Guest Post: Kyle McMillan looks at Personal Cap and Trade System

22 Nov Guest Post: Kyle McMillan looks at Personal Cap and Trade System

Climate Change Blog Series: Guest Blog on Personal Cap and Trade System

Thank you to Kyle McMillan, a law student at the University of Calgary (JD/MBA), for contributing this post to our Climate Change Blog Series.

This is the thirteenth post in the Environmental Law Centre’s blog series exploring climate change law in Canada. This blog series provides updates on climate change law developments and includes insights from our related law reform research. This blog series is generously funded by the Alberta Law Foundation. In this post, we look at the Personal Cap and Trade System.

INTRODUCTION: NATIONAL AND INTERNATIONAL RESPONSES TO CLIMATE CHANGE

 Anthropogenic greenhouse gas (GHG) emissions, particularly carbon dioxide, have long been recognized as a major contributing factor to global climate change. Since the industrial revolution, atmospheric CO2 levels have increased from about 280 to over 400 parts per million (ppm) with most of the increase being attributable to anthropogenic sources. As the International Panel on Climate Change (IPCC) has detailed extensively, increased levels of atmospheric carbon have corresponded with increased global atmospheric temperatures, a rising global sea level (approximately 1.5 cm rise during the 20th century) and receding glaciers (see here).

In response, there have been international efforts to address climate change by lowering anthropogenic sources of GHG emissions. Examples include the Kyoto Protocol (for how it played out in Canada see here), and the Paris Agreement. Governments that sign on to such agreements have several options as to how they will lower emissions within their own countries. These options include direct carbon taxes, cap and trade systems, and ‘command and control’ legislation that specifies a standard that must be met, whether performance-based or technology-specific. All of these systems have been used at some level in Canada (for example, see here, here and here). Cap and trade systems, which are the subject of this post, have been employed in Canada, but these systems have only been applied to large industrial polluters. It is, however, possible to apply similar systems to individuals as well – such systems are termed Personal Cap and Trade (“PCT”).

WHY HAVE A PERSONAL CAP AND TRADE SYSTEM?

Personal Cap and Trade Systems (PCT) are not a new idea (see here), however, they are not as widely known as other methods designed to reduce greenhouse gas emissions. This is probably because despite ongoing research in Canada and elsewhere, there are currently no legislated PCT systems in the world today. The rationale of PCT systems work in a similar fashion as cap and trade systems for industrial emissions: to use market forces to price carbon emissions, to cap the total emissions allowed under the system, and to encourage individuals to be more efficient and frugal in their emitting activities. Like any cap and trade system, a PCT would actually put a firm limit on emissions from the sources that it covered, which is good, because without a firm limit, there could be no guarantee that emissions would actually be reduced.

The specific aim of PCT systems is to fill an important gap in our national emissions regulations – emissions from individuals. These may be miniscule taken individually, but collectively they become quite significant. The industrial emitters covered under current cap and trade systems are capped on their own direct emissions (see for example, the reporting guidelines for Ontario), but not the emissions of the consumers who use their products (e.g., gasoline or natural gas).

Therefore, a significant amount of emissions are not currently captured. For example, a gas plant has to report the emissions that it is directly responsible for; however, all of the gas flowing out of the plant, which will be used to heat homes and from there escape into the atmosphere, is not captured. When we think of all the homes in Canada, the emissions add up – and that’s what a PCT system would attempt to cover.

HOW WOULD A PERSONAL CAP AND TRADE SYSTEM WORK?

It is unrealistic to suppose that a PCT system could eliminate the carbon footprint of each individual, since everything we buy and use has its own carbon footprint. The accounting can become very complex very quickly. Rather, a PCT system attempts to capture the emissions that can be directly linked to an individual. As a starting point, emissions directly attributable to an average person can be classified as fuels for heating (e.g., natural gas) and fuels for individual transportation (gasoline and diesel). Another starting assumption is that each Canadian adult would receive a certain number of credits from the government at the beginning of each year. The number of credits each person received would be slightly less than the amount needed to enjoy the current lifestyle of an average adult (since the whole idea, of course, is to reduce total emissions year-to-year). Thus, the average adult would either reduce their emissions, or they would use up their credits towards the end of the year, and would have to buy a few more from someone who had more than they could use. Individuals with low-carbon lifestyles would actually benefit from this plan because they would have a surplus of credits that they could sell to those who need credits. Individuals with high-carbon lifestyles would have to pay a premium to maintain their lifestyles, because after they used up the credits they received from the government at the beginning of the year, they would need to buy credits on the open market to the extent they needed to keep buying fuel.

Under a PCT system, a consumer would surrender an appropriate number of credits at the point of purchase (whether at the gas station or to the natural gas retailer). The retailers would then remit the credits to the government in a similar manner as sales taxes are remitted. An electronic market for credits would allow an individual to go online to buy credits to comply with the emission cap and to sell any excess credits they had. Effectively this would operate like a stock market with just one stock – individuals could log on to their accounts and click ‘buy’ or ‘sell’ for however many credits they liked. Each individual would maintain an account for his or her credits, which could be managed online like a trading account. The account itself would also be tied to a credit or debit card that could be presented to retailers, much like the card for bank account associated with a trading account.

