Cap-and-Trade vs Carbon Tax: No Clear Winner, as Ontario Joins California

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green-regulations-report-downloadThe Canadian province that gave us one of the original six NHL teams (the Toronto Maple Leafs), several original sketch and improv comedians (John Candy, Martin Short, Dan Aykroyd, Rick Moranis to name only a few) and a good deal of original (read: primary) nickel mining production now gives us an unoriginal carbon emissions reduction choice.

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Ontario, Canada – a heavyweight in population and GDP for our Neighbors to the North – just decided to undertake a cap-and-trade approach in reducing their greenhouse gas emissions, joining its Frenchier neighbor Quebec and the US state of California under the so-called Western Climate Initiative and its cap-and-trade program, to invest further in a green future. According to an article in the Financial Times:

“Under the banner of the Western Climate Initiative…California and Quebec already cap industry emissions such as those from electricity plants and oil and cement producers, and oversee more than 180 million metric tons of greenhouse gas emissions…Quotas are imposed on businesses that can purchase additional emission allowances, also called permits, and sell any they do not use.

Governments reinvest revenues from allowance auctions into clean energy initiatives and green transportation. California estimated in February that its revenues from the auction of allowances would reach about $2 billion or more 2015-16.”

Cap-and-Trade vs Carbon Tax: How Well Has It Worked?

For an example of how carbon emissions trading schemes have worked for manufacturing and heavy industry (such as steelmaking), look no further than Europe and the UK.

As background, initially the EU had set a goal of 20% reduction in greenhouse gas (GHG) emissions by 2020, and more recently they set a much more ambitious target of 40% reduction by 2030 – a very bold goal, considering President Obama promised a 26% to 28% reduction in US emissions by 2025, from 2005 levels, while the EPA is trying to push through its Clean Power Plan by this summer, calling for states to reduce existing power plants’ emissions by 30% by 2030. Outside of Europe, Australia scrapped its carbon tax system last year.

Back to cap-and-trade and carbon taxes, in general. According to Andrzej Kotas, managing director of Metals Consulting International and CEO of steelonthenet.com, neither work so hot across the pond. We asked Kotas whether he’s seen novel technologies that companies in the EU have developed that have helped counter the onslaught of regulations. He responded:

“I would say that very evidently the emissions trading system has been a failure in that sense. It was designed around the whole idea of having high-cost CO2 and charging people for producing a lot of CO2 gas would stimulate investment in new technology, but it has been a patent failure in that sense because it has simply not done so.

“We are talking, in the EU, about a CO2 tax of around 50 dollars per ton of CO2 generated kicking in about 2020, a tax expected to be about 120 dollars or more by 2030. That’s not going to apply if I’m making steel in Africa; neither would it apply if I’m making steel in China. I think if you speak to steelmakers they’ll tell you the whole emissions trading system has been failure; where it was economic to do so and returns to make on investments, steelmakers have made these decisions, so [ultimately] it hasn’t stimulated that investment – what it has done, I think, is the opposite: prompted investment abroad.”

Will Companies Leave Ontario?

If UK steelmakers, for example, have already been finding ways to produce offshore, will the same happen in the provinces and states under the Western Climate Initiative?

According to the FT, although Canada’s Prime Minister, Stephen Harper, has said that “Canada would release its greenhouse gas emissions targets before G7 meetings in June, after Canada’s premiers meet to discuss climate policy and an energy strategy,” he also is quoted as saying last December that, given the decline in oil prices, it would be “crazy economic policy” to apply unilateral emissions penalties on the oil sector.

It remains to be seen how Canada’s oil sector – and a host of other industrial sectors, especially those with operations in Ontario – will fare under the cap-and-trade scheme.

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