LONG-TERM ENERGY AND CLIMATE CHANGE STRATEGY
ADVICE ON SCOPING OF PHASE II RESEARCH
STEPHANIE CAIRNS
WRANGELLIA CONSULTING
AUGUST 4 2006

TABLE OF CONTENTS

EXECUTIVE SUMMARY ........................................................................................................................... I
1

BACKGROUND AND TERMS OF REFERENCE ........................................................................... 1

2 COMPARABLE RESEARCH AND EXPERIENCE ON LONG TERM SIGNALS FOR DEEP
EMISSION REDUCTIONS ........................................................................................................................ 2
2.1. EU ................................................................................................................................................... 3
2.1.1 Long term reductions policy: .................................................................................................... 3
2.1.2 Broad based signals:................................................................................................................. 3
2.2. UNITED KINGDOM:........................................................................................................................... 4
2.2.1 Long term reductions goal:....................................................................................................... 4
2.2.2 Broad based signals:................................................................................................................. 4
2.2.2.1
2.2.2.2

Climate Change Levy......................................................................................................................... 4
UK Emissions Trading Scheme.......................................................................................................... 6

2.3. FRANCE ............................................................................................................................................ 6
2.3.1 Long term reductions goal:....................................................................................................... 6
2.3.2 3Broad based signals:............................................................................................................... 6
2.3.3 Research: .................................................................................................................................. 6
2.4. U.S. STATES ..................................................................................................................................... 7
2.4.1 Long term reductions goal:....................................................................................................... 7
2.5. INDEPENDENT RESEARCH ON LONG-TERMS SIGNALS FOR DEEP EMISSION REDUCTIONS ................ 7
2.5.1 Tyndall Centre for Climate Change Research .......................................................................... 7
2.5.2 Wuppertal Institute for Climate, Environment, and Energy...................................................... 8
2.5.3 World Business Council for Sustainable Development ............................................................. 8
2.5.4 Pew Center on Global Climate Change.................................................................................... 9
2.5.5 Suzuki Foundation................................................................................................................... 10
2.5.6 Simon Fraser School of Resource and Environmental Management...................................... 10
3 GENERAL PRINCIPLES FOR EVALUATING AND COMPARING ENVIRONMENTAL
POLICY OPTIONS, INCLUDING PRICE SIGNALS........................................................................... 10
3.1.1
3.1.2
3.1.3
3.1.4

Effectiveness............................................................................................................................ 11
Efficiency................................................................................................................................. 11
Equity/Political acceptability.................................................................................................. 12
Competitiveness ...................................................................................................................... 13

4

LONG TERM SIGNALS FOR DEEP EMISSION REDUCTIONS: DISTINCTIVE NEEDS .... 13

5

BROAD-BASED INSTRUMENTS FOR ECONOMY-WIDE SIGNALS...................................... 15
5.1. GETTING THE CONTEXT RIGHT ...................................................................................................... 15
5.2. BROAD-BASED PRICE SIGNALS ...................................................................................................... 15
5.2.1 Why Include A Broad-Based Price Signal? ............................................................................ 15
5.2.2 Carbon Charge: General Characteristics and Experience..................................................... 16

5.2.2.1
5.2.2.2
5.2.2.3

5.2.3

General Characteristics .................................................................................................................... 16
International Experience................................................................................................................... 17
Canadian Experience........................................................................................................................ 18

Emissions Trading: General Characteristics and Experience ................................................ 18

5.2.3.1
5.2.3.2
5.2.3.3

General Characteristics .................................................................................................................... 18
International Experience................................................................................................................... 18
Canadian Experience........................................................................................................................ 19

5.2.4 An Alternative Emission Trading Model—Domestic Tradable Quotas .................................. 20
5.2.5 Comparing Carbon Charges And Emissions Trading: ........................................................... 20
5.3. ADDRESSING CONCERNS ABOUT BROAD BASED SIGNALS ............................................................. 22
5.3.1 Competitiveness ...................................................................................................................... 22
5.3.2 Equity/Distributional Impacts................................................................................................. 24
5.3.3 Impact On Overall Tax Burden............................................................................................... 24
5.4. ENGAGING CAPITAL MARKETS ...................................................................................................... 26
5.5. ADVICE ON SCOPE AND FOCUS FOR RESEARCH INTO LONG TERM SIGNALS IN PHASE II OF THE
NRTEE’S “WEDGES” WORK .................................................................................................................... 27
6

