Economic Instruments
for Long-term Reductions in Energy-based Carbon Emissions –
State of the Debate
Frequently Asked Questions (FAQ)
1. What is ecological fiscal reform
(EFR)?
2. Why does EFR work?
3. Does EFR mean taxes will be raised?
4. What benefit is EFR to the federal government?
5. Has EFR been used in Canada before?
6. Why didn’t these examples work?
7. How does Canada’s use of EFR compare to
other countries?
8. What was the goal of the NRTEE’s EFR &
Energy program?
9. What is needed for fiscal reform to succeed in
Canada?
10. Are economic instruments, and specifically EFR,
the solution to Canada’s climate change concerns?
11. What are the long-term benefits?
12. Will all fiscal instruments accomplish these
benefits?
13. Is EFR better than other policy instruments?
14. Why should Canada actively pursue an advantage
in carbon emission reduction technologies?
15. What are the benefits for a long-term carbon
emission reductions within an integrated policy framework?
16. Why does Canada need a coordinated, long-term
carbon emission reductions strategy?
17. Do all economic instruments have the same effect
on the government?
18. What considerations need to be taken into account
for a coordinated technology transition strategy?
19. What sectors did the NRTEE examine?
20. What is meant by industrial energy efficiency?
21. What is meant by emerging renewable power technologies?
22. What is meant by hydrogen energy?
23. What were the specific findings of the case
studies?
1. What is ecological fiscal reform (EFR)?
The principles underlying EFR aren’t that
complicated. It is based on an understanding that taxes and government
spending have a tremendous effect on the way the economy works
— Economics 101 — and that the way to maximize this
impact is to make sure that tax and spending policies work together.
EFR then involves a strategy where the way the government spends,
and the way it imposes taxes, create a unified set of incentives,
both positive and negative, to support its goals.
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2. Why does EFR work?
It works because it is cost-effective and market-driven.
By giving the right set of price signals, government enables the
optimal allocation of resources to achieve environmental and economic
policy objectives at a lower cost.
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3. Does EFR mean taxes will be raised?
No, EFR can be revenue neutral. The idea is not
to raise more government revenue or spend more but to shift the
source of revenues – taxing the bad and rewarding the good.
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4. What benefit
is EFR to the federal government?
At time when the federal government faces a range
of other spending priorities, EFR allows the government to meet
its environmental responsibilities without additional spending
or higher taxes.
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5. Has EFR been used
in Canada before?
Canada has had some experience in using economic
instruments to meet environmental needs. There’s a tax benefit
for gifts of environmentally sensitive land. When the country
was moving to the use of unleaded fuel, the federal government
set different levels of tax on leaded and unleaded gasoline. British
Columbia raised permit fees for forest companies using old beehive
burners used to get rid of sawdust, and then turned the money
back to companies through rebates for investment in alternatives.
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6. Why didn’t
these examples work?
Although worthy, many of the examples fall short
of real EFR because they tend to be isolated initiatives. EFR
involves not only the introduction of new measures but an examination
of existing policies to make sure that the entire range of government
policy measures is directed to the same goals.
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7. How does Canada’s
use of EFR compare to other countries?
Canada has lagged behind other countries in its
use of EFR. A number of European countries have successfully implemented
various aspects of EFR over the last decade.
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8. What was the goal
of the NRTEE’s EFR & Energy program?
The Round Table chose to focus on the strategic
issue of energy and climate change, and set for itself the objective
of developing and promoting fiscal policy that consistently and
systematically reduces energy-based carbon emissions in Canada,
both in absolute terms and as a ratio of GDP, without increasing
other pollutants.
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9. What is needed
for fiscal reform to succeed in Canada?
EFR depends on good data – recognizing the
true value of natural capital items. New tools such as the global
Millennium Ecosystem Assessment and the World Bank’s yearly
“Little Green Data Book” are helping to provide key
data, and the Round Table’s examination of key indicators
is important for Canada.
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10. Are economic
instruments, and specifically EFR, the solution to Canada’s
climate change concerns?
EFR is one tool that will allow Canada to address
its climate change concerns, and more specifically help reduce
greenhouse gas emissions. Promoting a long-term, coordinated strategy
for long-term, energy-based carbon emission reductions will require
coherent and cohesive policy reforms on many fronts, as well as
engagement from every level of government. EFR is a necessary
but far from sufficient instrument for meeting policy objectives.
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11.
What are the long-term benefits?
Under regulatory approaches based on command and control, compliance
decisions are made by the regulator. With fiscal instruments,
this decision making shifts to the regulated community (i.e.,
firms or individuals). This shift provides increased flexibility
for the targeted community, enabling it to make compliance decisions
that minimize compliance costs and thus maximize profits.
Fiscal instruments are also more attractive because,
in theory, they reduce government implementation costs, raise
government revenues and reduce budgetary outlays, thus reducing
the costs (both to government and industry) of meeting societal
objectives.
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12.
Will all fiscal instruments accomplish these benefits?
No. Many of the benefits of EFR will depend on the specific design
of the fiscal instruments, and badly designed EFR instruments,
like any other badly designed policy instrument, can be inefficient,
ineffective and administratively costly.
