Carbon tax or cap and trade?

The debate over carbon tax or cap and trade seems, with the support of many business organizations, to be tilting in Canada in favour of carbon tax. GallonDaily wishes to present a contrary opinion, in favour of cap and trade.

Before making our key argument we wish to stress:

  • either economic instrument is better than nothing. GHG emitters in most of Canada currently experience no mandated carbon emission reduction incentive
  • both tools are complex: a well designed program of either genre is better than a poorly designed program of any kind.
  • program design can easily tilt our opinion from the one to the other.

Having stated the above, let us explain briefly why we lean towards cap and trade.

Experience suggests that entrepreneurs, and business people in general, are much more incented (incentivised, if you must) by the opportunity to earn direct profits than they are by the opportunity for reducing costs. If that is not obvious, let us suggest as an example the relatively poor uptake of energy and other input efficiency programs. Even when a company is presented with the opportunity to reduce costs by a substantial amount through an energy or resource conservation program the likelihood is that they will sit on their hands until the government either mandates the program or provides a substantial economic incentive over and above the cost savings that the company will realize. Saving money is not something that corporate leaders get too excited about, at least until it comes to laying off employees.

On the other hand, if there is a new product on the radar or if a company faces the opportunity to increase revenue, many business leaders and entrepreneurs get very excited. More is better!

A carbon tax falls into the first category. The tax will increase costs and many companies will face the opportunity to reduce costs by reducing carbon emissions, but they will not face an opportunity to increase revenues or sell more products. A cap and trade program, on the other hand, presents carbon emitters and a multitude of entrepreneurs with an opportunity to make money and increase revenues by selling carbon credits and by implementing initiatives which create carbon credits. There is already evidence that this excites many CEOs and independent entrepreneurs much more than a less tangible reduction of costs. Cap and trade creates a new market for products – carbon credits – whereas a tax presents only a much more uncertain (or so it seems) opportunity to reduce input costs.

Given the above, we’ll plump for a cap and trade program. We are not surprised that many industry associations plump for the carbon tax, mainly because many industry associations are fundamentally anti-competitive, even if they expose that tendency in very muted ways.

GallonDaily supports a competitive marketplace in goods and services associated with a low carbon economy. Our 26 and more years of experience leads us to predict that we will see much more competition for low carbon goods and services, as well as products such as carbon credits, arise from a cap and trade program than we will from a carbon tax initiative. We hope that governments currently considering economic instruments for a low carbon economy are listening and will see the benefit of a competitive marketplace in low carbon instruments such as carbon credits.

The above is a GallonDaily opinion column.

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