Carbon Pricing

Two good news stories today. The BC Liberals won reelection so the BC carbon tax will continue. Hopefully this will demonstrate to other politicians that it is possible to put a price on carbon without it being political suicide. The second good news story is that Quebec is putting in place legislation to meet its requirements under the Western Climate Initiative.

I was happy to hear about the WCI in 2007, especially since the Bush administration was doing noting on the issue, and I’m still happy to hear about progress now. Despite reassuring words from the White House and some members of congress, I’m still not convinced that we will see a real price for carbon set in the US during Obama’s first term.

This leads me to a concern I have about this group moving forward in advance of some national frameworks being in place. If the WCI manages to reduce emissions across its membership, that is certainly good. My concern is that when it comes time to negotiate the US climate deal, the base year will be set in the year of negotiation, not 1990, or even 2009. The progress that WCI members make may simply be of no value in the future if the base year is set after their reductions took place. The only real hope that I have is for California to be able to set the US’ national policy since they are so big. Still, because of the 2 seats per state in the senate, there could still be substantial opposition despite California’s massive contribution to US GDP.

This brings me back to the debate over cap and trade vs. carbon tax. While the cap and trade system may appear to be the most economic, because reductions will take place where the cost is least, it does create some problems when it is implemented in the real world. The debate over the base year is just one factor. Should the credits be auctioned, or allocated based on emissions? Will they be allocated on a national or state by state basis? What is the volume, and how quickly will they be reduced? All these are questions which have important implications on the ease of implementation and the final result of the process.

A tax on the other hand eliminates many of these problems. There is no need for a base year to be set. If you have been reducing emissions in the lead up to the new tax regime, you will just pay less tax. There is no political decision to be made about whether to auction or give away credits, so the battles which that will bring are eliminated.

I suppose I’ll be happy simply to see a price on Carbon, and even if it isn’t perfect, at least it will be a step in the right direction. Much like the iPod, once these technologies get started, I have faith that they will rapidly become superior to our existing fossil fuel technologies. The US has the capital, infrastructure, and the concentration of brainpower that must be brought to bear on this problem. All that it needs is a properly structured system of incentives to unleash it.

Ask your friends on the right why they believe that the market can solve all problems…except climate change.