An industry perspective on carbon
emission pricing
Carbon Pricing and Environmental Federalism Conference
Queen’s University, October 17-18, 2008
Rick Hyndman
Senior Policy Advisor, CAPP
Canada’s GHG 2020 & 2050 Emission Objectives
2006
BEFORE
2020 Target
AFTER
2050 Target
Complex Issue, Confusing Labels
Free
Access to
allocation
Offsets
100%
Cdn Federal cap & trade
Warner Lieberman
“Cap &
Trade”
Access to Offsets
Yes
US SO2
Alberta
Cap &Trade
P set
directly
No
0
“Carbon
Tax”
BC Carbon tax
2008
100%
of target
RGGI
Phase 1
of WCI
Confusing labels: carbon tax label is dead
Carbon Tax
Born 2008
Died 2008
RIP
Complex issue:
Emission pricing design IS rocket science
Artistic depiction of String Theory’s Multiple Dimensions
Image:Calabi-Yau.png, Wikipedia
And yet ……
At its heart,
emission pricing
is
very simple
Emission pricing is taxation
Currency of the tax is either $ or an emission permit
The $/tonne
price is set
INDIRECTLY,
if the tax is
levied in
Govt- issued
emission permits
Environment Canada
The $/tonne
price is set
DIRECTLY,
if the tax is
levied in
Canadian $
CANADA
Une/One
Tonne CO2e
GHG Policy Compliance Certificate
1
The P v. Q issue is: Do we set the policy price of CO2:
Directly
Orderly, simple, clear
and predictable way
$/tonne
Time
or
Indirectly
Volatile, complex, costly
and unpredictable way
Setting the price indirectly via a permits market is
separate from emission trading
 Alberta cap & trade system has:
 a directly set (default) price of CO2
AND
 Emission trading among covered facilities and
ability to use offsets for compliance
Allocation
 Facility targets: emissions taxed if above
target, credits if below target
 Free distribution of permits
 Recycling of revenue
Design First, Bundle Later
 Break design into single policy elements
 Emission pricing element: using price
system to drive decentralized decisions
 Income and wealth effects based on the
incidence of pricing
4 categories of emissions with different patterns of
incidence of emission pricing
1. Upstream oil and gas production emissions (and other
industries with resource rent)

Prices are set internationally independent of Canadian costs

Carbon costs on production emissions not covered by
border adjustments are ultimately borne by resource owner
through reduced resource rent
2. Trade-exposed industry with significant life-cycle
emissions

Requires border adjustment to allow incidence to flow to
consumers
3. Electricity

Costs passed through to consumers, incidence varies
regionally with energy supply patterns
4. Other, end use consumption emissions

Roughly common patterns of consumption across regions,
though heating energy is a question
ALLOCATION
is about
INCIDENCE
Competitiveness
is an
incidence question
Border adjustments can shift incidence to end users
125
$/unit
100
75
50
25
0
-25
High Seas
Import
Price net of carbon cost
Carbon cost
Domestic
Export
Border adjustment
Without Border Adjustments, need to address
incidence via allocation
 Intensity targets for emission intensive,
trade-exposed sectors
 Might be possible in some sectors to accomplish
via international performance benchmarks
For other emission sources, recycling should address
differences in regional and sectoral incidence
 Key differences:
 Electricity generation
 Resource industries
 Recycling methods:
 Federal income tax reductions
 Replacement of GST
 Per capita grants
Won’t
do it
Mixed federal – provincial policy
 Provincial
 Electricity
 Resource industries
 Energy intensive industry unless covered by
border adjustments
 Federal
 Transportation
 Broad energy use
THE KEY POLICY & EMISSION PRICING ISSUE
$/tonne CO2
2020 Emissions Objective
Uncertain emission cost curve
= Choice of emissions & costs
$100
Where the govt says
it wants to be
$15
What the public
currently supports
Emissions mT CO2e
576
721
2006 Actual
800
2020 BAU