Aldyen Donnelly: Use product standards, not carbon taxes to reduce C02 emissions

(Feb.3, 2010) Governments should look to product standards, rather than economically harmful carbon taxes or cap and trade to curb C02 emissions.

As I have written many times in the past, if the economic modelling presented by the NRTEE is to be believed, it must have been most irresponsible for the government of Canada to bail out the Canadian auto sector in 2008/09.  After all, the NRTEE (along with most Canadian academic and bank-employed economists) insist that investors respond to taxes on key inputs by flooding the market with new capital investment, creating new jobs.  Clearly, therefore, all we needed to do to develop a large and technologically leading Canadian auto sector was hit all iron, steel, aluminium, glass and plastic sold to Canadian auto manufacturers with a huge new tax.  Equally clearly, Premier Campbell’s elimination of the PST on manufacturing inputs in BC, and shifting the tax burden to consumers who pay the HST, must be a manufacturing job killer.

Think of what the economic premium could have been had our government done the right thing and taxed auto manufacturing inputs as the global recession kicked in.  After all, we could have had 1,000s of new jobs in the auto sector AND billions in new government revenues.  How sad that our government elected to lend money to the major auto makers to get them through the global recession, totally missing the amazing opportunity to score the double dividend of a jobs increase and increased government revenues!

NRTEE’s analysis fails further when it moves on to advocate for Canadian “cap and trade”.  The analysis equates “cap and trade” to carbon taxation.  That is like saying the impact of imposing and administering the taxi licensing systems on municipal taxi markets is no different from introducing a tax on cab fares.  Of course, in real life, “cap and trade”, municipal taxi licensing regimes–like dairy and chicken quota regimes–limit supply and deliver unprecedented new opportunities to manipulate the price of services to the quota holders.  Quotas never sell at the marginal cost of increasing the service (as is assumed in the NRTEE and academic models).  Bankable quotas sell at the cost of securing market share (a much higher price).  Quota holders almost always derive a higher return on hoarding than selling.  None of this reality is recognized in the models.  Finally, 100% of the market value attached to the quota is directly deducted from the market value of the productive assets and labour input into the operations that are covered by the quota system.  All of the NRTEE and Canadian academic modelling, however, assumes that 100% of the market value for carbon quota comes out of thin air and fail to account for the shift in market rents from productive assets to the quota instrument.

I believe that climate change is a real issue and that our governments need to regulate to manage GHG emission trends.  But whenever we have been serious about addressing an environmental, health or safety issue efficiently and responsibly, we have:

  • introduced production standards where the “obligated party” (the party obliged to demonstrate compliance with a supply chain emission limit) is the entity that sells/distributes products and the point of regulation (where compliance with supply chain emissions is measured and reported) is the point of sale, not the point of production.  So neither production facilities nor “sectors” are regulated;
  • specific products/classes of products (electricity, natural gas, petroleum products, cement, aluminium, iron & steel, pulp paper and paperboard, wood products, glass, fertilizers, beef, pork products, rice and grains…that is over 90% of the GHG inventory covered in fewer than 12 product standards) are covered by standards that can be developed by Environment Canada, Transport Canada and/or Natural Resources Canada and administered by the Canadian General Standards Board.

The key is a regulatory strategy in which government neither sets prices nor selects new technologies/solutions.  The private sector competes on price and through innovation to deliver new products and services that are compliance with the nation’s environmental, health and safety standards.  Product standards make markets for better products.  When it comes to carbon content/supply chain GHG regulation, we should use the tried and true mechanism of product standards–not production limits, consumption taxes or quota regimes.

I have attached employment statistics for Germany, Denmark, and Sweden.  You can draw your own conclusions about the impact CO2 taxes may or may not have had on relative job counts.

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