At first glance, this seems like a big order because of the logistical challenges it presents. Although such a system would be a challenge to set up, it is far from unimaginable. Today many Canadians pay for good and services with their smartphones every day, and credit card payments are virtually ubiquitous – there is no reason why carbon credits could not be exchanged using a similar infrastructure as we already use for cash.

Another obvious challenge with such a system is that many Canadians are likely to be uncomfortable with the idea of a regulator tracking all of their emissions. However, if the system is set up so that the retailers (rather than individuals) surrender the credits back to the government, this effectively removes the possibility of “Big Brother” looking over our shoulders – regulators have always tracked the amount of fuel that retailers sell, a PCT system would simply add an emissions dimension to the existing framework.

POLICY CONSIDERATIONS AND COMPARISON WITH A CARBON TAX

The creation of a PCT system raises several policy questions. There are broad issues of equity and equality, as well as specific questions, such as the determination of individual cap levels, organization of the PCT regulator, and scope of the program. There is also the very important question of whether it wouldn’t just be simpler to implement a tax. Finally, a PCT system operating across jurisdictions would also raise a series of cross-border questions, such as whether trade in PCT credits should be open to Canadian citizens only, and whether the credits could be converted into other credits like EU ETS credits or Kyoto CDM credits. In this post, we’ll stick to the big-issue questions rather than the specifics of a PCT plan.

The first policy issue to consider is whether everyone is treated equally under a PCT system. The geographic realities of Canada can certainly make for what seem like inequitable results. Residents in southern Canada do not have the same heating needs as those in northern Canada and rural Canadians generally need to drive further to get basic necessities. These are important concerns, but they can be addressed by the design of the program. For instance, individuals above a particular latitude could be allocated a ‘northern allowance’ of additional credits each year. Other geographic discrepancies could be addressed in a similar way, based on resident’s postal codes.

Another factor to consider, borrowing some terminology from tax policy, is whether a PCT system will be progressive (placing a greater relative burden on higher-income individuals) or will it be regressive (placing the greater relative burden on lower-income individuals). In a report prepared for the UK government in 2008 , researchers found that 71% of low-income households (defined as the lowest 30%) would “win” under a PCT system (by having surplus credits available to sell), while 29% would “lose” (by not having enough credits for the year, and therefore having to buy more). For high-income households (defined as the highest 20%), the numbers are 45% “winners” and 55% “losers”. Thus, while there would be high-income “winners” and low-income “losers”, the system on the whole would be progressive because low-income households are more likely to have excess credits at the end of the year than are high-income households. The researchers noted that differences in the thermal efficiency of rural vs. urban homes was a major distinguishing factor between “winners” and “losers”, as was the number of adult occupants sharing a single residence. Canada, of course, has different conditions than the United Kingdom, but the factors identified by the British researchers are likely to be broadly similar, and therefore lower income Canadians may be more likely to benefit under a PCT system than to have a burden imposed on them. A simple carbon tax on all domestic vehicle and heating fuels, by comparison, could potentially be regressive, hitting low-income Canadians harder because a greater percentage of their total income is likely to be spent on gasoline/diesel and domestic heating.

Finally, it’s no secret that people don’t like paying taxes. That being said, a recent survey has shown that most Canadians do support pricing carbon. While a majority of Canadians would support a carbon tax, support is higher and more consistent across the provinces for cap and trade. We can only speculate what people might think of PCT, but the prospect of being able to make money by reducing one’s own emissions is probably enticing, especially when we consider that even if a payment is made for more credits, it will not go into the general government coffers, but rather into the hands of another citizen who was able to keep his or her emissions down. So, while a new tax might have some Canadians up in arms about a government “cash grab” (whether rightly or wrongly), the same cannot be said of PCT.

WHAT WOULD A PERSONAL CAP AND TRADE SYSTEM ACHIEVE?

A personal cap and trade system could help Canada meet its international obligations by targeting emissions that might otherwise get missed by an industrial cap and trade system. Furthermore, a PCT system offers several benefits that a carbon tax does not, including:

• using the free mechanism to determine the best price for emissions, rather than an arbitrary value;
• placing a true cap on emissions from individual fuel sources, rather than simply discouraging these emissions by adding a cost; and
• putting the funds generated by the system in the hands of individuals who keep their carbon emissions low, rather than in the hands of the government.

A personal cap and trade system may be news to most people but perhaps it’s an idea we should give some serious thought to. There are numerous challenges in designing a PCT system, both in terms of broad policy issues and the actual nuts-and-bolts of the program, but if a satisfactory system could be designed it would be a major step to reducing our carbon emissions as a nation and it may be preferable in many ways to a carbon tax.

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