The government of Nova Scotia has just released a discussion paper on its proposed Cap and Trade (C&T) System for provincial GHG emission reductions  (https://climatechange.novascotia.ca/). The C&T system is a key component of Nova Scotia’s contribution to Canada’s overall effort to implement the Paris Climate Agreement. Under the Paris Agreement, Canada commits to making a fair contribution to keeping global temperatures to well below 2 degrees, to implement Canada’s current commitments announced by the previous federal government, and to increase those commitments over time, at least every 5 years starting in 2018.  To do its fair share, Nova Scotia will have to significantly improve on the 30% reduction target by 2030.

The global goal of keeping temperature increases well below 2 degrees is driven by our growing scientific understanding that while there will be serious impacts even at those levels of climate change, meeting this target should allow the world to avoid the worst impacts, such as runaway sea level rise resulting from melting of polar ice and glaciers, collapse of the gulf stream, major disruption to food and water supplies, etc.

In practical terms, a fair contribution from developed countries such as Canada means decarbonizing our economies as soon as reasonably possible while allowing for a smooth transition of our economies and our workforces. The pricing mechanism is a key element of the Pan-Canadian Framework negotiated in 2016 (https://www.canada.ca/en/services/environment/weather/climatechange/pan-canadian-framework.html), because it ensures that over time (very gradually), sectors who have until now contributed to the problem without having to pay for the costs associated with climate change will not continue to have an unfair competitive advantage over alternatives that do not contribute to the problem.

Under the Pan-Canadian Framework, Nova Scotia has a choice of carbon pricing mechanisms. It can put in place either a C&T system or a carbon tax. The recently released discussion paper proposes a C&T System, a system that puts provincial limits on emissions from key sectors and allows participants to trade emission reduction allowances to reduce emissions at the lowest cost. The discussion paper outlines the following key design elements of the proposed C&T system:

• Sectors covered will be limited to those required to be included under the Pan-Canadian Framework (though both combustion and process emissions will be covered)
• All sectors covered will receive free allocations
• The overall cap will be negotiated with Environment Canada based on the minimum requirements, which in turn are based on modelling what would be achieved in those sectors with a carbon tax of $10 in 2018 going up to $50 in 2022
• The emission reductions expected from the electricity sector will be based on emissions expected from existing measures and regulations in place to reduce GHG emissions from electricity
• There will be an overall cap for all sectors included in the C&T System, and the free allowances will then be allocated to upstream actors in the sectors covered, meaning NSP, and suppliers of fossil fuel in Nova Scotia
• Fugitive emissions will not be included
• Other sectors (about 10% of emissions) will not be included, but could sell offsets into the system based on approved GHG emission reduction protocols for those sectors (agriculture, forestry)
• The C&T system will, at least for now, not be linked to C&T systems in other jurisdictions.

It seems clear from the discussion paper and the stakeholder consultations held by the Department of Environment on March 15th that while the province may be open to hearing views on these design choices, the province is currently not interested in changing these key elements of the system. There are other, more technical elements on which the province is more actively seeking input:
• Compliance periods
• Ability to bank and borrow credits
• Suitable protocols for offsets
• Solutions to new entrants into the system with significant GHG emissions

The initial comment period on the prosed C&T system concludes at the end of March, leaving little time for Nova Scotians to begin to understand the implications of the choices being proposed, let alone provide meaningful input. The province has explained that the rush is driven by its desire to have the C&T system up and running for 2018. To be fair, the province has indicated that it will continue to receive input as it continues to work on the design and implementation of the system over the spring and summer.

The 2018 timeline, of course, is driven by the Pan-Canadian Framework, which clarifies that the federal government will put in place a carbon tax in jurisdictions that do not put in place their own compliant carbon pricing mechanism by 2018. In provinces where the federal government implements a carbon tax, it has committed to pass on all revenues generated back to the respective province.

How effective is the C&T system proposed by the NS government? Much depends on your expectations. What the C&T system delivers is minimal impact on captured industries, minimal impact on consumers, minimal impact on the price of electricity and fuel in Nova Scotia and minimal GHG emission reductions. It seems designed to help the province meet the minimum GHG emission reduction obligations under the Pan-Canadian Framework, while minimizing any impact on Nova Scotia’s economy, good or bad. In, short, if you see the proposed C&T system as a threat to electricity and fossil fuel prices in NS, and to our economy, you will be very pleased.

If, however, you expected the proposed C&T system to ensure that we continue our successful path toward a GHG emission neutral, diverse economy that shifts from wasteful use of largely imported fossil fuels to the efficient use of renewable energy produced in our own province with all the economic, social and environmental benefits that come with this transition, you will be disappointed. The proposed C&T system, through its free allocation of allowances, does nothing to phase out the unfair subsidies to the fossil fuel sector.

