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Cap & Trade: Exceptions Are the Rule

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I see that our Minister of the Environment, Glen Murray, is in the newspaper talking about exceptions to the carbon caps for some companies. This is exactly what we predicted when he chose cap-and-trade instead of a carbon tax.

Cap-and-trade is a political process: the government hands out permits. The pressure to give extra permits to certain iGlen_Murray_croppedndustries and certain firms can be huge. The very first thing choosing cap-and-trade does is to create a brand-new lobbying industry.

Murray is now feeling the effect of creating this new industry. Think of him as a man surrounded by sharks that he lured into his own swimming pool. Is he tough enough to say no? Or do they start taking little bites out of him? If he shows weakness they could eat him alive.

Exceptions are bad because they undermine the effectiveness of the carbon controls. They might be justified if three conditions are satisfied. The industry would have to be both carbon intensive and trade sensitive. There are few industries in that class. Cement is an important industry that is carbon intensive, but cement is very heavy and little is shipped to international markets: it is not trade sensitive. When you go through the list of industries there are few that satisfy the two first requirements for an exception.

The reason for carbon controls is to reduce the size of industries that emit a lot of carbon dioxide and increase the size of ones that don’t. You cant ask for an exception just because it will hurt your business. It is supposed to hurt some businesses. Exceptions undermine the whole purpose of carbon pricing. The third requirement, then, is that you need a very good reason to stop your carbon pricing from doing what it was designed to do. Maybe you want to prevent a sudden, massive loss of jobs.

The trouble with this argument is that the carbon price Murray has introduced is low – it will not have a large effect on anyone. If he does grant exceptions – and he will – it is a sign of weakness not intelligence. For cap an trade to work well Murray has to be tough. He has already signaled that he will not be tough.

And that is why industry wanted and got cap-and-trade in the first place.



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