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Designing Integration:

Regional Governance on Climate Change in North America

Design Issues for Linking Carbon Markets

Waterloo – Sept. 23/24, 2010

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MBIs: cap-and-trade vs. carbon tax

• Rationale for MBIs/carbon pricing is as sound as ever:– “to argue for a carbon price is an argument in making markets

work”

• Rationale for carbon pricing is expanding into new areas: innovation policy, industrial (clean tech) policy, fiscal policy, etc.

• Political debate is elsewhere: in US, moving away completely; in Canada, towards regulation

• Debate on cap-and-trade vs. carbon tax is not yet settled

• Simplicity of carbon tax is key sale point

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Linking/expanding markets

• Again, basic rationale is sound. Wider the market, greater the liquidity, lower the cost

• Key question to address is why that rationale comes up against political blockages around:– Economy-wide application of market

instrument– Geographic expansion of market and

wealth transfer

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Role of offsets

• Rationale is sound, if environmental integrity of basic system can be addressed– CDM reform efforts

• Political smell test around “hot air” has not been resolved (at least in Canada) and lack of consensus from environmental community doesn’t help

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Gains from cap-and-trade• Great untested hypothesis for Canada: we can come

out winners of NA carbon market, with lowered carbon price

• Operational gains from trade also potentially significant

• Also important to consider pressure to equalize cost of carbon in absence of linking, particularly for Canada. This argument forms basic rationale for current Canadian government posture

• Two counter-arguments presented by Fischer and Sawyer (C.D. Howe, 2010):– Large financial outflows to the US– In long-term, lower allowance prices stifles

innovation and makes more expensive deeper emission cuts

• OECD, taking note of US legislative gridlock, has just urged Canada to move unilaterally to avoid costly delay and investment uncertainty.

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Key assumption: Abatement cost curves

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Design elements of cap and trade

• Devil is in the detail, which exactly why the details is where there is so much divergence.

• Design details reflect national and sub-national interests

• Key question is how to design a market that allows for national/regional interests to remain, while preserving efficiency of market mechanism

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Key unaddressed questions

• Role of regional programs as laboratories of policy across borders

• Key barriers in Canada around provincial jurisdiction over energy

• Whether fundamental “reboot” on using carbon markets as driver of NA integration is required, and what other vehicle might be....clean energy?