The social cost of carbon is currently estimated by the US EPA to be in the range of $50 US per ton of GHG emissions (https://www.epa.gov/climatechange/social-cost-carbon), meaning any fossil fuel that does not contribute at least that much through a carbon pricing mechanism is being subsidies and is competing unfairly against lower GHG energy sources, as well as conservation and efficiency measures. The result is that we will continue to import largely foreign fossil fuel rather than invest in a local economy based on renewable energy, building retrofits, efficiency measures etc., and continue to make a disproportionate contribution to the climate problem.  Canada is among the highest per capita emitters of GHG emissions, and one of very few developed countries where emissions have not even peaked.

So what are we to do? We are clearly far from getting our C&T system right. To do so, would require time, careful analysis and a public dialogue on priorities and values rather than starting assumptions that all we care about is trying to preserve the status quo for as long as we can. Other jurisdictions have generally taken years, not months to design their C&T systems. A thoughtful approach would be to carefully assess key sectors (electricity, transportation, buildings, manufacturing, mining, oil and gas, agriculture, forestry), and consider their importance to NS in the short, medium and long term. We would consider which sectors are trade exposed, and what opportunities there are in each sector to achieve emission reductions in the short, medium and long term. This would be followed with an assessment of which sectors are likely to play an important part of a climate resilient, diverse and GHG emission neutral economy of the future.

Based on this analysis, we would then be in a better position to decide which sectors warrant protection in the short and/or medium term as a result of being trade exposed and important to our current economy. We could identify which sectors will be able to make the transition to GHG neutrality, and which combination of carrots and sticks would be most effective in helping each sector get there. We could identify which sectors are not likely to be part of our economy in the long term, and how we ensure we thrive economically, socially and environmentally through the transition away from these sectors to other sectors that will thrive in the carbon constrained future we are all facing, whether we like it or not.

This analysis would lead to rational and transparent decisions about which sectors to include in the C&T system, and which sectors not to include. It would lead to rational and transparent decisions about which sectors will receive free allocations in the short term, which will receive free allocations in the medium term, and by when the subsidies represented by these free allocations would be eliminated for each of the sectors.

It would result in rational and transparent decisions about the scale of emission reductions to be expected from each of the sectors included in the C&T system in the short, medium and long term to drive innovation. It would result in rational and transparent decisions about complementary measures needed to facilitate the transition, such as investment in the electrification of transportation and heating, retrofit programs for existing buildings and higher energy standards for new buildings. It would result in rational and transparent decisions about which sectors not included under the cap would be able to participate through offsets, and on what basis.

Clearly, such an approach to the design and implementation of Nova Scotia’s C&T system will take time. It will require background work, and it will require an active and transparent engagement of Nova Scotians for a considerable period of time, likely a year or two. How can we do that when we have a federally imposed deadline of 2018 for the design and implementation of Nova Scotia’s carbon pricing mechanism?

The answer lies in the Pan-Canadian Framework itself. It does not actually require Nova Scotia to have its system in place by 2018. What it says is that if Nova Scotia does not have its system in place by 2018, the federal government will implement a $10 per ton carbon tax in Nova Scotia and pass on all revenues from that tax to the Nova Scotia government. For 2019, the tax would increase to $20 per ton, and for 2020 it would reach $30 per ton, the price at which a provincial carbon tax has operated successfully in BC for a number of years with positive economic consequences. It is important to note that the $10 per ton tax will barely be noticed by most Nova Scotians in comparison to seasonal fluctuations in the price of fossil fuels for transportation and heating.

What’s more, there are simple and effective ways Nova Scotia could redistribute the revenues generated from this federally imposed carbon tax to ensure Nova Scotians who will be affected by the tax are not economically hurt during the year or two we would rely on the federally imposed tax while we design our C&T system. The revenues could be distributed back to Nova Scotians to ensure Nova Scotians who have no alternative, do not pay more to drive their cars or heat their homes than before the tax. One simple approach would be to divide the revenues from the carbon tax equally among all Nova Scotians, though there may be even better, more equitable ways to effect the distribution.

This approach would buy Nova Scotia the time needed to get the C&T system right rather than rush into a system that will be administratively expensive without meaningfully advancing the underlying objectives. It would give us the time we need to consider the best way to use the carbon-pricing tool to promote sustainable prosperity in Nova Scotia, to diversity our economy, to phase out our reliance on energy imports, to move toward GHG emission neutrality, and to do our fair share to protect the climate.

 

Meinhard Doelle,

Professor of Law,

Associate, Marine & Environmental Law Institute

To download some of my publications on related topics, including an article on the Paris Climate Agreement, see http://ssrn.com/author=715387.