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Linking to a Star is fun, but the ride may be wild…

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Ok, so cap and trade with the US just got really interesting:

Canada to seek climate deal with Obama

Here

There was talk of this post election, including morphing the current intensity based system (in the Regularly Framework) to something with a hard or binding cap before 2015. Linking a national cap and trade program to the US is likely a step in the right direction since with the US involvement, competitiveness issues largely fall away (if we all have the same carbon price there are not cost differentials in product markets). This issue has been a major stumbling block to moving forward and resolving it will help. But, new excuses will likely arise that will lead to more inaction, notably our current economic and financial poverty, and what about China and India? But still, this seems to be a good omen from Canadian Climate Policy.

And most US proposals bring under the cap and trade program emissions from buildings, transportation and other manufacturing, which is something Canadian policy has not done (i.e. the Regulatory Framework covers about 50% of Canada’s emissions).

But I think the more important question is can we assume linking cap and trade systems is always good? I can think of a number of reason why linking initially with the US could be problematic:

Policy sovereignty. For anyone who has reviewed the WCI design document knows, once you sign on, you have to adopt what others have developed. And in the case of say Manitoba with 3 MT of reductions and California with 300 MT, whose interests do you think matter? This has been the case with WCI and it could be the case with Canada and the US.

Governance. With the provinces forging ahead, this sudden resurgence from the feds can’t make the Canadian WCI partners too happy. And with multiple trading systems emerging, it could be a real nightmare for large emitters.

More distributive impacts. While economic theory says linking is good since it lowers overall compliance costs, the incidence of trading is not uniform between buyers and sellers. Simply, linking permit trade to a larger market will change domestic permit prices, and if you are a buyer or seller, this matters. So, some may be better off and some worse.

Volatility. A larger market with voracious (and ahem, unregulated) traders will drive price volatility, which results in uncertain permit prices and inefficient outcomes. Something industry hates.

So, linking can be good but it can be bad, so one needs to proceed with caution. In other words, when you hitch yourself to star, be prepared for a wild ride.

Written by Dave Sawyer

November 5th, 2008 at 10:24 pm

One Response to 'Linking to a Star is fun, but the ride may be wild…'

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  1. .

    tnx for info!…

    Craig

    29 Jul 14 at 3:34 am

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