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On the NDP and budgets

As information continues to trickle out about the NDP cap-and-trade program, I thought I should go back to the NDP budgets quickly. An issue arose today with respect to the eventual gas price impacts of their cap-and-trade policy, and whether an NDP policy which does not price transportation emissions could reach their budget targets. It could. In fact, the math lines up very nicely. The practical likelihood of getting such a system on line in 2012 remains minuscule, but let’s put that aside for now.

Clare Demerse rightly points out that the NDP has projected 3.6 billion dollars worth of revenue, from auctioning 25% of the permits in the first year of the system, with an expected auction price of at least $45.  Quick math tells you that means they are planning to allocate 320Mt of emissions permits in total, with an 80Mt auctioned to give the 3.6 billion in revenue.  Who would be required to hold these permits, and based on what emissions? Well, if you define “big emitters” as including energy industries and electricity generation, you can flip to page 49 here, and you will see that those sources total up to 306Mt in 2008. The emissions in the energy and electricity sectors will likely grow, without policy, to 330-340Mt by 2012. If you included all of the transportation and heating fuel emissions associated with burning the gasoline, diesel and natural gas, that would add at least another 200Mt to the total (see page 52 here for a breakdown by vehicle class).  If you wanted to include downstream emissions, there would simply be far too few permits to go around if you are only issuing/auctioning 320Mt worth.

So, it seems very likely that what the NDP has in mind is a combined allocation and auction of permits which would cover the facility emissions in energy production and refining as well as electricity production. If you capped emissions from this sector at 320Mt for 2012, a price of $45 per ton is well within the appropriate ballpark for what the permit would be worth, so you could expect them to collect their projected 3.6 billion in revenue.

This all assumes they could get a system off the ground in that time, which is unlikely at best. If the system seeks to cover all 320Mt from the industrial sectors, this will take some additional work since some of those emissions are not reported under the current facility reporting framework. Large facilities in those sectors only report point source emissions (plants, not trucks and shovels) and only large facilities report, so the total emissions that are ready for a cap-and-trade program today is closer to 250Mt than 320Mt.

If this is, in fact, the system they have in mind, refineries would not be responsible for purchasing permits for combustion emissions, and so you should expect, as I outlined here, a price impact of about 4c/l.

If you take the NDP or any of the federal parties at their word in terms of targets, there is no escaping the need for the gas price impact to increase.  To meet the Government of Canada 17% below 2005 target, we will likely need the equivalent of a carbon price of around $75-100/ton by 2020 covering almost all emissions in the economy including gasoline and heating fuel. The impact of meeting these targets on gasoline prices would likely be in the area of 30c/l by 2020.


2 responses to “On the NDP and budgets”

  1. Roger

    That would be two then.

    The clarification in details is welcome. It would have been nice to see it come from the party, but I think the best one can expect from campaign material and comments are rough outlines of policy.

    I would agree that the NDP’s timetable is overly ambitious given the details that need to be sorted out, but not excessively so. All large emitters (>100,000 t/yr) have reported GHG emissions for several years now (as evidenced by the NIR). New business activities know they must report and make accommodations for such. The delay will come from the complexity of setting up the auction market, the clearinghouse for trading allowances, and the incessant debate as to “acceptable compliance mechanisms.” (i.e. whether there will be free allocation of allowances and what constitutes acceptable out of programme allowances, aka “offsets”.) The simplicity and effectiveness of a focused environmental tax becomes evident when this debate dulls any progress – just ask Australia.

    That aside, I would suggest that if the NDP programme proceeds it would constitute the second national Cap and Trade framework in Canada. The Conservatives have managed to camouflage the first one rather well. Officially, it is the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations. While it does not include the auction of permits, it works fundamentally on the Cap and Trade concepts. First, each vehicle manufacturer is required to ensure the fleet average emissions of cars sold in any particular year fall below the legislated maximum emission level (the Cap). Second, those that beat the Cap create “credits”, which in turn can be banked for future use or sold to other manufactures as an acceptable compliance mechanism (the Trade). Walks like a duck…

    Coincidently, this raises another point that seems to go unnoticed. The Regulation forces manufacturers to improve the fuel efficiency in vehicles and will to some degree raise the cost of vehicles. While officially not a “tax”, it nonetheless imposes new costs for “transportation services”. If we are to improve the environment and change the way we operate the economy it will, one way or the other, change the underlying cost structure. There is no free lunch – some just like to ignore this fact.

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