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To tax - or not to tax? A 'Danish' dilemma for Canada
The recent statement by Lorraine Mitchelmore, Royal Dutch Shell's Canadian president, calling for a price on carbon to bring about the adoption of CCS technology in is very much at odds with the current policy of the Conservative Government of Prime Minister Stephen Harper. It was PM Harper's Government that took Canada out of the Kyoto Protocol in December 2011 because the country was far from being on the path to achieve their agreed emission reductions. Now, as the world is starting to gear up to try to find a successor to Kyoto, how can Canada reverse its trend of increasing emissions in order to be a credible party for any future agreement?
An ever increasing number of energy experts in both developed and developing countries recognise that CCS is a technology that will have to be widely deployed, already during the next decade, if we are to achieve our objective of a maximum 2oC increase in global temperatures. The Federal Government of Canada and the Provincial both actively support the demonstration of CCS Technology – as witness the project of Shell – but the challenge of driving its deployment is proving very divisive, even in countries and regions that want to see it. This will be particularly difficult for the companies developing Alberta's oil sands – the third largest oil reserve in the world.
The Canadian Government has categorically rejected the calls to adopt a carbon price and, according to the Globe and Mail have accused the New Democratic Party leader Thomas Mulcair of backing a "ruinous carbon tax" for supporting a cap-and-trade approach. The Globe and Mail quote the Natural Resources Minister Joe Oliver as saying "it is the policy of the Government of Canada not to introduce carbon pricing. That is something the NDP has advanced; we consider that a tax on everything and therefore, on everyone". This is a debate that has been carried out in Europe over a good part of the last two decades, so it could be interesting, and even instructive, to look at what has happened there.
There are really only two ways of incentivising the deployment of CCS. The first of these is by regulation – basically requiring power plants and fossil fuel using industries not to emit carbon dioxide. This can be done gradually, by regularly lowering the amount of carbon dioxide any facility can emit (using emission performance standards), or more abruptly by setting a date or dates in the future after which all plants (old and new) will have to be 'carbon emission free' (or as near as technically feasible).
The second option is by putting a price on carbon emissions, as proposed by Ms Mitchelmore. There are different possible ways of doing this but the two main ones are either through a straightforward carbon tax – a fixed amount paid for each tonne of carbon emitted – or through a cap-and-trade system such as the European Union's system (ETS). Both carbon pricing systems have their supporters and their critics, with the benefit of the tax being that it is more predictable regarding the future carbon price while the cap-and-trade system is more predictable as to the amount of carbon that can be emitted and is designed to bring around innovation and technology change at a lower cost to the overall system than other methods.
Most people do not regard the cap-and-trade approach as a tax, but as a market. It has been used successfully in the past – for example by the US Environmental Protection Agency (EPA) in the fight against acid rain when it contributed significantly to the reduction in emissions of sulphur oxides.
When the EU set up the ETS, it was expected that it would quickly bring about a carbon price that would incentivise the demonstration and deployment of low-carbon energy sources in Europe and that the example set would soon start to be adopted by other countries around the globe. Ideally, all the different systems would eventually be linked so that the carbon market became a worldwide one. Unfortunately, the best laid plans..... Many Member States initially clearly overestimated the number of carbon allowances that they required so the market was flooded and the price crashed (though not before some of the traders had made massive 'windfall profits'). Then, of course, we had the global economic crisis with a decrease in energy demand in Europe as well as many other regions. So, presently, the carbon price is too low to incentivise any technology change.
From the point of view of bringing about technology change, the EU's ETS is proving ineffective, at least for the moment. However, it is widely accepted that it needs to be – and can be – fixed. Steps are being planned to correct it and this time it appears that many of the major utilities will be behind the system (as opposed to against it when it was originally launched). It will of course take some time as any significant revisions will need the support of the EU's Member States – many of whom are, like the Canadian Government, concerned about the possible cost and threats to competitiveness from less environmentally conscious regions. On the other hand, however, nobody contests the fact that the ETS is, in fact, achieving its primary objective. The EU's emissions are expected to achieve the reduction agreed in Kyoto, though how much of this is a result of the ETS and how much a result of other factors is an ongoing debate.
Of course there is a cost whichever option is followed – regulation, tax or cap-and-trade. A higher carbon price will either have to be paid by the utilities and industry, with this cost being passed on to the consumer, or they will need to invest in more expensive low-carbon technologies, and pass on this cost too. But, of course, if we do not deploy CCS and the other low-carbon technologies we will have to pay the far higher price of adapting to climate change. The choice is ours – or, in this case, the Canadian Government's. But if we seriously wish to combat climate change decisions need to be taken and something needs to be done, and done soon, in Canada and elsewhere. A cap-and-trade system may really be just what Canada needs.