TARGETED MEASURES FOR THE THREE LARGEST WEDGES.......................................... 28
6.1. INTRODUCTION: TARGETED MEASURES ......................................................................................... 28
6.2. RELEVANT LESSONS FROM THE NRTEE’S ECOLOGICAL FISCAL REFORM PROGRAM .................... 29
6.3. NOTE RE: MEASURES PROPOSED FOR FURTHER RESEARCH ........................................................... 30
6.4. FREIGHT TRANSPORTATION ........................................................................................................... 30
6.4.1 Wedge 2050 Scenario Summary.............................................................................................. 30
6.4.2 Analysis ................................................................................................................................... 31
6.4.3 Advice on Measures to Investigate in Phase II of the NRTEE’s “Wedges” Work .................. 31
6.5. CARBON CAPTURE AND GEOLOGICAL STORAGE ........................................................................... 32
6.5.1 Wedge 2050 Scenario Summary.............................................................................................. 32
6.5.2 Analysis ................................................................................................................................... 32
6.5.3 Advice on Measures to Investigate in Phase II of the NRTEE’s “Wedges” Work .................. 33
6.6. COMMERCIAL BUILDINGS -- ENERGY EFFICIENCY ......................................................................... 34
6.6.1 Wedge 2050 Scenario Summary.............................................................................................. 34
6.6.2 Analysis ................................................................................................................................... 35
6.6.3 Advice on Measures to Investigate in Phase II of the NRTEE’s “Wedges” Work .................. 35

7

THE (EVEN) LONGER TERM PERSPECTIVE ............................................................................ 35

BIBLIOGRAPHY ...................................................................................................................................... 37

LONG-TERM ENERGY AND CLIMATE CHANGE STRATEGY
ADVICE ON SCOPING OF PHASE II RESEARCH

EXECUTIVE SUMMARY
Phase I of the NRTEE’s Long-term Strategy on Energy and Climate Change contained a
scenario examining how existing and near-term technology could be used to reduce
domestic energy-related greenhouse gas (GHG) emissions by 60 per cent by 2050
(hereafter referred to as the “wedges scenario”). 1 The NRTEE is now planning Phase II
of this program, which will consider policies for the dissemination and adoption of these
technologies at the levels suggested in the scenario analysis, and practical, realistic,
feasible ways to provide long-term policy signals with respect to GHG reduction.
This report offers advice on the scoping of this Phase II research, considering:
i) Identification of related policies and policy research on the use and design of long-term
signals (fiscal and regulatory) for deep emission reductions;
ii) Application of broad-based long term signals to reduce GHG emissions across the
economy (charges and tradable emission permits); and
iii) Targeted measures for the three largest reduction wedges as identified in the
scenario: carbon capture and sequestration, freight transportation and energy efficiency
in commercial buildings.
A review of research on deep emission reductions suggests that the NRTEE will be in a
select group in considering this issue from the perspective of policy measures for deep
emissions reductions. The focus to date of most discussion on deep emission
reductions has been from one of two perspectives: emissions reduction goals
connected to keeping atmospheric GHG concentrations and associated global average
temperature increases below levels that would induce “dangerous anthropogenic
interference with the climate system”, and technology packages and pathways for
achieving deep emission reductions, akin to Phase I of the NRTEE’s work.
Organizations looking at policy approaches include the Tyndall Centre for Climate
Change Research (UK), the Wuppertal Institute for Climate, Environment, and Energy
(Germany), the World Business Council for Sustainable Development, and the 10-50
project of the Pew Center on Global Climate Change (U.S.). Within Canada, the David
Suzuki Foundation and Simon Fraser’s School of Resource and Environmental
Management have put forward comprehensive policy proposals for deep emission
reductions.
1

National Round Table on the Environment and the Economy, Advice on a Long-term Strategy on Energy
and Climate Change, Ottawa, 2006.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research
August 4, 2006. Wrangellia Consulting – Final Report

