Many of Canada provinces are pursuing a carbon-trading plan to fight climate change, saying on Tuesday it was inevitable the country would adopt a such system, even if the current federal government is cool to the idea.
British Columbia, Ontario, Quebec and Manitoba have been discussing adopting carbon trading, or emissions credit trading, in conjunction with the Western Climate Initiative (WCI) in the United States, an idea championed by California Gov. Arnold Schwarzenegger.
Establishing a broad scale carbon trading system is difficult. An effective system requires universal coverage, otherwise those not subject to the cap would receive what effectively amounts to a free input into production. That's why a federalist approach to carbon cap and trade is unlikely to be very successful. Case in point...
Alberta, the center of Canada's oil and gas industry, has told the other provinces it is not interested and warned that forcing it to cut carbon emissions too quickly would harm the entire national economy.
What would happen if all Canadian provinces established carbon caps and allowed trade among participating provinces? The resulting 'market' price of carbon in the participating provinces amounts to a carbon tax in those provinces. So let's say the price of a ton of carbon equilibrates at $100 in participating provinces but remains $0 in Alberta. If you are a carbon intensive industry, what are your incentives? You now have the incentive to move operations away from the cap and trade covered provinces and into the lower cost province. In other words, incomplete coverage may very well lead to a shift of carbon emissions from participating provinces to non-participating.
Ironically, the perverse incentives created by incomplete policy coverage may result in a political victory for participating provinces--they will be able to claim reduced carbon emissions as a result of carbon trading.