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13. Is EFR better
than other policy instruments?
The Round Table is not favouring EFR at the exclusion
of other policy instruments. Rather, the intent is to drill down
on one set of the policy reforms necessary to enable greater deployment
of carbon-reducing technologies. The intent is also to explore
and highlight the possible benefits of EFR – over other
policy tools – as a cost-effective, agile and integrative
means of pursuing sustainable development objectives.
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14. Why should Canada
actively pursue an advantage in carbon emission reduction technologies?
More than any other country, we combine a rich and
varied mix of energy sources with the knowledge capital that can
enable use to maintain our global leadership in the energy economy,
even as it shifts and diversifies to mitigate climate change.
Untapped wind, water, solar and biomass resources of world-class
calibre abound alongside the hydrocarbon, uranium, coal and large
hydro resources that have formed the basis to date of Canada’s
energy wealth. We are knowledge leaders in several of the new
technologies – small hydro, biomass, hydrogen, and carbon
capture and sequestration – that are critical elements of
a lower-carbon energy future. And the geographic diversity of
our communities enables experimentation with technologies for
urban and remote locations, cold and moderate weather and conditions.
In other words, we have all the resources necessary to adapt to
the coming energy revolution, provided we advance strategically
and with a clear vision.
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15. What are the
benefits for a long-term carbon emission reductions within an
integrated policy framework?
Public investment in a long-term carbon emissions
reduction strategy would yield many benefits including:
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Energy Security – including
overcoming the supply shortage (by 2020, approximately 15% of
Canada’s current electrical generation capacity will be
more than 40 years old. Incremental generation requirements
by 2020 for both plant replacement and demand growth are expected
to be 40% of the current stock); improving security of supply
(The September 11 terrorist attacks, combined with the rolling
California brownouts in the winter and spring of 2001 and the
August 2003 eastern North America blackout, have renewed public
interest in the security of energy supplies. More diverse sources
of fuels, a more responsive supply mix – including renewable
energy sources – and a greater energy efficiency are key
ingredients); and, improving price stability (stability of energy
pricing has also become a priority following recent experience
with rising crude oil prices and significant price volatility
in the natural gas and deregulated electricity markets).
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Clean Air and Improved Quality
of Life – The largest sources of human-created air pollution
are energy generation, transportation and energy-intensive industries.
Energy efficiency programs that reduce the quantity of fossil
fuels burned, zero-emission renewable energy sources and hydrogen
technologies with zero emissions at the point of combustion
can all reduce emissions of smog precursors in Canadian urban
centres and improve the quality of life.
-
Reduced Health Care Costs –
Air pollution causes respiratory ailments, exacerbates cardiovascular
disease and contributes to higher mortality rates from a number
of conditions. The associated hospital admissions, emergency
room visits, doctor visits and medication costs impose a large
cost on the health care system. These costs could be lowered
by reducing smog.
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Industrial and Manufacturing Capacity
in New Environmental Technologies – The domestic economic
benefits of large investments in long-term carbon emission reductions
would be amplified if Canada were able to supply the requisite
technology and expertise. At present, many of the energy technologies
required for carbon mitigation would need to be imported. Analysis
conducted for Industry Canada concluded that, given present
Canadian manufacturing capacities, one-third or more ($25 billion
to $75 billion) of the machinery and equipment required to satisfy
Canada’s Kyoto targets would need to be imported. A deliberate
emphasis on promoting domestic manufacturing capacity in these
emerging industrial sectors would permit Canada to expand its
share of the booming global markets for energy management and
renewable energy technologies. It would also keep the economic
benefits of substantial expenditures on machinery and equipment
in Canada.
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Targeting Growing Export Markets
and Developing Country Needs – Nearly 70% of the increase
in world primary energy demand between 2001 and 2030 will be
in the developing and transition economies; half of total global
energy investments during this period, US$7.0 trillion will
be directed to developing countries. The primary energy sources
and energy use efficiencies that are used to meet this ballooning
demand will determine the ecological future of the planet, as
well as environmental and health effects at regional and local
scales. A Canadian focus on assisting the commercialization
of cleaner, reduced-carbon technologies could also benefit developing
countries.
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Commercializing and Leveraging
Government-funded Research – Government fiscal involvement
in the development of new energy technologies has historically
focused mainly on the idea generation and conceptual stages
of product development. The recent establishment of the Sustainable
Development Technology Fund aims to address the gap in funding
at the demonstration and pre-commercialization stages, just
prior to venture capital investment.
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New Jobs and Regional Development
– Other countries are achieving worthwhile employment
benefits from the R&D, manufacturing and servicing of carbon
emission reduction technologies.
-
Innovation and Development of
Value-added and Intellectual Property-Intensive Secondary Industries
– Canadian leadership in new, knowledge-based industries
– such as hydrogen fuel cells or carbon sequestration
– can supplement commodity-based energy sector exports
to diversity our economy.
