Designing Economic Instruments to Reduce Greenhouse Gas Emissions in North AmericaReport on a Multi–stakeholder Workshop held in Toronto, Canada on January 16-17, 1997
Acknowledgements Order a paper copy ($CDN20 - package includes the report, participant list with addresses, and speaker's overhead slides) ACKNOWLEDGEMENTS
The workshop was hosted by the Canadian Global Change Program of the Royal Society of Canada and by the Eco-Research Chair Program in Environmental Policy at Queen's University. It was a joint project of these two organizations, the Pembina Institute for Appropriate Development, who initiated the project, the World Resources Institute, Westcoast Energy, Enron, the Faculty of Environmental Studies at York University and Unidad de Analisis Economico, Secretaria de Medio Ambiente, Recursos Naturales y Pesca (SEMARNAP) of the Mexican Government.
The workshop organizers would like to thank the following organizations for their financial and/or in–kind support for the workshop and production of this report:
This report is also available in French and Spanish. Additional copies of the report and a collection of unedited speakers' materials may be obtained, as a package, for CAN$20.00 from:
Cheques should be made payable to the Royal Society of Canada. INTRODUCTION
It is now widely accepted that human activities are having a discernible influence on global climate. At the same time, it is increasingly clear that the largely voluntary action plans currently being pursued by governments in North America to reduce greenhouse gas emissions are not adequate to address the prospect of climate change. New and innovative policy approaches are required.
The Intergovernmental Panel on Climate Change has concluded that, "at both the international and national levels, the economic literature indicates that instruments that provide economic incentives, such as taxes and tradable quotas/permits, are likely to be more cost-effective than other approaches." (IPCC. 1995. IPCC Second Assessment - Climate Change 1995. World Meteorological Organization and United Nations Environment Programme. pp.55)
A growing number of organizations and analysts believe that economic instruments have an important role to play in national greenhouse gas emission reduction strategies and are working to promote discussion about how such instruments can best be designed and implemented.
The workshop Designing Economic Instruments to Reduce Greenhouse Gas Emissions In North America brought together 80 individuals from businesses, universities, environmental groups, consulting firms, and governments in Canada, the United States and Mexico to participate in such a discussion. A full list of workshop participants is found in Appendix A. The objectives of the workshop were to:
It pursued these objectives in two ways. The first day of the workshop was devoted to a series of presentations by experts from Canada, the United States, Mexico and Europe on recent initiatives or studies related to the analysis or use of economic instruments to reduce greenhouse gas emissions. Topics covered included various forms of greenhouse gas emissions trading, taxation instruments, and hybrid instruments which make use of both emissions trading and emissions charges.
A full list of speakers and the titles of their presentations can be found in the Workshop Program which is attached to this report as Appendix B. Please see the Acknowledgments section for information on ordering a copy of the materials used by the speakers.
On the second day of the workshop, participants were divided into six discussion groups each of which included stakeholders from different countries and different types of organizations. As the Workshop Program indicates, each discussion group held sessions on greenhouse gas emissions trading, carbon charges and "hybrid" instruments which combine elements of carbon charges and emissions trading, and moving the economic instruments agenda forward. In each of these issue areas, the groups were guided by a common set of questions which are listed at the beginning of the respective sections of this report.
This report has been prepared by the workshop organizers to provide an overview and summary of the conclusions reached by the various discussion groups. If a general agreement existed among the different groups, it is noted in the report. More commonly, however, a diversity of views was raised by workshop participants and the report attempts to reflect these differing points of view.
Although the workshop organizers are responsible for the preparation of this report, the views expressed herein do not necessarily reflect the views of these organizations. Rather, this report represents, in the eyes of the workshop organizers, a fair and accurate description of the discussions that took place at the workshop. GREENHOUSE GAS EMISSIONS TRADING
While emissions trading has not yet been adopted as a mechanism to reduce greenhouse gas emissions in any country, several forms of emissions trading have potential to address the climate change issue. These include:
There was a general agreement among the discussion groups that the implementation of greenhouse gas emissions trading would have to be an evolutionary process. Many participants expressed the view that this evolution would be most effective if it occurred from the "bottom-up", i.e., national level programs should be established before any complex international system is put in place. It was also noted, however, that national programs must be consistent with whatever international norms have been established. Many participants argued that the first step in this evolutionary process should be the establishment of one or more national "pilot" credit trading systems. Accordingly, most of the discussion groups spent a significant amount of time discussing the appropriateness of such a system as the first step in an evolutionary process. This meant that no clear conclusions were reached by any discussion group on the role carbon content trading systems or allowance trading systems could play in the evolution of emissions trading in North America. It was widely agreed that a "pilot" credit trading system could not succeed unless greenhouse gas emitters had a stronger incentive to take action to reduce greenhouse gas emissions than is currently provided. Clear and consistent policy signals are required from government to mobilize interest in taking action to reduce greenhouse gas emissions. In particular, there was general agreement that governments must take steps to create a market for greenhouse gas emission credit trading by creating a "value" for voluntary action taken by emitters to reduce greenhouse gas emissions. There was no consensus, however, on the actions governments should take to create a "value" for greenhouse gas emission reductions. Many participants argued that emission reductions should only be given a value if they meet a regulatory requirement (e.g., if new projects were required to offset a portion of their emissions), exceeded a regulatory standard or were taken in the context of meeting an emissions cap. Some participants argued that all emission reductions should be considered "valuable" no matter why they were implemented. Many of the discussion groups raised concerns which would have to be taken into account in the design of a "pilot" credit trading system, although there was no attempt to develop a consensus view of these concerns. Two of the biggest concerns raised by the discussion groups are that:
One mechanism to allocate permits is by auctioning them off to emitters. Among the discussion groups that examined this issue, however, there was general agreement that this was a political non-starter. Most participants felt that permits would have to be "grandfathered" and given away to emitters, but some participants also identified the following difficulties with such an approach:
There was broad agreement among the participants that any emissions trading system established internationally would have to provide individual countries with the flexibility to design climate change reduction strategies appropriate to their own national circumstances. It was recognized, however, that international norms would need to be established about what constitutes an emissions permit or reduction credit which could be traded between countries.
