Opinion: Premier Smith Finds a New Enemy: Cap-and-Trade

By Geoff Stiles

Last week, the federal government announced that it plans to introduce a cap-and-trade system to regulate emissions in the oil and gas sector. This should come as no surprise to Alberta. A cap of some sort was always on the federal books and adding a trading element should if anything make it appear more palatable to the anti-regulation cowboys in the Alberta government. Moreover, the new policy has been undertaken after extensive consultation with the oil and gas industry. Looks like a no-brainer, eh?

Not exactly. Premier Smith has predictably used this as an opportunity to vent against the fed’s interference in Alberta’s oil and gas hegemony. The premier called the plan an “attack on the province’s economy” and vowed that her government will develop “a constitutional shield” in response while continuing with its own emissions reduction program. Nor is this just another knee-jerk response to federal intervention. Smith and her fellow-travellers have positioned themselves as the ultimate saviours of the Albertan way of life and want to run the entire fossil fuel show without any federal involvement at all. If Alberta’s growing emissions interfere with the feds’ ability to meet their international targets, that’s just too bad.

Indeed, the federal program of cap and trade is intended to do just that: constrain the unbridled growth of Alberta’s greenhouse gas emissions. But why object to using a market-based mechanism to do that? This has always puzzled me, ever since Doug Ford ended Ontario’s involvement in the California-based Western Climate Initiative (WCI), another cap-and-trade system. Ford conflated cap-and-trade with carbon taxes, which is particularly ironic when you realize that the idea of cap-and-trade arose out of the late-80s Reaganite obsession with turning regulatory policies into market-based ones. Is Alberta making the same mistake?

As even conservatives will admit, the US experiment with cap-and-trade worked really well. From 1990, when the US initiated the first cap-and-trade program, for Sulphur Dioxide (SO₂ is a big contributor to acid rain), emissions from coal-fired power stations were reduced by 30 per cent. A later cap-and-trade program focusing on Nitrous Oxide (NO) emissions resulted in a 60 per cent reduction. Rather than impose regulations to solve the acid rain problem, the U.S. government worked with the emissions-producing industries to find an agreeable solution. Even then, regulation was not a politically attractive option, and cap and trade provided a more palatable and effective way to achieve the needed reductions.

Conservatives rejoiced, because it demonstrated that the free market could solve America’s environmental problems in an equitable and effective way without the “big hand” of government. Companies affected by these programs (mostly power plants) were able to maintain production while reducing emissions to meet the cap.

Once the U.S. started the ball rolling, cap-and-trade became a popular alternative to carbon taxes, and now the largest cap-and-trade program in the world is run by the European Union, covering a wide range of industries and sectors. Sure, the EU program had a few ups and downs, but it’s still the most successful program for reducing emissions anywhere. Globally, there are 28 countries and sub-national entities using some form of cap-and-trade to constrain greenhouse gas emissions, and another 8-10 with programs under development.

One of the former is Quebec, which stayed with the WCI after Ontario left, and has realized over $7  billion in revenue from cap-and-trade, revenue which has been re-invested in Quebec industries and households to further reduce greenhouse gas emissions.

So why is Premier Smith objecting to a cap-and-trade solution? Here’s what she needs to know:

1. Cap-and-trade is about emissions, not production. The fossil fuel sector is free to continue increasing production, as long as its companies reduce emissions in keeping with their “cap.”

2. The “cap” can be location- or company-specific.  Most cap-and-trade systems give caps for specific emissions-producing entities, others assign them collectively for all similar entities under a company’s ownership. The allocation of caps can be done flexibly, for example by allowing companies to merge caps from several entities to reduce the business impact on high-emissions facilities.  Flexibility is built-in to cap-and-trade systems, as the EU’s many adjustments to their emissions trading system have shown.

3. The caps can be met by alternative means, e.g. buying credits from other companies that have reduced their emissions below their caps, or buying offset credits from a variety of sources such as forestry and landfill projects. Thus, if emissions reductions are too expensive, companies can continue to emit and meet the cap in other ways—ways that   have a similarly beneficial impact on global emissions.

So, what’s not to like here, Ms Smith? Perhaps it’s the fact that Alberta has done little or nothing to reduce oil and gas emissions on their own, and the feds have now shown the initiative you have failed to show? Or do you just believe that oil and gas companies should be free to emit greenhouse gases forever, without constraint?

If it’s the former, you get need to get on board and accept that cap-and-trade is the most cost-effective and economically efficient option available. If it’s the latter, you are out of touch with a major global trend.

Geoff Stiles is an independent journalist and policy analyst based in Ottawa, Ontario.