More sophistication, please

Since Sunday’s release of the Liberal party platform and the non-announcement of a cap-and-trade program, the reaction in Alberta has been sadly predictable.  Many people in the province seem to know exactly what will be in this policy, and they know that it will be bad news for Alberta. In fact, the Wild Rose Caucus has declared the policy to be the NEP 2.0, and they are quick to cite a TD-Suzuki-Pembina Institute report which shows that the costs of the particular cap-and-trade implementation they consider would be disproportionately felt in Alberta. The Sun seems to know that the policy will contain adjustments at the border for high-carbon products.

I would love to write a long post in this space and say that they are wrong.   I would love to say that this policy will be good for Alberta. I would love to be able to talk about how it recognizes the critical role of Alberta’s energy and resource industries in Canada, and will not seek to disadvantage Alberta (and by extension Canada) to score short term political points. I would love to tell you that it will not place a disproportionately high price on carbon in Canada relative to climate leaders such as the EU.  I’d love to say all of that, but I can’t because I simply don’t know what the policy will do because I don’t know what the policy is.

The study cited by the Wild Rose Caucus is a good assessment of a particular policy, but it tells us little about what the effect of the Liberal policy might actually be. If you take the time to read this report done using the same model as the TD report with the same targets in place, you will see that the design of the cap-and-trade program, and in particular how you hand out the permits, is what determines the size of the wealth transfer.   The right reaction, and the one taken by Saskatchewan Premier Wall, is to ask for clarity, not to jump to conclusions and scare tactics.

Right now, both the Liberals and the Conservatives have signed on to the same long-term GHG emissions targets for Canada, but each has committed to a different approach to get there. In this context, I found it interesting to read the caption at the bottom of the Wildrose Caucus website: “The Wildrose Caucus stands for free enterprise, less government, increased personal freedom and democracy.”

The Liberals have committed to a market-based regime which allows free enterprise to determine, without direction from the government, which improvements to make in their business to reduce GHG emissions. Under this system, innovative business models and firms with competitive advantage in emissions efficiency will win, all else equal.  Of course, as discussed above, the benefits also depend crucially on how the property which will be traded in this new market is handed out.

The Conservatives, on the other hand, have committed to a regulatory model, similar to the EPA approach in the US, wherein individual performance requirements will likely be set at the sector or facility level.  If you want to know what source performance standards look like, look here. Not exactly small government. Now, the other part you should know is that regulatory approaches generally look at each facility and ask what that facility can afford to pay. Alberta, as we all know, has some of the highest value uses of carbon emissions in the country. Under a regulatory approach, oil and gas facilities can afford to pay a great deal more than, for example, steel mills in Eastern Canada. Last time I checked, the party pushing the regulatory approach needs votes around Toronto and in SW Ontario much more than it needs votes in Alberta. Don’t be too quick to assume that the oil sands will be the first to get special treatment.

Before we rush to judgment in Alberta on cap-and-trade as the NEP 2.0 and therefore sweep it off the table, we have to consider what we really want out of a carbon policy, since both the Conservatives and the Liberals have committed to the same target. Do we want a system where our businesses can win if they generate the highest value per ton of carbon in the country (as long as they are placed on a level playing field at the outset) or do you want a system where our business will be penalized for higher profit margins with more stringent requirements to reduce emissions? You might not want a lot of the other stuff that goes with the Liberal platform, but don’t be so quick to kick cap-and-trade to the curb.

I would love to see our politicians hold the oil sands up as an example and say, as Rick George and others have done, that the oil sands are more than ready to compete on a level playing field with any other business in the country.  Our industry competes very successfully for talent against all comers, and will easily do the same in a carbon market. Ask any economist which is better for free enterprise, carbon pricing or a regulatory approach and you will get the same answer every time.  Let’s just make sure we get the design of that level playing field right.