CLIMATE CHANGE: THE CASE FOR A CARBON TARIFF/TAX Thomas J. Courchene and John R. Allan The opting-on voluntarism of Kyoto, while admirable, is not adequate for addressing the climate-change challenge. This is because it excludes many of the highest polluting countries and, relatedly, because it cannot cope with the serious environmental-free-riding issues. The first of our proposed two tiers addresses free riding via a nationally imposed carbon import tariff combined with an equivalent domestic carbon tax. This “tradables” tier would engage global exporters (and importers) and not governments. The second tier would involve governments and could be Kyoto-like with commitments related to emissions, standards, cap-and-trade systems, etc. The first tier would, constitutionally, fall under federal jurisdiction, while all levels of government would hopefully play key roles in the second tier. Certes admirable, l’adhésion volontaire au protocole de Kyoto ne suffit pas à relever le défi des changements climatiques. D’abord parce qu’elle exclut de nombreux pays très polluants et, en corollaire, parce qu’elle n’offre aucune solution au grave problème du resquillage. Les auteurs propose de s'attaquer à ce dernier problème par le biais d’un tarif national à l’importation de carbone et d’une taxe équivalente sur les émissions de carbone applicables aux exportateurs (et importateurs) mondiaux. Ce premier niveau d’intervention serait de compétence fédérale et pourrait faire l’objet de mécanismes d’échange. Le second niveau d’intervention proposé par l’auteur viserait les gouvernements et pourrait s’inspirer de Kyoto en prévoyant des engagements en matière d’émissions, de normes, de plafonds, de systèmes d’échange, etc. Sur le plan constitutionnel, tous les ordres de gouvernement joueraient idéalement un rôle clé à ce niveau. anada’s National Round Table on the Economy and pulting climate change to the top of the global policy the Environment (NRTEE) has recently recom- agenda and may well be of signal importance in trigger- C mended that we adopt a carbon tax as the pre- ing creative and effective programs in individual nations, ferred policy instrument for addressing the climate change Bali will almost certainly fall far short of expectations. challenge. For its part, the Canadian Council of Chief This is so because while there are very substantial eco- Executives (CCCE) welcomed this NRTEE report, noting nomic costs to “volunteering,” there is no guarantee that that the proposal echoed the earlier CCCE Policy recalcitrant nations will follow through and, therefore, Declaration in recognizing the need for economy-wide sig- no guarantee the climate change challenge will be suc- nals to pressure businesses and individuals alike to reduce cessfully addressed. emissions of greenhouse gases (GHGs). Moreover, a market- based carbon tax also came in first place in IRPP’s Canadian he Harper Conservatives appear to be taking an inter- Priorities Agenda, an impressive agenda-setting and policy T mediate position between reliance on the market (and evaluation exercise involving nearly 50 of Canada’s recog- expressly on putting a price on carbon emissions) and non- nized policy analysts and designed to identify the country’s binding voluntarism. Specifically, the government is, thus top policy priorities. far at least, rejecting the NRTEE proposal for a carbon tax As a general principle, a carbon tax on all emissions in favour of a regulatory regime that would target the big is a decidedly preferable approach to the opting-in/vol- polluters in a “make the polluters pay” approach. Opera- untarism of Kyoto. And Kyoto is arguably superior to the tionally, the concerns here are that (1) the targeted com- recently embraced Bali Action Plan, which contains no mand-and-control approach could be prone to very binding commitments on signatories. While the substantial industrial and even provincial lobbying for reg- Kyoto/Bali initiatives are obviously important for cata- ulatory exemptions and (2) it would be very difficult to POLICY OPTIONS 59 MARCH 2008 Thomas J. Courchene and John R. Allan ensure that Canadian firms do not rifice significant economic growth to ot surprisingly, our approach to resort to the international economy to reduce our emissions, we ought at the N climate change begins with circumvent this regulatory approach. same time to ensure that the overar- addressing these international free- This latter observation leads directly ching international approach we are rider issues, and then complementing to the core difficulties with most of working within has some potential and supplementing them with appro- the existing proposals and, what is for successfully addressing the global priate domestic policies. Moreover, essentially the same thing, to the core climate change issue. We must also the target group for addressing free building blocks of our proposal. ensure that our efforts do not subject riding is not