No consensus was reached on what form of emissions trading system should be adopted in Canada or the United States to facilitate their participation in an international system. Many participants did, however, hold the view that Mexico would only be able to participate in an international system through credit trading because it was unlikely to adopt an emissions cap. This was not a consensus view, however, as some participants did indicate that they believed Mexico should adopt an emissions cap.
Without a cap, credit trading with Mexico would require that credits be created for emission reductions relative to a baseline on a project by project basis. Some participants expressed discomfort with this manner of creating credits. CARBON CHARGES AND "HYBRID" INSTRUMENTS
Prospects
Carbon taxes are already in place in five European countries. Despite this, there was widespread agreement among the participants at the workshop that there is virtually no prospect of implementing such an economic instrument in North America in the short term. The main reason cited was the fact that the current "anti-tax" mood in North America makes the implementation of carbon charges politically unfeasible at this time.
Some of the discussion groups did conclude, however, that it was nonetheless important to continue to analyze and consider carbon charges and/or "hybrid instruments" as policy options to address climate change. It should be noted that this view was not shared by everyone attending the workshop. While some participants strongly believed that carbon charges ultimately had to be part of the climate change solution and therefore required further analysis and study, other participants were either philosophically opposed to the use of such instruments or felt them not worthy of attention in the current political climate. Design Characteristics
Workshop participants who supported further consideration of carbon charges stressed that these instruments could only be implemented gradually as part of national strategies to reduce greenhouse gas emissions. Other policy instruments and approaches would be required to increase the responsiveness of emitters to the carbon charge and to cover emission sources not easily addressed by this instrument.
These workshop participants also argued that carbon charges could be designed in a manner that would make them more politically palatable. Two different proposals received the most attention:
Other workshop participants argued that significant barriers stood in the way of either of these two approaches. Many participants felt that governments could not be trusted to implement and remain committed to "revenue-neutrality" because revenue generation is also important to them. Many participants also stated that it would be extremely difficult to overcome the traditional reluctance of governments to earmark tax revenues to specific programs.
A number of other concerns with the use of carbon charges were raised by participants, and it was suggested that these concerns would have to be analyzed and addressed before any successful carbon charge can be designed and implemented.
Some of these concerns included:
The potential impact of carbon charges on industrial competitiveness was also frequently cited as a concern, although there was some debate about how significant this impact might be. Within those discussion groups that addressed this issue specifically, there appeared to be a general view that competitiveness concerns should not be addressed by harmonizing carbon charges among different countries. Several participants indicated that it was important to determine what role national border tax adjustments could play in addressing such competitiveness concerns. "Hybrid" Instruments The concept of "hybrid instruments" generated some interest and discussion amongst workshop participants. While no general conclusions can be drawn from these discussions, participants did suggest a number of different mechanisms that could be used to combine emissions charges and emissions trading. Two of these proposals are that:
MOVING THE ECONOMIC INSTRUMENTS AGENDA FORWARD
Although all of the discussion groups felt it was important to move the economic instruments agenda forward, many of them reminded workshop participants that these instruments represented only one part of a greenhouse gas emissions reduction strategy. Several groups noted that different policy approaches might be a necessary complement to, or substitute for, the use of economic instruments, particularly in some sectors such as transportation and forestry.
In general, it was agreed that the adoption of economic instruments to address climate change would be an evolutionary process that is pragmatic and incremental in nature. The discussion of mechanisms to move the economic instruments agenda forward focused primarily on the two areas of implementation and research and analysis. Some discussion groups also concluded that education was an important element. Implementation Virtually all discussion groups argued that moving the economic instruments agenda forward requires development of some practical experience in the use of these instruments to control greenhouse gas emissions. The most commonly proposed method of doing this was to implement a "pilot" credit trading system. The views of participants on such a system are described in more detail in the emissions trading section of this report. Other mechanisms proposed to accelerate the implementation of economic instruments included:
While the discussion groups thought it important to begin some limited practical experimentation with economic instruments to reduce greenhouse gas emissions, many felt that this should be part of a larger effort to research and analyze different designs and approaches to the use of economic instruments. Indeed, most discussion groups clearly felt that more research and analysis was required before economic instruments could be adopted on a broad scale. A number of key areas for future analytical work were identified by the various discussion groups. However, the plenary session did not attempt to identify a common set of priorities for this work. Some of the suggestions offered for future research and analytical work on the use of economic instruments to reduce greenhouse gas emissions in North America included:
Finally, some discussion groups concluded that moving the economic instruments agenda forward requires that a greater effort be made to educate stakeholders and to seek a consensus amongst them about the use of economic instruments to reduce greenhouse gas emissions at both the national and international levels.
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