Canada can’t afford to wait on cap-and-trade: C.D. Howe

A made-in-Canada solution for trading greenhouse gas emissions need not rely on the U.S. adopting a similar system, a leading conservative think tank said in a report Thursday.

C.D. Howe Institute economists Dave Sawyer and Carolyn Fischer suggest that a “go it alone” policy, with prices based on the expectation that the U.S. will eventually follow suit would be a “low-risk” strategy for Canada.

Both countries have similar emission-reduction targets and Prime Minister Stephen Harper has expressed an interest in following America’s lead on a cap-and-trade initiative. The Obama administration has said it’s committed to the idea but C.D. Howe said it’s barely on the radar of U.S. Congress these days. Moving ahead of the U.S. on the issue could put Canadian industry at a disadvantage relative to its competition south of the border, Harper has argued.

Cap-and-trade markets, which are already in place in Europe, put a limit on emissions and allow firms to buy and sell rights to emit. If a business exceeds the cap it can buy credits from greener companies whose emissions fall below permitted limits.

The current global carbon market is valued at roughly $126 billion.

But Canada has more to gain – and potentially lose – from carbon trading than the U.S., the authors said.

That’s because the costs of lowering emissions will likely be higher on this side of the border.

For one, emissions are growing at a faster rate in Canada. And we have fewer cheaper alternatives in the electricity sector. Emissions in the oil and gas sector, the lifeblood of our resource economy, could also prove difficult to drastically reduce.

Plus, a linked Canada-U.S. trade system would further lessen the incentive to invest in technologies like carbon capture and storage in the oil and gas sector.

In addition, there’s no guarantee the U.S. would be open to the idea of sharing permits with Canada since policymakers there haven’t shown much interest in linking with foreign trading systems.

“To wait for the U.S. to legislate emissions policies would mean delay for Canada,” the pair said.

A handful of U.S. states and Canadian provinces, called the Western Canadian Initiative, plan to launch a cap-and-trade system in 2012.

C.D. Howe economists estimate carbon will trade at roughly $31 a tonne in 2020, while the WCI estimates prices to hover around $33 a tonne.

Critics of cap-and-trade say the system is flawed because it doesn’t get to the root of the problem. Instead, they say, it gives the biggest polluters a licence to continue bad practices simply by paying off smaller, greener companies. It also risks forming an economic bubble, some say.

Others are in favour of a carbon tax to reduce emissions and promote green energy as an alternative to cap-and-trade.