Posted by Tim Stobbs on May 15, 2009
Well right now there is a bit of political uncertainty on the entire concept of cap and trade. After the BC election the words ‘Carbon Tax’ no longer appear to leave such a bad taste in people’s mouth after the entire Dion’s Green Shift plan did in the last federal election.
To most people the matter of cap and trade verus carbon tax is rather confusing. After all they still are just a tax any which way you do it. The reality is both concepts are two sides of the same coin and the difference is mostly about public policy.
A carbon tax provides price certainty to the market. If you know a tonne of CO2 is worth $40 you will change your business to stop emitting those amounts with a cost less than $40 in hopes of saving some tax. The downfall of a straight tax is there is no means to hit a specific target. As such if you want a 20% reduction from 2006 levels by 2020 you don’t have any means to ensure you will get there other than raising the amount of the carbon tax and hoping it is high enough.
On the other side if you do a cap and trade you have no idea what the price is going to be. It’s like trying to predict a stock market value and you don’t even know the trading rules yet. Yet you can move the cap to ensure you hit a certain reduction limit.
One concept that isn’t getting a lot of play in the media is simply doing both. You do two cap and trade systems that interlink. One covers the big emitters directly and the other cap and trade covers the upstream producers of natural gas and oil. That way when you buy gas at the pump your carbon price would already been built in. To give some initial price certainty you put in a floor price on carbon say $15/tonne which acts as a carbon tax.
Why do it that way? Well because getting car and households to reduce their emissions has always been a problem with a cap and trade system. It’s a huge waste of money to make every person trade for every tonne of carbon they emit. So often they get excluded from the system which leaves out a large piece of the emissions.
In the end the solution won’t matter for most people they just want to know how much more tax am I going to pay. Under a cap and trade system the answer will be ‘more, but we can’t know how much.’ Now doesn’t income tax seem a lot simpler compared to this mess?