption like on sales of SUVs instead of taxing everyone's personal income? We should be taxing consumption instead of income and investment anyway. Whenever I say I support a carbon tax I mean a revenue-neutral tax.

Instead of trying to head off a cap and trade system, Stelmach has tried to impress environmentalists by throwing billions of Alberta taxpayer dollars at the boondoggle of carbon capture. Needless to say, no one has been much impressed since there isn't a fully operational working example of successful carbon capture anywhere on the planet, and Alberta's own energy executives have said carbon capture will be extremely expensive on a per barrel basis (hence BIG subsidies would be required to implement it!).

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