The devil is in the details of environmental policies

Kathryn Harrison and David Green
Vancouver Sun
April 28, 2009

Voters have been presented with a bewildering array of environmental policies in the B.C. election.

The Liberals stand behind their carbon tax, though they've also committed to joining the Western Climate Initiative's cap-and-trade program.

The New Democrats have promised to "axe the tax," to adopt their own cap-and-trade program, and to subsidize good environmental behaviour through their Green Bonds.

But which policies are the most effective and least expensive? Let's begin with a review of the options.

With subsidies, consumers are offered money to encourage them to undertake environmentally friendly behaviour such as insulating their homes.

With regulation, the government mandates lower emissions from producers.

Cap and trade starts out like regulation by allocating a fixed number of emissions permits among polluters, but polluters are then allowed to buy and sell those permits.

Both approaches will raise the price of carbon-intensive goods, because firms will pass their costs on to consumers. Under a carbon tax, fuels are taxed in proportion to their carbon emissions. This, too, raises the price of goods that involve heavy use of fossil fuels, again giving consumers and firms incentives to conserve energy and switch to cleaner fuels.

The first key point is that all approaches involve costs to ordinary British Columbians -- there is no free lunch. We need to make substantial changes in how we live if we want to pass a habitable planet on to our children, and those changes will cost money.

Most serious commentators agree that subsidies are the most costly approach, because governments end up compensating a significant number of individuals and firms for activities they were going to do anyway.

Regulation ensures we will meet our emissions goals, but it, too, is relatively costly because it imposes a "one size fits all" approach. It would be cheaper to require greater reductions by firms that can reduce their emissions at the least cost.

By raising the price of carbon emissions, both provide incentives for firms and individuals to change their behaviour efficiently and for firms to invent clean technologies. Assuming cap-and-trade permits are auctioned by the government, both approaches bring revenue into government coffers than can be used to offset impacts on the poor, build public transit, or provide cuts in other taxes.

The two approaches differ in their ease of implementation. The carbon tax can be readily administered under the existing tax system.

In contrast, for cap and trade, a bureaucracy will have to be created to monitor compliance and prevent Enron-type gaming of the market.

A carbon tax provides certainty about the price of carbon and allows firms, consumers and governments to plan their investments accordingly.
However, it is harder to know the exact effects on carbon emissions.

The opposite is true for cap and trade. We know what reductions will be achieved, but not the cost. A more important advantage of cap and trade is ease of harmonization with other jurisdictions that are already employing this approach, including the European Union and the U.S.

The devil clearly is in the details and some important details remain unclear.

Will the Liberals commit to continuing to raise the carbon tax -- and increasing compensation for low income citizens -- as needed to achieve B.C.'s emissions goals?

And will the NDP clarify which sources will be covered by its cap-and-trade program, and with what impact on British Columbians, including those most vulnerable?

David Green teaches in the economics department and Kathryn Harrison teaches in the political science department at the University of British Columbia.