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Why BC Isn't Rushing to 'Cap and Trade' Carbon

California beckons with new market for emissions offsets. Will we join soon?

By Christopher Pollon, 28 Nov 2011, Tyee Solutions Society

Smoke stack, carbon series

Hazy timetable: After hurrying up, B.C. waits on cap and trade.

Related

[Editor's note: This is the fourth article in an in-depth Tyee Solutions Society series, "BC's Quest for Carbon Neutrality: Reports from Canada's Climate Policy Frontier." Find the series so far here.]

Acid rain was sterilizing lakes across Canada and the northern U.S. during the early 1990s, until the Americans put a dollar price on the pollution that was causing the problem. By 2002, sulphur dioxide emissions from coal-fired power plants were 40 per cent lower than they had been in 1980, as new life crept back into the continent's dead-zone lakes.

Why not apply this same approach to the carbon emissions causing climate change?

That's a question a group of North American states and provinces posed when they formed the Western Climate Initiative (WCI) in 2007.

Driven by frustration over the laggard climate change policies of North American federal governments, the WCI led by California envisioned a "cap and trade" system setting strict limits on the emissions of the biggest polluters.

From the beginning, this regional cap and trade scheme was intended to lay the foundation for a continent-wide system including the U.S., Canada and Mexico -- an ambition that did not seem so far-fetched back in 2007. But nearly five years after the WCI was conceived, the can-do optimism of many of the participating states and provinces has waned. Today, just California and Quebec are sure to be there when a test-run begins in January.

British Columbia -- the only North American jurisdiction to have imposed a relatively serious price on carbon to date -- has already completed most of the upfront work needed to participate; all that is lacking is the political decision to move forward. So which way will the B.C. political winds blow on cap and trade?

"We're staying the course in terms of our negotiations and collaborative work with California on a cap and trade system, but we still haven't made a decision," says B.C.'s Environment Minister Terry Lake, a former Kamloops mayor appointed by Premier Christy Clark last spring. Lake notes that Quebec is moving forward with a noncompliance year in 2012 -- a sort of test run of the system -- with full participation by 2013. "That is certainly a consideration for us."

NORTH AMERICA'S OTHER CAP & TRADE SYSTEM

The Regional Greenhouse Gas Initiative is a cap and trade system that limits CO2 emissions from electrical plants across 10 northeastern U.S. states.

Established in 2008, the participants have committed to reducing electricity power sector CO2 emissions by 10 per cent by 2018. Each state is responsible for establishing its own trading program, issuing allowances, and staging auctions to distribute the allowances; regulated utilities can then use allowances from any of the 10 states to meet their CO2 limits. 

A November 2011 study shows the first three years of the initiative resulted in lower consumer electric bills, increased installation of energy efficiency measures, and more than $900 million generated from allowance auctions. -- C.P.

So if this consideration strengthens into resolve to participate, what are the risks and benefits to British Columbia of joining this small, California-led coalition of the willing? And how would such a system have to be designed to actually work?

How it works (in theory)

Historically, it has cost nothing to treat the atmosphere as a giant waste receptacle. Carbon pricing schemes, like carbon taxes and cap and trade, provide a disincentive to do this by forcing polluters to pay for the carbon they dump. A cap-and-trade system sets a limit or "cap" on the overall amount of carbon pollution from industry (and sometimes other sectors) and reduces that cap year after year, with a goal of hitting a pollution reduction target over time.

Tradable "allowances" in a quantity equal to the overall cap are distributed to participants. They in turn must quantify and report their emissions, eventually surrendering an allowance credit for every tonne of greenhouse gas they produce during a set compliance period. Polluters who do not reduce their emissions enough have two options: buy emission allowances from other polluters who have met their emission limits and have a surplus to sell, or invest in low-carbon projects as "offsets" -- which are then credited as a reduction against their own emissions.

Over time, the system-wide cap on emissions is ratcheted ever downward, forcing participants to progressively lower their emissions.

How it needs to work

That, at any rate, is how cap and trade works in theory. In practice, there is enormous leeway for participants to shape and amend the rules -- and therein lies both the strength and weakness of the approach, says David Suzuki Foundation climate change campaigner Ian Bruce. There are, however, ways to ensure the "environmental integrity" of a cap and trade system, he says.

"The most important thing is the cap on emissions and the target you use to ratchet down emissions year after year," says Bruce. For example, B.C. already has a legislated target to reduce emissions by one-third over 10 years, so if we joined the WCI system, the province would need to ensure our overall cap aligns with that legislated target. Anything less would water down our existing commitment to reduce greenhouse gases.

Another key to a cap and trade system with integrity concerns those carbon 'offsets'. According to the Pembina Institute's climate change director Matt Horne (who has made cap and trade design recommendations to both B.C. and Quebec), they represent a loophole that must be either severely limited or closed altogether. "One analysis after another on offset systems is showing that they are not producing the emission reductions we are counting on them for," he says.

Emission allowances as a commodity

Operating since 2005, the European Union's cap and trade system is the largest multinational emissions trading scheme in the world. It offers important lessons about how such systems work in the real world.

When the EU system was first set up, participating companies received emission allowances for free or very little. But since participants who sufficiently reduce their emissions can sell their surplus allowances for cash, the permits acquired financial value. Giving them away for nothing ultimately resulted in windfall profits for some European companies: public wealth went straight to the private bottom line.

Bruce and Horne agree that if B.C.'s carbon market does launch, its participants must pay for their allowances from the outset -- most practically, through auctions.

Volatile markets with wild swings in the price of credits is another concern, particularly in the early stages of a cap and trade system. A Massachusetts Institute of Technology study that evaluated the growing pains of the EU system details how, a little more than a year into the cap and trade trial period, allowance prices plummeted.

"The uncertainty concerning the demand for allowances is especially large at the beginning of any program," the MIT study found, "because it reflects not only the usual unpredictable variables of economic activity, weather, and energy prices, but also, and perhaps most importantly, the amount of abatement that will take place in response to the new price on emissions.

It's important to note that the same report considered the growing pains minor compared to the importance of creating a carbon price for Europe. "The initial challenge is simply to establish a system that will demonstrate the societal decision that GHG emissions shall have a price, and to provide the signal of what constitutes appropriate short-term and long-term measures to limit GHG emissions," the study concluded.

California dreamin'

The first step in the creation of the WCI regional carbon market is for participating jurisdictions to adopt their own cap and trade regulation -- which California did in late October. (Quebec plans to follow later this fall.) Each participant ultimately creates their own local cap and trade system, which over time will be tweaked and harmonized to fit with the others. It's an approach that allows fence-sitters to join the system at a later date.

When it comes into full compliance in 2013, California will set its overall emissions cap at two per cent below the state's forecast total emissions for 2012. Industrial facilities will get 90 per cent of their "California Carbon Allowances" for free in the initial years of the program.

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