Why cap-and-trade may be Susan Holt's least-bad carbon price option
New premier wants to ditch federal carbon tax before April 1 increase, but has few other choices
It must be tempting for Premier Susan Holt to run down the clock on carbon pricing.
Holt knows the federal Liberal government is unpopular and that by this time next year, there may be a Conservative prime minister who no longer requires a carbon tax on consumers.
Even so, the premier said she will present a proposal to Ottawa to replace the current tax, hopefully in time to head off the next scheduled increase in April 2025, from 17.6 cents per litre of gas to 20.9 cents per litre.
"We would love to have something in place before that," she said. "If we can move that quickly, then that would be ideal."
Meeting Holt last week, Prime Minister Justin Trudeau said his government is open to her government creating its own system "that reaches the same level of stringency and impact" as the federal pricing standard in place now.
One carbon pricing model that meets the federal standard, without hitting consumers with a 17.6-cent charge at the gas pump, is a cap-and-trade system.
Nova Scotia's Liberal leader, Zach Churchill, pitched an Atlantic region-wide version as part of his election campaign platform earlier this month.
Cap-and-trade has been in place in Quebec for more than a decade and may be a better option than a direct carbon tax on consumers, according to Pierre-Olivier Pineau, an energy market expert at HEC Montreal, a business management university.
"As long as people are willing to pay [the carbon tax], you can emit as much as you want," he said.
But "the goal is not to make people pay. The goal is to actually reduce emissions … and the cap-and-trade is probably providing a better horizon in terms of emissions reductions than the carbon tax."
A cap-and-trade system creates a cap on emissions, along with a market for tradable emissions credits.
Emitters that go over the cap must buy credits. Emitters that stay below it earn credits, which they can sell to those who exceed it.
In other words, reducing emissions is a money-maker, while emitting too much is costly.
Emitters can pass those costs on to consumers, like they do with other costs.
Back in 2017, when provinces were sorting out how to comply with the new federal pricing standard, Nova Scotia Premier Stephen McNeil said he was open to other Atlantic governments joining his cap-and-trade system.
But they ended up going in different directions, and Nova Scotia eventually ditched its model.
The result was that all four provinces in the region became subject to the increasingly unpopular federal carbon tax on consumers.
Earlier this year, Green Party Leader David Coon said that, due to rebates, concerns about the tax's impact on affordability were overblown. But he, too, said it was time to shift the burden to big industrial polluters.
Politically, the time may be ripe for cap-and-trade, but switching now would be complex, making Holt's April timeline optimistic.
"I think you're looking at years," said Herb Emery, an economist and public policy expert at the University of New Brunswick.
"Given I haven't seen a government in Canada in the last decade accomplish anything in under a four- to five-year time frame, at best, it's strange for me to think that anyone can move lightning quick on such a large regulatory change."
Under cap-and-trade, some costs for emitters are passed down to consumers, but it's not as visible or direct as the tax at the pumps.
The important thing, Pineau said, is that it can be more effective in forcing emissions down.
"The horizon is there that there will be a declining cap," he said.
In theory, credits become harder and harder to earn, making them scarcer in the trading market and driving up their value. That gives industry a strong motivation to earn credits now — so they can sell in the future for a higher price.
Cap-and-trade markets can straddle multiple jurisdictions. Quebec and California share the same market, which used to include Ontario.
New Brunswick could join it, Pineau said.
Holt said during the recent election campaign that industries in this province want a pricing system that would "match what they see in other provinces" for stringency — a possible argument for joining the Quebec regime.
But Emery, recalling the cancelled 2009 plan to sell N.B. Power to Hydro-Quebec, isn't sure the new premier could sell that politically.
"If you're going to go to New Brunswickers and say 'we just wholesale accepted all of Quebec's terms,' I'm guessing there's going to be some suspicion," he said.
New Brunswick's existing pricing system for industry, developed by the Higgs government in 2019 and approved by Ottawa in 2020, sounds similar to cap-and-trade, but it's less stringent.
Known as an "output-based pricing system," it sets a specific emission benchmark per unit of production — or "output" — for each large polluter and charges them if they exceed it.
It means a plant can stay below that per-unit benchmark — its emissions "intensity" — and avoid the tax, even if an increase in the production of units leads to higher net emissions.
Cap-and-trade is stricter because it caps overall emissions, period.
But businesses like predictability and may not want to switch now, Emery said.
"You have built in a regime — carbon pricing, the large emitter pricing — that's part of the business plan, part of the factoring going forward, and now we have uncertainty."
Michelle Robichaud of the Atlantica Centre for Energy, an industry-supported research institute, agrees but said it's too early to write off the Higgs-crafted output-based pricing system, which "hasn't yet had enough time to effectively measure results."
Emery said it all may be moot because he expects any push for change will be slowed by the expectation the Trudeau Liberals will lose next year's federal election.
"I would guess that a lot of stakeholders aren't going to enter into any negotiations with a lot of interest until they actually know there's a government that's going to continue to require a carbon price at a certain level," he said.
Governments and industry could agree to consult and study and discuss, Emery said, "then you wait and see if it expires anyway and there's nothing to do."
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