-
Maintaining Canadian Competitiveness
– A long-term carbon mitigation strategy is a pre-emptive
response on two fronts: to ensure the continued acceptance of
conventional Canadian commodities – heavy crude from oil
sands, electrical power and minerals – into international
markets; and to position Canada to participate in new growth
sectors such as the production of hydrogen-fuelled vehicles.
Improved energy efficiency in the industrial sector will also
enhance the productivity of Canadian firms.
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16. Why does Canada
need a coordinated, long-term carbon emission reductions strategy?
The pursuit of other objectives of a sustainable
energy strategy, without a specific long-term carbon emission
reduction objective, may lead to perverse emission impacts.
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17. Do all economic
instruments have the same effect on the government?
No. Economic instruments can be grouped into three
broad categories according to their effect on government finances:
Revenue-raising instruments such as taxes and auctioned
permits that increase relative cost of emission-intensive technologies
and products. These instruments create a continuous incentive
for innovation to improve emission efficiency or to shift to lower-emission
substitutes, as well as providing revenues to the government.
Budget-neutral instruments that increase the relative
cost of emissions- and/or energy-intensive technologies and products
but do not raise renvues for government. This includes market-based
regulation, which requires firms to meet certain standards but
allows them to trade with other parties in meeting this commitment.
Budget-neutral instruments can focus on technology (e.g., a renewable
portfolio standard or California’s Vehicle Emission Standard)
or on performance (e.g., a Large Final Emitters domestic emissions
trading program).
Expenditure instruments such as subsidies and other
incentives that reduce the relative cost of technologies and products
with lower emission and/or energy intensity, making them more
competitive with incumbent technologies. They may target current
decisions (e.g., through accelerated depreciation for tax purposes
or mail-in rebate programs) or long-term cost competitiveness
through funding for research, development and commercialization
of new technologies. Financing these subsidies requires governments
to either: increase other taxes or reduce other expenditures.
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18. What considerations
need to be taken into account for a coordinated technology transition
strategy?
A key consideration for policy-makers will be how
to tailor policy measures to support the different development
stage of each technology. Particular consideration will need to
be given to creating synergies between current and future technologies,
so that these technologies can reinforce one another where possible.
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Case Studies
19. What sectors
did the NRTEE examine?
The Round Table commissioned several case studies
to show how EFR can play an important role in helping Canada cut
greenhouse gas emissions and make the shift to energy sustainability.
The studies looked at three issues: the impact of industrial energy
efficiency to illustrate mature technologies; the use of renewable
power technologies to illustrate emerging technologies; and the
use of hydrogen fuel technologies, to illustrate longer-term technologies.
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20. What is meant
by industrial energy efficiency?
Energy efficiency refers to the relationship between
the output (service) or a device or system and the energy put
into it. The NRTEE focused on the Canadian manufacturing and mining
industries.
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21. What is meant
by emerging renewable power technologies?
Emerging renewable power was delineated as EcoLogo
certifiable, electricity generating, grid-connected technologies.
These technologies included: wind turbines (both on- and off-shore);
small hydro; grid-connected photovoltaics; landfill gas (utilisation
for electricity generation); biomass (in electricity generation
capacities); ocean energy; and geothermal.
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22. What is meant
by hydrogen energy?
Hydrogen energy was defined as any energy system
where the primary fuel, at some point within the process, is hydrogen.
Fuel cells, because they use hydrogen as their primary fuel, are
a major component of this sector.
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23. What were the
specific findings of the case studies?
Industrial energy efficiency
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The NRTEE concluded that policy
intervention would be most appropriate at the two ends of the
product pipeline: on the market uptake of existing (and eventually
emerging) technologies and processes and on the research and
development related to the development of new energy efficiency
technologies.
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Market-oriented regulation was
considered to be the most environmentally effective, economically
efficient, and politically acceptable means to encourage market
uptake of energy efficient technologies and processes in the
manufacturing and mining industries.
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Canada has similar or better renewable
energy resources than the nations who are leaders in the renewable
energy supply. This includes substantial wind potential and
viable sites across the country, a rich solar resource, several
thousand potential sites for small hydroelectric plants and
unused biomass potential.
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Canada has an excellent opportunity
for aggressive policy innovation on emerging renewable technologies.
These can help solve growing supply, security, and environmental
challenges in the short, medium and long term.
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The NRTEE found a strong case
for the effectiveness of economic instruments, especially economic
instruments that target the price gap that exists between emerging
renewable energy technologies and incumbent technologies can
promote market penetration.
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Generally, hydrogen technologies
face technical, economic, and infrastructure barriers to market
penetration.
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Canada is a leader in hydrogen
technology development. This leading-edge position has been
assisted by historical support form the federal government –
in August 2003 alone, $130 million in additional federal support
was given.
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Hydrogen technologies considered
in the NRTEE analysis realized relatively little market penetration
in the business-as-usual cases.
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The case study considered the impact
of two categories of fiscal instruments: consumer incentives
(e.g., consumer tax credits) and producer incentives (including,
tax credits, R&D grants, accelerated capital cost allowances
and investment tax credits).
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Public investment in hydrogen
technologies should focus on lower-carbon (on a life-cycle basis)
hydrogen pathways, particularly those from zero-emission primary
energy sources.
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