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The United Kingdom is the only national government with an explicit long-term reduction
goal, 2 backed by consistent, high level political focus on the issue, and matched with a
comprehensive package of long-term signals, both broad-based and targeted to specific
technologies. Other jurisdictions with stated long-term reduction goals are France and
California, New Mexico, and the New England Governors/Eastern Canadian Premiers,
but comprehensive policy frameworks are not in place to support these goals.
A review of general principles for evaluating and comparing fiscal signals for
environmental protection identifies some fairly common criteria:
ƒ Effectiveness: the extent to which the measure will deliver emission reductions.
There are four dimensions to effectiveness: linkage and targeting, point of
application, life cycle effectiveness, and policy coherence.
ƒ Efficiency: the extent to which emission reductions will be reached with the lowest
marginal economic costs, considered from the perspectives of the government
administrator and the firms/households subject to the measure, and on both static
and dynamic bases. There are five dimensions to efficiency: instrument choice
efficiency, economic efficiency, administrative efficiency, adjustment efficiency, and
dynamic efficiency.
• Equity/Political acceptability: the extent to which the effects between sectors,
regions, individuals, and generations are equal. A balanced assessment of must
also include the secondary impact of any compensation payments, tax reductions,
and the induced employment effects, as well as the distributional effects of the
environmental benefits resulting from the measure.
• Impacts on competitiveness and trade: the extent to which the international
competitiveness of industries producing goods that are traded in the international
marketplace is maintained. The competitiveness implications of the proposed
measure should be considered in comparison to those of alternative policy
instruments for achieving the same desired objective.
The lens on long term, deep emission reductions through the deployment of existing and
near-term technologies highlights several essential characteristics that are needed from
the policy framework, distinctive from what could be sufficient to drive smaller, near term
reductions. These include:
ƒ breadth of coverage: deployment of many different technologies and stimulation of
behavioural change, across many sectors; addressing both the efficiency with which
we use energy and the carbon intensity of energy production;
ƒ breadth of leverage: the magnitude of the investment needed overwhelms
government funding capacity. Measures to leverage the massive private investment
2

Short-term targets for reducing carbon dioxide emissions by 20 per cent below 1990 levels by 2010,
making real progress towards the 50 per cent goal by 2020, and putting the UK on a path to cutting carbon
dioxide emissions by some 60 per cent from current levels by about 2050.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research
August 4, 2006. Wrangellia Consulting – Final Report

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ƒ

ƒ

now directed at conventional development into low carbon technologies and
development are also needed;
durability: potential signals need to be durable—politically, fiscally,
administratively—on a multi-decade timeframe, and hence whether they can be
predictable and consistent signals to capital investment decisions;
reflect uncertainty: by pursuing multiple technology options and avoiding an
excessive focus on one or two, and by practicing adapting management in policy
design.

The key rationale for applying broad-based fiscal instruments within the package of
greenhouse gas policies is that these are the most effective in delivering on the carbon
reduction policy objective, the most efficient in the allocation of abatement costs, create
incentives for continuous improvement, and are neutral to technology choice. An
overview of the general characteristics and experience to date with carbon charges and
CO2 emissions trading is provided, and an alternative emissions trading proposal
designed to introduce emissions trading among energy end users, the Domestic
Tradable Carbon Quota, is profiled. Carbon charges and emissions trading are
compared from a theoretical and an applied perspective, and options and rationales for
combining carbon charges and emissions trading are reviewed. Additional targeted
approaches to engaging capital markets, to leverage ongoing private economy-wide
investments towards low-carbon development, are reviewed.
Targeted measures are also needed to push and pull specific technologies that might
not enter the market under a broad based signal. The appropriateness of various
classes of measures to specific technologies is dependent on a number of factors,
including the nature of the actors in the market, the market setting, and the development
stage of the technology. The lessons from the NRTEE’s previous program, Economic
Instruments for Long-term Reductions in Energy-based Carbon Emissions, are
summarized. These are then applied to the three largest reduction wedges identified in
the wedges scenario-- carbon capture and sequestration, vehicle efficiency in freight
transportation, and energy efficiency in commercial buildings—to identify priority classes
of policy signals for further investigation.

