ONTARIO’S CARBON COMMANDMENTS.

Some provinces are right to balk at a new federal environment policy statement, revealed l ast week, that aims to impose a “Pan- Canadian Approach to Pricing Carbon Pollution.”

From a distance, such a national carbon- emissions tax policy makes sense for many businesses and to many economists who follow environmental issues. Up close, things are not so clear.

Some businesses that operate across provincial boundaries have good reason to like a single national approach to taxing carbon emissions. Fully harmonized policies that impose an explicit tax per tonne of emissions are less costly to comply with and to monitor, and do not much affect business investment choices across provincial borders. And provincial governments can stop thinking about it.

For other businesses, a cap-and-trade system is perfectly sensible, and preferable. Such a system requires a firm to surrender a permit (or emissions credit) for each tonne of emissions it produces, and emitters buy permits from others who do not need their entire permit allotment or have earned extra credits by reducing their own CO2 output.

Under some specific conditions, explicit pollution taxes and cap- and- trade systems can translate to equivalent emissions prices and environmental outcomes. That is why the newly proposed federal policy would accept provincial policies that imposed sufficiently stringent tax rules, or cap- and- trade systems, as equivalent. It says:

“For jurisdictions with an explicit price- based system, the carbon price should start at a minimum of $ 10 per tonne in 2018, and rise by $10 per year to $50 per tonne in 2022.

“Provinces with cap- andtrade need: ( i) a 2030 emissions reduction target equal to or greater than Canada’s 30 per cent reduction target; ( ii) declining ( more stringent) annual caps to at least 2022 that correspond, at a minimum, to the projected emissions reductions resulting from the carbon price that year in price-based systems.”

Further, revenues generated by either a tax or a trading system could be used by the provinces as they saw fit, including using the revenues to reduce more economically harmful taxes, such as personal or corporate income taxes.

What is wrong with this picture is that it is far from complete, and may not represent the best way to manage CO2 emissions.

The economic literature that insists that carbon taxes are the most efficient means of reducing emissions, and that cap and trade can be equivalent, makes a range of simplifying assumptions. The approach leaves little space for differing industrial structures and, most important, existing taxes and regulatory constraints.

Emissions standards imposed on industry by regulation, which are costly to comply with but can be very effective, are the most obvious example. Layering on additional taxes or imposing cap and trade may do serious economic harm without a matching environmental benefit.

Another example is policy mandates aimed at electricity generation, directing a phase-out of reliance on coalor oil-burning for generation. This transition has already cost some provinces billions, and electricity ratepayers in Nova Scotia and Ontario, for instance, will be paying for it for decades to come. Their air quality has also already improved, at a great price, one many consider worth paying.

Newfoundland and Labrador, in turn, recently imposed a massive fuels tax increase, for fiscal reasons. Were it labelled a carbon tax, it would be the stiffest carbon emissions tax in the country.

That the impact of a “carbon price” depends on the existing tax and regulatory framework has been known among serious environmental economists for decades. The matter’s current salience gave rise to two recent and thorough papers, written from very different perspectives.

One, published by the more-or-less market-oriented University of Calgary School of Public Policy, hammers home the point that while carbon taxes can work, they are only likely to be cost effective when designed in the context of the existing regulatory framework. The other, published by Simon Fraser’s School of Resource and Environmental Management, emphasizes that flexible regulations, such as performance standards, can be the most practical and effective means of achieving a given environmental outcome.

This makes rather odd the “Pan- Canadian Approach to Pricing Carbon Pollution” statement that the federal plan should be “flexible and recognize carbon pricing policies already implemented or in development.” The proposal offers a menu that includes only carbon emissions taxes and cap and trade.

The federal carbon emissions plan does not include the word regulation, and this is a crucial omission. Affected provinces are right to vehemently object.