January 25, 2007

Canadian action on climate change is unfocused, ineffective and way too complicated.

There is, however, a straightforward mechanism that with fairness, predictability and certainty, would put a substantial cork in our carbon emissions.

A simple carbon tax would harness $15 billion a year to pave Canada’s path toward a green industrial revolution based on a low-carbon economy.

First, a basic fact: In 2004, nearly 50 per cent of Canada’s total greenhouse gas (GHG) emissions were courtesy of just a few hundred facilities.

It is much easier to corral emissions from these large facilities than to round up Canada’s 18.2 million passenger cars and trucks, which accounted for 9.7 per cent of Canada’s 2004 GHG emissions.

Here’s how it would work.

Announce that, effective in 2008, all extractive industry and power generating large final emitters in Canada would be levied an initial modest tax of $30 per tonne of CO2 equivalent (CO2e). This would be accompanied by a specific schedule of the carbon tax’s rise over the coming decades.

The monies flowing from this tax would be pigeonholed into each facility’s individual trust accounts and managed by the ‘Carbon Innovation Fund’ (CIF). The legal rights to this money would not belong to the government, but the facility itself with certain provisions. 

The facility could only access deposits it had made into the fund to finance emission reduction projects at the facility, up to a maximum of the total value of estimated GHGs averted over the project’s life, as determined and verified by CIF’s economists.

To spur investments in emissions reductions at early stages, money deposited in the Fund would have to be spent within three years. This structure would provide a double dividend to companies investing in carbon emissions reductions because they would get their money back, in a sense, and lower their future carbon tax bill at the same time.

The arrangement would keep the innovation money close to those with the most use for it, provide incentive to invest in accelerated emissions reductions, and allay concerns about Ottawa dipping its fingers into Alberta’s oil-rich kitty.

Large final emitters in Canada spewed out 355 million tonnes of Canada’s 758 million tonnes of greenhouse gas output in 2004. An industry-targeted carbon tax, if applied equally to all industries, would raise in excess of $10 billion for the ‘Carbon Innovation Fund.’

While this sounds like a lot of money, it is only about five per cent of the quarter trillion in revenues that large final emitters made in 2004. The most efficient oil sands producers today generate 1/15th of a tonne of GHGs per barrel of oil. For a company such as Shell, this would mean a cost of $2 per barrel, roughly one-tenth the $25 variation in crude oil prices over the past six months.

A key advantage of the carbon tax over emissions credits, aside from the hot air that qualifies for credits, is that it would remove the government from deciding who gets how many credits, a process which is rich in ‘rent seeking’ (i.e. companies lobbying government for bigger allotment of credits). It would also not penalize companies like Dofasco, for instance, with a cap that is lower than their more laggardly competitors who have been biding their time.

The intended effect of the industrial carbon tax would be to provide a powerful and clear incentive for polluters to reduce their GHG emissions by hundreds of megatonnes. The annual multi-billion dollar scale of redirected capital to emissions reductions would put Canada on track to become the world’s super power in clean energy and decouple the growth of the blossoming oil sands from increasing greenhouse gases.

But what might be the unintended effects of an industrial carbon tax?

Fortunately for our carbon tax, the majority of Canada’s industrial greenhouse gases come from upstream oil and gas (also the fastest growing portion), which is both profitable and immobile, or from coal-powered electricity generators, which can pass costs onto the end-user through rate increases. Just ten facilities—all oil sands and coal-generated power plants—accounted for 94 megatonnes in 2005, about one-eighth Canada’s total greenhouse gas emissions (Source: http://www.ghgreporting.gc.ca).

The necessary nuance in the carbon tax will be to charge power-generating, upstream oil and gas and mining facilities the full $30 per tonne and the rest of the value-added upgrading and manufacturing facilities $15 per tonne. This would be enough to encourage and finance innovation, without driving companies away.

While relatively small, thirty million Canadian consumers nevertheless are directly responsible for Canada’s overall GHGs making it, therefore, irresponsible and unfair for the carbon buck to stop solely at industry’s doorstep.

If we start in 2008 and continue through to 2012, a carbon tax of $50 per tonne on all passenger and freight vehicle fuels would generate annual revenues of $6.5 billion (based on 2004 levels), which would cost about $15 per month for the average owner of a personal vehicle. This could go into a general “Green Vehicle Fund” to provide rebates on purchases of bus passes, best-of-class fuel-efficient vehicles, and 21st century trucking and railway infrastructure. The fuel tax and rebates would provide a double incentive to choose more emissions-friendly modes of transport, like Calgary’s wind-powered LRT.

The key to unlocking latent Canadian innovation coiled up and ready to power a green industrial revolution is this precision guided carbon tax. As we prepare for a federal election, the carbon tax could set apart the pretenders from the contenders.

Backgrounder  (PDF, Word doc) or read below

Chart  (PDF, Word doc)

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Toby A.A. Heaps is the President and Editor of Corporate Knights Inc. and member of the Board of Directors, Friends of the Earth Canada.

Beatrice Olivastri is the Chief Executive Officer of Friends of the Earth Canada (FOE). A Co-founder of FOE in 1978, she returned as CEO in 1996. In the past 10 years, she has led in polluter pays and environmental justice campaigns across the most pressing environmental and social issues of our times including climate, transboundary air and water issues, banning hazardous chemicals, and more.

BACKGROUNDER

How would a Carbon tax work in practice?

Ontario Power Generation’s (OPG) Nanticoke Generating Station is Canada’s number one source of GHGs, emitting 17,629,437 tonnes in 2005. At $30 per tonne, Nanticoke would be sending $528,883,110 to the ‘Carbon Innovation Fund’ (CIF) this year. After three years, Nanticoke would have paid around $1.5 billion to the CIF, and could access these funds at any time to invest in projects that would lower GHG emissions.

OPG could decide to use this money in one of two ways: carbon sequestration and other emission reducing process measures or shut down the plant and put the $1.5 billion toward the capital costs of lower-carbon in-country electricity generation (natural gas, wind, hydro or biomass), with the provisos that it be fully insurable by free market operators and save an equivalent value of carbon over its lifespan.

The number two emitter in 2005 was TransAlta Utilities Corporation’s Sundance Generating Plant, emitting 16,181,007 tonnes of GHGs, which would generate $485,430,208.41 for the CIF.

The number three emitter in 2005 was Syncrude Canada Ltd’s Lake and Aurora North Plant Sites, emitting 10,357,330 tonnes of GHGs, which would generate $310,719,908.31 for the CIF.

TransAlta and Syncrude could use the CIF to capture the majority of their GHG emissions at these two facilities, link into the carbon pipeline that Alberta will have up and running in the coming years, inject the GHGs into suitable geological terrain, and pay into an insurance fund to protect against the million-year liability associated with the small chance the carbon may leak out at a quicker rate than 0.2 per cent per 5,000 years.

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