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BACKGROUND AND TERMS OF REFERENCE

In June 2006 the National Round Table on the Environment and the Economy (NRTEE)
released Advice on a Long-term Strategy on Energy and Climate Change, 3 containing a
scenario examining how existing and near-term technology could be used to reduce
domestic energy-related greenhouse gas (GHG) emissions by 60 per cent by 2050
(hereafter referred to as the “wedges scenario”). One of the key findings was the urgent
need for a long-term signal:
The chief difficulty in significantly reducing GHG emissions is not the lack of relevant
technologies—rather it is the lack of a long-term signal. Such a signal is needed to
help the private sector make shorter-term investment decisions that take GHG
reductions into consideration.
Among the next steps for the NRTEE is to go from the “what” to the “how”, including
policies to encourage the dissemination and adoption of these technologies at the levels
suggested in the scenario analysis, and practical, realistic, feasible ways to provide longterm policy signals with respect to GHG reduction.
Wrangellia Consulting was retained to provide advice on the scoping of this Phase II
research, considering both the application of broad-based long term signals to reduce
GHG emissions across the economy (charges and tradable emission permits), and
targeted measures for the three largest reduction wedges as identified in the scenario:
carbon capture and sequestration, freight transportation and energy efficiency in
commercial buildings.
This advice considers
a) related policy research (domestic and international) on the use and design of longterm signals to convey that deepening GHG emission reductions will increasingly be
one context for capital investment decisions;
b) related policy research (domestic and international) on the use and design of
ecological fiscal reform/economic instruments for environmental protection
measures; and
c) the findings from previous NRTEE programs, in particular the Economic Instruments
for Long-Term Reductions in Energy-based Carbon Emissions project of the former
Ecological Fiscal Reform program.

3

National Round Table on the Environment and the Economy, Advice on a Long-term Strategy on Energy
and Climate Change, Ottawa, 2006
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research
August 4, 2006. Wrangellia Consulting – Final Report

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2

COMPARABLE RESEARCH AND EXPERIENCE ON LONG TERM SIGNALS
FOR DEEP EMISSION REDUCTIONS

A review of research on deep emission reductions suggests that the NRTEE will be in a
select group in considering this issue from the perspective of long-term signals for
deep emissions reductions. The focus to date of most discussion on deep emission
reductions has been from one of two perspectives:
i) emissions reduction goals connected to keeping atmospheric GHG concentrations
and associated global average temperature increases below levels that would induce
“dangerous anthropogenic interference with the climate system”, as per the UNFCCC. (A
summary of this discussion can be found in a previous NRTEE staff memo, A Canadian
Perspective On Dangerous Anthropogenic Interference With the Climate System, August
2005); or
ii) technology packages and pathways for achieving deep emission reductions. Some
of these are inspired by the Pacala and Socolow wedges scenario which assumes that
deep reductions can be achieved using existing and near term technologies, 4 some of
these assume the need for revolutionary new technologies following the thinking of
Hoffert. 5 An overview of government and think tank work on low-carbon scenarios from
eight countries, similar to the wedges analysis conducted by ICF Kaiser in Phase I of this
NRTEE program, can be found in the record from a side event at the December 2005
COP 11 negotiations. 6
However, only a small number of organizations are looking at the policy approaches to
bring about long term, deep emission reductions – whether or how these would differ
from approaches to more modest, short-term reductions, and what package of signals
will be needed.
The following section identifies, where applicable:
ƒ Jurisdictions with long term, deep emission reductions goals and what these goals
are;
ƒ Broad based price signals, in those jurisdictions with an explicit post Kyoto deep
emission reductions goal; and
ƒ Research focussing specifically on long-term signals for deep emissions reductions.

4

Pacala and Socolow, Stabilization Wedges: Solving the Climate Problem for the Next 50 Years with
Current Technologies Science vol 305, p. 968 (2004).
5
Hoffert et. al., Advanced Technology Paths to Global Climate Stability: Energy for a Greenhouse Planet
Science vol 298, p. 981-987 (2002).
6
http://2050.nies.go.jp/2050sympo/cop11_side.htm
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2.1. EU
2.1.1

Long term reductions policy:

The European Council has instead adopted a long-term objective of a maximum global
temperature increase of 2°C over the pre- industrial level as the guide for its internal and
external climate change policy. 7
In March 2005 the Council of EU Environment Ministers proposed a goal of 15-30%
reductions by 2020 and 60-80% reduction by 2050. The subsequent summit of EU
leaders adopted a more equivocal statement saying that “reduction pathways for the
group of developed countries in the order of 15-30% by 2020…should be considered",
but only "in the light of future work on how the objective can be achieved, including the
cost-benefit aspect". Precise targets for after 2020 were rejected. 8
2.1.2

