A spokesman for Ontario Environment Minister Glen Murray says it is easier to implement a carbon tax, but a cap-and-trade system is more effective. Register file photo

The morality of a cap-and-trade system

  • July 2, 2015

The Ontario government is steaming ahead with a cap-and-trade system to reduce greenhouse gasses despite a clear warning from Pope Francis about buying and selling “carbon credits.”

In his encyclical Laudato Si’, the Pope expressed concern in paragraph 171 that creating a marketplace for carbon credits could lead to “speculation which would not help reduce the emission of polluting gases worldwide.” He called this a “quick and easy solution” that does not “allow for the radical change which present circumstances require.”

Ontario policy makers are undeterred, however, as they proceed with plans to bring cap-and-trade to the province.

“When it comes to cap-and-trade systems, the devil, if you will, is always in the details of how the system is designed and how it is implemented,” said Lucas Malinowski, a spokesman for Ontario Environment Minister Glen Murray.

The key, said Malinowski, is in the cap. Setting a cap and then gradually reducing it actually deals directly with the problem of carbon emissions, he said.

By contrast, a carbon tax sets a price for carbon then assumes people will modify their behaviour to avoid paying the tax. Malinowski, however, concedes at least one clear benefit to a carbon tax.

“It’s certainly easier to implement,” he said. “You just put a tax on everything and call it a day. Cap-and-trade is a bit more challenging in that regard. But we believe it is a much more effective option for Ontario.”

British Columbia has discovered it’s not so easy to predict just how industry will choose to avoid paying the carbon tax. When B.C. imposed its $30-per-tonne carbon tax in 2008 it hit the cement industry hard. Rather than pay the tax by buying local cement, the construction industry started sourcing its cement from outside the province. 

The result was, if anything, higher carbon emissions associated with cement because offshore cement had to be transported into B.C. Finally, earlier this year the government created a $22 million transition fund to be paid out to B.C. cement producers over three years.

By aligning with Quebec and California in the Western Climate Initiative, Ontario will join a cap-and-trade market that covers 61 million people and more than half of Canada’s economic output.

“The system is not designed to benefit the elite,” Malinowski said. “The system will be designed to ensure we get reductions in greenhouse gases and do so in a way that is balanced and that does actually encourage innovation, instead of stifling economic growth or encouraging companies to just move their operations offshore where there may not be as much concern about climate change.”

Throughout the encyclical, the Pope is very skeptical of the magic of markets and the culture of waste and extreme individualism they seem to engender. So when Francis talks about a “ploy which permits maintaining the excessive consumption of some countries and sectors,” many readers immediately think of the complexities of cap-and-trade systems.

But that may not be what Pope Francis is talking about, McGill University School of Environment economics professor Christopher Barrington Leigh told The Catholic Register.

A government-regulated cap-and-trade system to reduce total carbon emissions is a very different thing than buying and selling carbon offset credits, he said.

Anyone who has taken a plane ride recently has probably been offered the opportunity to buy carbon credits to offset their share of the carbon produced by their flight. The money goes to organizations that either plant or preserve carbon absorbing forests, often in environmentally fragile and critical places such as the Amazon basin. That sort of thing is both morally and environmentally dubious, according to Barrington-Leigh.

It certainly is possible for large corporations to game the system under cap-and-trade, as early European experiments have shown. But Barrington-Leigh, who calls the Quebec system “beautifully designed,” rejects the cap-and-trade versus carbon tax argument.

“The correct policy is absolutely certainly to have a tax in the short term and make a smooth transition to a cap in the long term,” he said. “There’s nothing wrong with having a tax and a cap at the same time.”

One way to combine cap-and-trade with a carbon tax is to set a minimum price for excess emission permits. That’s an option Ontario is considering, Malinowski said. Ontario is going into cap-and-trade with its eyes open, he said.

“Ontario and Quebec did commit to having the system be transparent and accountable and effective,” Malinowski said. “We very much stand by that commitment, for people to believe that this isn’t just a shell game.”

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