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 2050 Target Target BEFORE AFTER

P set directly “Carbon Tax” “Cap & Trade” Free Allocation to emitters 0 Access to Offsets No Complex Issue, Confusing Labels P set via Q Free allocation 100% Access to Offsets Setting policy price directly or via Q Yes 100% of target Alberta Cap &Trade Phase 1 of WCI Phase 3 of WCI Warner Lieberman RGGI Cdn Federal cap & trade US SO 2 BC Carbon tax 2008

Confusing labels: carbon tax label is dead Carbon Tax Born 2008 Died 2008 RIP Carbon Tax

Complex issue: Emission pricing design IS rocket science Image:Calabi-Yau.png, Wikipedia Artistic depiction of String Theory’s Multiple Dimensions

And yet …… At its heart, emission pricing is very simple

Emission pricing is taxation CANADA Une/One Tonne CO 2 e GHG Policy Compliance Certificate 1 Environment Canada The $/tonne price is set DIRECTLY, if the tax is levied in Canadian $ The $/tonne price is set INDIRECTLY, if the tax is levied in Govt- issued emission permits Currency of the tax is either $ or an emission permit

The P v. Q issue is: Do we set the policy price of CO 2 : $/tonne Time Directly Orderly, simple, clear and predictable way Indirectly Volatile, complex, costly and unpredictable way or

Setting the price indirectly via a permits market is separate from emission trading  Alberta cap & trade system has: a directly set (default) price of CO 2 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

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 CO 2 Emissions mT CO 2 e $15 $ BAU 2020 Emissions Objective Actual Uncertain emission cost curve = Choice of emissions & costs Where the govt says it wants to be What the public currently supports