Broad based signals: 9

The EU has established the EU Emissions Trading Scheme (EU ETS), which has
become the largest emissions market in the world. In 2005, 362 million EU Allowances
(EUAs) were traded, with a value of approximately €7.2 billion. 10 The EU ETS will
operate in two phases – from 2005-07, and from 2008-12. In the first phase, the
program covers CO2 emissions only. Phase 1 covers direct emissions from the following
sectors:
• energy sector: combustion (over 20 MW thermal, aggregated for all on-site
activities), excluding waste combustion; oil refineries; coke ovens;
• metals sector: ores; pig iron and steel (over 2.5 tonnes (metric tons) per hour);
• minerals sector: cement (over 500 tonnes per day); lime (over 50 tonnes per day);
glass (over 20 tonnes per day); ceramics (over 75 tonnes per day); and
• other sectors: pulp; paper (over 20 tonnes per day).
Over 12,000 installations, which are projected to account for an estimated 46% of EU
CO2 emissions in 2010, will be subject to the program’s emission reduction
requirements.
Phase 2 of the EU ETS (2008-12) could be expanded to regulate all six GHGs. It also
may be expanded to cover the aviation, chemical and aluminium sectors. The EU
7

1939th Council meeting, Luxembourg, 25 June 1996: “... the Council believes that global average
temperatures should not exceed 2 degrees above pre-industrial level and that therefore concentration
levels lower than 550 ppm CO2 should guide global limitation and reduction efforts...”.
8
www.euractiv.com/en/sustainability/eu-post-2012-climate-change-policy/article-137310#summary
9
Extracted from National Round Table on the Environment and the Economy, Consistency in Carbon
Markets: Linking Canada’s Domestic Market to International Markets, prepared for the NRTEE by Doug
Russell, GSCI-Natsource Consulting, Ottawa. April 2006.
10
Carbon Market Analyst, February 14, 2006, via Point Carbon, http://www.pointcarbon.com.
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“Linking Directive” allows for Certified Emission Reductions (CERs) to be used for EU
ETS compliance starting in Phase 1, and Emission Reduction Units (ERUs) starting in
Phase 2.
No announcements have been made about a post-2012 EU ETS policy.
2.2. UNITED KINGDOM:
2.2.1

Long term reductions goal:

The February 2003 Energy White Paper, Our energy future: creating a low carbon
economy, adopted the Royal Commission on Environmental Pollution’s recommendation
that to put the UK on a path to cutting carbon dioxide emissions by some 60 per cent
from current levels by about 2050. Subsequent policy statements on both climate
change and energy policy have re-affirmed this long term goal, and added short-term
targets for reducing carbon dioxide emissions by 20 per cent below 1990 levels by 2010,
and making real progress towards the 50 per cent goal by 2020. 11
The United Kingdom’s clear policy on a long-term deep emissions reduction goal, a
commitment that has been consistently reinforced at the highest political level and
across ministerial mandates, has itself been an influential long-term signal to the private
sector.
2.2.2

Broad based signals:

The United Kingdom has the most comprehensive package of broad based signals for
emissions reduction. It includes a Climate Change Levy with companion Climate Change
Agreements enabling discounts, and a domestic Emissions Trading Scheme.
2.2.2.1 Climate Change Levy
A “Climate Change Levy” (CCL) was announced in the 1999 Budget and introduced in
2001. The levy is a tax per unit of energy, imposed at the time of supply to industrial
commercial, agricultural and public sector consumers. The rates are--gas and coal 0.15
p/kW ($45/tonne C for gas, $24/tonne C for coal), electricity 0.43 p/kWh ($46/tonne C),
liquefied petroleum gas 0.07 p/kWh.
Households are exempt. There is a full exemption for fuel used for transport purposes;

