Aldyen Donnelly: BC’s plans for cap and trade

(June 24, 2010) Last week I had some rather enlightening conversations with a few very senior BC government officials. We talked about BC’s evolving GHG offset system (I raised concerns about offset protocols that doubt and triple count reductions) and the developing BC cap and trade regime.

Two disturbing comments were repeated by most of the senior officials I talked to—even though the conversations were independent of each other and I did not prompt the comments:

  • With respect to BC’s GHG offset system: [the experts on whom we rely] assure us the entire offset market will be dead within 3 years.” So the officials I talked to appear to have decided not to dedicate any energy to ensuring that BC’s emerging GHG offset system is inventory-based or sustainable.
  • With all of the officials, I raised the issue of the apparent conflict between the BC budget and revenue forecast—which assumes continuing and increasing revenues from carbon taxes—and the apparent plan to implement “cap and trade”. The BC government has assured industry that there will be no “double taxation” of carbon and that once a facility is covered by the cap and trade regulation it will become exempt from BC’s carbon tax. The problem—as I see it—is that the current BC budget forecasts carbon tax revenues in 2012/13 that will only be realized if all BC industrial and energy facility operators continue to pay carbon taxes, and INCREASE aggregate GHGs at least 5% over the next 3 years. Exempting only the largest stationary GHG emitters from BC’s carbon tax blows a $500 to $600 hole in BC’s annual tax revenue forecast, a hole that this government cannot afford. I asked BC officials how they thought the government would address this issue. First, all of the officials reminded me that the government has many regulatory and taxation options at their disposal and that  “No final decision has been made to go ahead with cap and trade.”  But then all of the officials suggested that if/when the BC government does go ahead with cap and trade, “the Province could sell all BC GHG allowances to maintain government revenues.”

What Does This Potentially Mean for BC Manufacturers?

For now, let’s assume the Province is considering including every facility with 10,000 TCO2e/year in GHG discharges with the cap and trade regime. Assuming this population of facilities discharged, say, 18 MM TCO2e in 2007, the Province will:(1) prohibit GHG discharges from those facilities without authorization, and (2) stipulate that government authorization will take the form of a government-issued quota unit/GHG allowance.

Then, government will create and auction—with a minimum auction price—a supply of bankable, tradable GHG quota units/allowances.

Based on the discussions I had last week, I think we can anticipate that BC will propose to oversupply the market with GHG allowances in the early years of the 2012 – 2020 control period (just like the RGGI states did and most WCI states are likely to do), to dampen industrial resistance to the concept of being covered by a quota-based carbon supply management regime. But BC has legislated a legally binding physical cap for 2020, which is 33% below 2007 actual emission levels.

If/when BC GHG quota is perpetually bankable(as currently proposed), any surplus quota supply the BC government creates and sells in the early years has to be offset by an equivalent reduction in GHG quota supply in the later years of the 2012 – 2020 period to ensure physical compliance with the binding 2020 cap.

With these things in mind, the table below shows you what the BC government-set minimum prices for BC manufacturers’ GHG quota will have to be to maintain the provincial government carbon revenue forecast, assuming that the Province initially creates a 22% quota supply surplus for the first year BC’s cap and trade regime is in full effect, and that year is 2012.

It appears that the government of BC is hoping to finalize its cap and trade law as soon as possible after the summer of 2010.

The current plan, as I understand it, is to auction 2012 vintage quota early in 2011 to improve provincial government cash-flow sooner rather than later. If the Province executes this plan as currently proposed, in 2011 BC manufacturing facilities covered by the BC cap and trade rule will still be subject to the carbon tax for fiscal 2011/12 and will also have to dedicate capital to their acquisition of 2012/13 vintage GHG quota in the same year. So the Province’s plan to use the cap and trade regime to accelerate cash flowing to the Province will directly come in the form of reduced cash-flow for BC manufacturers.

Please note that if the direct result of this minimum BC GHG quota price forecast is capital flight and unanticipated reductions in the BC industrial GHG emissions that will be covered by the cap and trade regime, the Province will have to accelerate the rate of increase in the minimum BC GHG quota price to maintain provincial government revenue forecasts.

This means that BC industry will not be in a position to realistically forecast operating cost savings in association with GHG reductions. Also note that carbon taxes and GHG quota acquisition costs are pre-tax operating expenses, so both the carbon tax and BC manufacturers’ GHG quota acquisition costs will be partially offset by reduced resource royalty and income tax payments to the province and the federal government.

This whole BC carbon market thing is likely to play out exactly the same way BC’s old pollution discharge fee system worked. Once government establishes a continuing revenue requirement for the system, industry can no longer realize operating cost savings from reduced pollution fees when they realize emission reductions. Emission rates are just pollution tax mill rates. Government revenue requirements increase annually, and the price the government charges per tonne has to increase to meet government’s revenue requirements regardless how fast facility operators cut their emissions.

Linking This To BC Forests

What does any of this have to do with woodlands or the BC offset system?

If you look at the sample minimum BC GHG quota price trend in the table below, it should be apparent to BC mill operators that it is essential to ensure that: (1) the carbon accounting for BC woodlands offsets is credible, does not include double counting of carbon stocks and generates the highest price for offset credits (as opposed to a system that generates an exaggerated volume of credits and artificially low offset prices) and (2) the BC offset system survives—does not die within 3 years as forecast—and provincial GHG inventory-linked forest management/woodlands GHG offset credits form a continuing and integral part of BC mill managers’ GHG cost containment strategy.

I should note that the same issues that are beginning to appear in the BC GHG tax/quota system design—especially the dominance of the offset market by protocols that generate offset credits when no reduction can be reported in the national GHG inventory and forecast—may also emerge as issues in the federal GHG offset system.

Fixing our emerging offset system may be an important opportunity for BC to lead the country as a whole.

Gillard replaces Kevin Rudd, a fellow Labour party member and sitting prime minister who was unceremoniously bounced by his party, in part for his global warming position. The ruling Labour Party is staring at defeat against the opposition Liberal Party under Tony Abbott, who last year led a revolt against his own pro-global warming leader. As has the Australian public, the Liberal Party has turned against the conventional wisdom on global warming.

While affirming her support for renewable energy and other emerging technologies, and her belief that man contributes to climate change, Gillard shelved any notion that Australia would be seeing carbon taxes any time soon. Instead, she implied that Australia wouldn’t even argue for  carbon taxes until the global economy recovered and until Australia’s economy could afford them. At that point, she implied, her advocacy of carbon taxes would be global in scope, implying that Australia wouldn’t go it alone by adopting its own carbon scheme:

“If elected as Prime Minister, I will re-prosecute the case for a carbon price at home and abroad. I will do that as global economic conditions improve and as our economy continues to strengthen,” she explained.

How long is she prepared to wait before implementing carbon taxes? Maybe forever.

“First, we will need to establish a community consensus for action,” Gillard told reporters after her election as Labor leader. Then, she explained, she would take “as long as I need to” to win over the community.

Aldyen Donnelly, June 24, 2010

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