Stealth Taxation By Cap And Trade

The federal government gave provinces a choice between collecting a growing tax on carbon emissions, or setting up a “cap and trade” system. Nova Scotia has chosen the latter—but, for homeowners and drivers, the result will look quite a bit like the former.

About 80% of Nova Scotia’s 16.6 megatons(mt) of emissions are driven by fuels: 7.3mt by Nova Scotia Power (NSP) at its coal and gas fired plants; 4.3mt by gasoline, diesel, and other transport fuels; 2.2mt by home heating fuels.

Cap and trade systems work to reduce emissions by allocating emission producers a quota based on their production at the time the program is launched, and then gradually reducing a percentage of those permits in succeeding years in line with the overall goal for emission reductions.

The permits are tradable. Producers that reduce their emissions at the same rate that the number of permits are reduced experience no financial impact. Those who do not must buy permits from those who do better than the emission reduction goals. This results in financial penalties for failing to reduce.

It also creates a financial incentive to find new ways to reduce emissions. Furthermore, in a market where there are lots of producers of different kinds, it will cause the greatest reductions to come from those for whom the economic cost is the lowest, since they will profit most from making the necessary investment.

Larger markets will be more efficient than small ones. For example, in the European system there are many different utilities producing power from fossil fuels, so the greatest reductions will come from the utilities that can reduce emissions the most cheaply. Nova Scotia has chosen to confine the available market to Nova Scotian emission producers.

Nova Scotia’s market will not be efficient. The cost of buying emission quota for transport and heating fuels will be borne by those at the wholesale level—the oil and gas companies that sell to retail distributors.

They will be able to pass those costs down to retail customers because they will all be in the same situation. They have no ability or incentive to affect the choices of retail customers.

Choices to buy more fuel-efficient cars or to improve a home’s insulation are made by car and house owners. Those choices will reduce overall demand at the wholesale level, reducing the wholesaler’s cost of buying emission permits. The unit price benefit of that reduction will be spread equally over all retail customers, whether or not they contributed to the reduction.

And from whom will the permits be purchased? The only seller that matters will be NSP. They already have baked into their plans substantial replacement of coal plants by electricity from Muskrat Falls. It will take no further initiative from them to more than meet their share of emissions reductions.

So they will have lots of permits to sell and, as the only seller, will be in a position to dictate the price. This is not an efficient market.

The government asserts that whatever benefit NSP receives from selling emissions permits will be passed on to ratepayers. That is, of course, the right objective. Being sure that it happens will not be easy.

Meanwhile, oil and gas companies will be passing on to retail customers the cost of the permits they are required to buy from NSP. The price of heating your home in winter or filling your car’s fuel tank will go up, even if global prices remain the same.

This government promised in its election platform that it would make NSP pay for the cost of Efficiency Nova Scotia, which used to be shown as a separate item on electricity bills. In practice, it just hid the cost in the overall price of electricity.

If it follows that example, we can expect it to claim credit for reductions in electricity rates from NSP selling permits—if ratepayers get those benefits.

Don’t expect there to be acknowledgement that growing prices for home and automotive fuels are also the result of government requiring oil and gas companies to buy those permits.

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