11

Department of Trade and Industry (United Kingdom), Our Energy Future: Creating a Low Carbon
Economy, The Stationary Office, London: February 2003; House of Commons, Science and Technology
Committee, Government Response to the Committee's Fourth Report: Towards a Non–Carbon Fuel
Economy: Research Development and Demonstration Sixth Special Report of Session 2002– 03. The
House of Commons, London, 9 June 2003; and Her Majesty’s Government, The Energy Challenge: Energy
Review Report 2006. July 2006. At www.dtistats.net/ereview/energy_review_report.pdf Accessed July 17,
2006.
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electricity from new renewables and 'good quality' combined heat and power plants; and
for energy products that are used as chemical feed stocks and for electrolysis.
Energy intensive sectors who have signed negotiated “Climate Change Agreements”
(CCA) to reduce energy use or carbon emissions receive an 80% discount; targets have
been agreed between sectors and the Government for two year periods until 2010, and
ongoing eligibility for the discount is contingent on meeting targets set under earlier
agreements. These targets may be absolute (tonnes) or performance based (tonnes per
unit output). Trading of emissions credits will be permitted between firms and sectors in
order to meet targets.
The revenue raised from the CCL is recycled through three streams: a) £1 billion
enabled offsetting cuts of 0.3% in employers' National Insurance Contributions; b)
additional support for energy efficiency (technical support plus a 100% first year capital
allowances for certain energy saving investments, which is expected to be worth up to
£130m in 2002/03); and c) programs to stimulate the take-up of renewable sources of
energy (£50 million per annum).
A new private, business-led, not for profit company, the Carbon Trust, has been
established to lead energy efficiency research, development and integrated business
support programmes. The intention is to leverage a new scale of private sector
investment and engagement by working in a partnership business model. The Carbon
Trust, for example, has a role in updating the list of energy saving technologies eligible
for the enhanced capital cost allowances.
An evaluation of the UK’s CCL shows that there was an ‘announcement effect’ in the
period after the announcement of the CCL in the Commerce and Public Sector which
contributed a reduction in carbon emissions that was comparable to the pure price
effect. Energy efficiency targets established under the CCAs were surpassed, as
substantial cost effective efficiency opportunities in industry were taken up and perhaps
because the targets were not so demanding due to an asymmetry of information. 12
Another study concluded that a given carbon reduction might have been cheaper to
achieve with the CCL alone and without discounts, but that this ‘awareness effect’
means that CCL plus the CCAs may have outperformed a no-discount CCL both
environmentally and (less certainly) economically. 13

12

Agnolucci, Paolo, Ex Post Evaluations of CO2-based Taxes: A Survey. Tyndall Centre for Climate
Change Research, June 2004.
13
Ekins, P., and Etheridge, B. The Environmental and Economic Impacts of the UK Climate Change
Agreements, Energy Policy 2005. Quoted in Köhler, Jonathan, et.al. New Lessons for Technology Policy
and Climate Change, Investment for Innovation: a Briefing Document for Policymakers. Tyndall Centre for
Climate Change Research, Briefing Note 13. April 2005
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2.2.2.2 UK Emissions Trading Scheme
The UK also has a domestic Emissions Trading Scheme, which was launched in 2002.
It was the first cross-industry, national greenhouse gas emission trading scheme. Entry
into the programme was voluntary, but mandatory penalties are imposed upon entrants
once in the programme. The initial auction in March 2002 engaged 34 successful
bidders for approx 4 million tonnes carbon. Companies subject to Climate Change
Agreement targets under the Climate Change Levy (CCL) may trade in the ETS in order
to meet their obligations.
2.3. FRANCE
2.3.1

Long term reductions goal:

France’s Climate Plan presents the country’s long term objective as being to reduce its
greenhouse gas emissions by 75 to 80% by 2050. The plan sets out a strategy for
technological research which will enable France to meet a target of reducing greenhouse
gas emissions four- or fivefold by 2050. 14
2.3.2

3Broad based signals:

No domestic signals, but participant in EU Emissions Trading Scheme (see above).
2.3.3

Research:

France’s Interministerial Task Force on Climate Change (MIES) is conducting research
into factor 4 emission reductions by 2050. Nineteen scenarios for factor 4 emission
reductions have been developed, exploring various degrees of energy efficiency
improvements, demand side versus supply side emphasis, and breakdowns by energy
type, and new integrated energy systems at a large-scale. 15 These scenarios have been
analyzed to draw high-level conclusions about:
ƒ choices leading to a dead end: trends that are incompatible with a factor 4
reduction in emissions,
ƒ imperative choices: trends that must be followed,
ƒ difficult points: uses where fossil fuels can be replaced the least and which will thus
have priority when it comes to allocating the factor 4 emission potential,
ƒ areas of choice: when different strategies lead to equivalent results, and
ƒ step changes: grouping together major technological changes which could provide
more room for manoeuvre.