governments but, rather, Whether one relies on prices/taxes, Canadian firms to unfair competition multinational enterprises. But govern- on some version of a command-and- in domestic and external markets ments cannot be left out of the solu- control regulatory regime with finan- from firms located in non-participat- tion. Accordingly, we are led to a cial penalties or on Kyoto’s moral ing countries. two-tier approach. The first tier is con- cerned primarily to ensure Whether one relies on prices/taxes, on some version of a that the carbon footprint command-and-control regulatory regime with financial penalties of internationally traded or on Kyoto’s moral voluntarism, the bottom line must surely be goods and services attracts the same carbon tax bur- to ensure that the domestic economic costs associated with the den as that of non-traded chosen system will be validated by successfully controlled domestic goods and servic- carbon emissions. Phrased differently, success on the climate es. Readers may want to change front will be beyond our grasp unless the emerging refer to this as the “trad- ables” tier. The second tier economic superpowers like China, India, Brazil, Indonesia and deals with the whole others are effectively co-opted into the process. panoply of non-tax meas- ures to which governments voluntarism, the bottom line must Our view is that the proposals on may resort to effect a reduction in surely be to ensure that the domestic the table do not meet these tests GHG emissions. While the tradables economic costs associated with the (although the carbon tax could be tier will focus on firms, often multina- chosen system will be validated by suc- reworked to provide a Canadian ver- tional firms, the second tier will focus, cessfully controlled carbon emissions. sion of what we are proposing on a in Kyoto fashion, on governments. We Phrased differently, success on the cli- global scale). Beyond the inclusivity deal with these in turn. mate change front will be beyond our issue addressed above, the key flaw The analytical underpinnings of grasp unless the emerging economic in all the proposals is the failure to the tradeables tier exist, in an embry- superpowers like China, India, Brazil, come to grips with “free riding.” onic stage, in California’s proposal to Indonesia and others are effectively co- There are at least two sorts of free- measure the carbon footprint of its opted into the process. rider problems. The first is that firms energy imports right through to their In order to stress this point, con- in non-signatory countries, or non- source. If the resulting carbon emis- sider China. It is already the largest complying countries, will have an sions are too high, then California user of (dirty) coal and is planning to advantage in terms of exporting to will ban such imports into the state. open a new coal-fired power plant complying countries, and to interna- This California approach is also every week for the foreseeable future. tional markets generally. The second adopted in the Energy Independence Writing in the New York Times, is that firms in complying countries and Security Act of 2007, signed by Andrew Revkin reports that “even if will have enhanced incentives to President Bush in December. Section the established industrial powers outsource from, or offshore to, non- 526 of this statute precludes US feder- turned off every power plant and car complying countries, and then re- al agencies from purchasing vehicle right now, unless there are changes in export back to their home countries, fuel derived from non-conventional policy in poorer countries the con- thereby avoiding the domestic envi- sources unless its carbon footprint is centration of carbon dioxide in the ronmental regime. Moreover, as less than that of conventional petro- atmosphere could still reach 450 parts China, Brazil, India and the others leum. How will Alberta and the oil per million — a level deemed unac- continue their economic ascent, sands producers react? We think that ceptably dangerous by many scien- these free-riding concerns of comply- it is a very safe bet that the energy tists — by 2070. (If no one does ing countries will be correspondingly patch (and the province) will not anything, that threshold is reached in magnified and will surely test the want to lose access to US government 2040.)” The message that we draw resolve of those countries to hold to agencies and the California market from this is that if we are going to sac- their commitments. (and potentially to the entire US mar- 60 OPTIONS POLITIQUES MARS 2008 Climate change: the case for a carbon tariff/tax ket as more states follow California’s tries will actually be on the products to export into the huge US or EU mar- lead). Hence, they will take signifi- of corporations headquartered in the kets, as one assumes that they will, cant measures to conform to the G7 and other developed industrial will be subject to the carbon tariff.