Carbon Trading: Unleashing market forces to battle climate change – at a discount

(Green Machine Magazine)

Whether it’s under the Kyoto Protocol or a made-in-Canada approach, reducing the greenhouse gas (GHG) emissions that are destabilizing the planet’s climate patterns is a major challenge for Canada.

We have the means to rise to this challenge by using a variety of economic instruments that harness the power of the market to reduce greenhouse gas emissions at the lowest possible cost.

For instance, a study commissioned by the National Round Table on the Environment and the Economy found that no matter what GHG reduction strategy is used, reductions can be achieved at half the cost or less by using an emissions-trading regime.

Emissions-trading is an innovative way of engaging the private market to meet the public’s targets for reducing harmful emissions. It is an economic instrument designed to lower the costs of reducing emissions by encouraging the implementation of those reductions where they can be made most cheaply.

While there are different ways to trade, one approach is that a regulator sets a maximum annual emissions limit from a given industrial sector or geographic area. Units of allowable emissions acquire a monetary value set in a free market by individual polluters buying and selling rights to emit.

Simply put, GHG polluters who can reduce emissions more cheaply can “over-reduce” and sell their surplus reductions to a GHG polluter whose cleanup would be more expensive. The polluters in aggregate attain the environmental goal, but at a lower total cost than if each emitter had to achieve a set percentage actual reduction.

By giving a dollar-value to carbon dioxide reductions, emissions-trading employs our existing economic system’s traditional pursuit of profit to attain an environmental objective.

There’s nothing like necessity to motivate innovation. Monetizing carbon dioxide emissions will prompt development of innovative technologies as entrepreneurs seek to supply the demand for energy-efficient and low-emission processes, machinery and structures from polluters who would rather sell emission rights than buy them.

Experience in the United States suggests that emissions-trading can successfully serve both the environment and the economy.

In 1991 when the Americans decided to fight acid rain by requiring large reductions in sulphur dioxide pollution have hit reduction targets designed to protect the environment – and they are saving an estimated $1 billion a year by using emissions-trading. A study found that participating utilities achieved a 75% to 80% saving compared to the costs they would have incurred to make the reductions without trading.

Other countries are already moving to employ emissions-trading in their GHG reduction programs. Denmark and the United Kingdom are setting up domestic emissions-trading systems to help them meet their Kyoto obligations. The European Union is on track for such a program by 2005. An international market is not far behind. If Canada moves quickly on emissions-trading, we could help keep the trading business – and the commissions – at home, rather than exporting those jobs and revenues to a foreign market.

There’s no question that making serious changes at a systemic level is difficult. So let’s harness the power of the market and creative, economic approaches to make the journey less costly.

We may look back and find that implementing a Canadian response to climate change was not about pain, grief and cost, but turned out to be an opportunity for this country to gain competitive advantage in a new, carbon-constrained global energy economy. CK

David J. McGuinty is President and CEO of the National Round Table on the Environment and the Economy.

Index to Articles