Earlier today, I had a quick Twitter exchange with Macleans’ Andrew Coyne (@acoyne) with respect to the NDP revenue projections from their cap-and-trade proposal. Coyne’s points, with which I don’t entirely disagree, were that the NDP platform costing document contains implausible claims that a) an auction would yield $3.6 billion revenue in the current (2011/2012) fiscal year, and b) that an auction of 100% of the permits would yield only $7.4-billion in year 4. I thought I would look at both in a few more than 140 characters.
Getting a cap-and-trade system up and running can be a long, arduous, and documentation-intensive process. In fact, it seems to be one of those “if you can’t do it, write another report,” type of things. If you want a peak into the world of mechanism design, look no further than the Western Climate Initiative Document Library, or at the EU Emissions Trading System website. There is no question that the process can take as long as you give it, but I am not convinced that makes for a better system – it might just give you more time to solve problems that your system doesn’t really have, and in so-doing create more problems that need to be solved with more reports.
What if they just did it? What if the NDP, or whoever forms our next government just said we’re doing this? An industrial cap-and-trade regime that covered all facilities with emissions over 50,000 tons of CO2 equivalent per year, the so-called big polluters, would only have to cover about 450 individual facilities, and fewer corporate entities since many corporations own and/or operate more than one of the listed facilities. These facilities are already required to report their annual GHG emissions, and you can see how they break down in this report. These 450 sites generate about 250 Mt/yr of GHG, or a little under 30% of Canada’s total. Suddenly the system gets a whole lot smaller when you think about a few hundred players.
If the NDP were to follow a smooth path to their target, they would have to quickly begin restricting the number of permits available. The fewer permits are made available, and the more limited the means of compliance would be for the firms, the higher would be the price. The NDP hasn’t given us much to work with in terms of emissions targets, but let’s work backwards from their emissions reductions. Suppose they keep their commitment to a 100% auction, and they restricted the quantity of emissions permits available to these covered facilities to 240Mt/yr for 2012, a small decrease. The price, at auction, for these permits would only have to be $15/t (a famous number in Canadian climate lore, I might add) to meet the 2012 revenue target. So, if you assume that you could get an industrial cap-and-trade program up and running by 2012, getting revenue of $3.6 billion from an auction of permits is not an outlandish number.
The next question is whether you could a cap-and-trade system going in that time frame. Likely the best example here is Alberta and the rush to get the Specified Gas Emitters Regulations in place. Faced with the possibility that the Harper government would enact the Regulatory Framework for Air Emissions after the filing of its Notice of Intent to Regulate GHG emissions in October of 2006, Alberta raced to craft (late 2006 and early 2007), pass (March 2007) and enact (July 2007) its own GHG emissions policy. It was seen as a matter of constitutional necessity in Alberta to get a system in place first and they certainly did. So, could a new government sworn-in this May get a cap-and-trade system sufficiently advanced so that an auction could be held before March of 2012? It seems possible, but would be difficult.
The NDP has some elements going for it which Alberta did not have in 2006-2007, in that many jurisdictions have created a lot of paper on these programs, including plenty in Canada. The Harper government, in its earlier flirtations with a modified cap-and-tax regime under the Regulatory Framework for Air Emissions, created things such as offset guidelines, the reporting framework, etc. They’d be wise to have some sort of price assurance for the first few years, which luckily has also been done before under what was then called a Technology Fund.
So, with respect to Coyne’s first point, the 3.6 billion (gross of any CIT interaction effects) revenue sometime in 2011-2012 is not unimaginable, but they would be up against a wall and I am not sure it’s a good idea to rush a policy of this magnitude to that degree.
With respect to Coyne’s second point, a $7.4 billion revenue from a full auction of permits in 2014 is harder to reconcile, at least if the NDP is serious about meeting its GHG targets domestically. Let’s suppose they are very aggressive on the targets, reducing GHG emissions among large emitters to 150Mt/yr by 2014. If this were the case, any price greater than $50/ton would result in auction revenue greater than $7.4 billion, and a permit market that restrictive would likely generate much higher permit prices. However, if we supposed that the permit system would allow international offsets, there is a good chance the permit prices could be kept below that $50 per ton figure, even if compliance objectives were kept tight. The only way I can see these numbers making sense is if you have an auction of somewhere in the neighbourhood of 150-180Mt of permits for large emitters currently covered under the reporting requirements, with a market price of $40-50/ton which is kept low by access to offsets.
Here, the net revenue problem would arise again, since firms spending money on offsets would be deducting those expenditures from corporate taxes and if the offsets are international there would be no corresponding tax revenue from the offset seller. Further, if the emissions reductions are taking place abroad, our domestic emissions won’t be decreasing as rapidly in reality as on paper. That may not be important, since our UN Copenhagen target will be judged net of internationally acceptable offsets.
So, is the NDP out to lunch on their revenue? It’s hard but not impossible to see how their revenue numbers jive with their GHG targets. It would likely be impossible without both a heroic regulatory effort and significant access to international offsets for our big polluters.
Oh, and not to make their lives difficult, but they would still have to do something with the other 70% of the emissions in the economy…