14

Ministère de l’Écologie et du Développement Durable, Climate Plan 2004: Let’s Act Together to the
Challenge of Climate Change. Republique Française, At www.effet-de-serre.gouv.fr Accessed July 17
2006.
15
Ministère de l’Écologie et du Développement Durable (France), Reducing CO2 Emissions Fourfold in
France by 2050: Introduction to the Debate. Republique Française, March 2004. At www.effet-deserre.gouv.fr Accessed July 17 2006.
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MIES’ published work includes only considers public policies to guide these factor 4
reductions at a very preliminary level. 16
2.4. U.S. STATES
2.4.1

Long term reductions goal:

Several U.S. States have adopted long term reduction goals:
• California: by 2010, reduce GHG emissions to 2000 levels; by 2020, reduce GHG emissions
to 1990 levels; by 2050, reduce GHG emissions to 80 percent below 1990 levels. 17
• New Mexico: Climate Change Advisory Group to develop “proposals to the (Climate
Change Action) Council) to reduce Mexico’s total greenhouse gas emissions to 2000 levels
by the year 2012, 10% below 2000 levels by 2020 and 75% by 2050.” 18
• New England Governors/Eastern Canadian Premiers: “Long term goal: Reduce
regional GHG emissions sufficiently to eliminate any dangerous threat to the climate;
current science suggests this will require reductions of 75–85% below current
19
levels.”
2.5. INDEPENDENT
REDUCTIONS
2.5.1

RESEARCH

ON

LONG-TERMS

SIGNALS

FOR

DEEP

EMISSION

Tyndall Centre for Climate Change Research

The UK’s Tyndall Centre for Climate Change Research “undertakes integrated research
into the long-term consequences of climate change for society and into the development
of sustainable responses that governments, business-leaders and decision-makers can
evaluate and implement.” The research is a partnership between 10 U.K. universities,
and a collaborative effort among climate scientists, social scientists, engineers and
economists.
One of the Tyndall Centre’s four research themes is “Decarbonising Modern Societies”;
its “Decarbonizing the UK: Energy for a Climate Conscious Future” explores 60%
reduction scenarios using existing and emerging technologies. Of particular relevance
to the NRTEE’s future plan of work is the following observation:
…there are no simple answers for policy-makers and other stakeholders arising
from Tyndall’s Decarbonising the UK research theme. There is no “magic bullet”
which will, by itself, provide sufficient incentives to provoke system innovation,
whether it be in the form of a carbon or energy tax, an emissions trading scheme,
a new set of regulations or a new technology. Indeed, it could be argued that part
16

Ibid, p. 33.
Executive Order S-3-05 by the Governor of the State of California, June 1 2005.
18
Executive Order 05-033, by the Governor of the State of New Mexico, June 9 2005
19
New England Governors/Eastern Canadian Premiers, Climate Change Action Plan 2001. August 2001.
17

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of the problem in past policy thinking towards decarbonization has been an overreliance on a single or a few policy instruments, or the promotion of new
innovative technologies without sufficient regard for the need for a receptive
socio-technical regime. 20
Among the several dozen working papers for this project are several which would be
relevant to Phase II of the NRTEE’s Wedges work.
2.5.2

Wuppertal Institute for Climate, Environment, and Energy

Germany’s Wuppertal Institute for Climate, Environment, and Energy conducted a study
on behalf of WWF Europe on policies and measures to reduce EU greenhouse gas
emissions by 30% by 2020, relative to 1990. The study lays out a scenario for energyrelated emissions reductions, similar to the NRTEE’s Wedges report. It makes
recommendations for a comprehensive policy package, including:
ƒ Further develop and strengthen the European Emissions Trading Scheme (ETS).
The ETS should form a central part of the overall strategy as it covers sectors
responsible for 60% of the total emissions reductions expected by 2020. For the ETS
to achieve its full potential, strict and reliable long-term emission reduction paths are
crucial….
ƒ Comprehensive sector- and technology-specific policies and measures for energy
end-use and supply efficiency, combined heat and power production, and electricity
generation from renewable energies;
ƒ Targeted and intensive policies and measures for transport energy efficiency,
support for thermal uses of renewable energies, and support for combined heat and
power heating and renovation of households;
ƒ Removal of direct and indirect subsidies for unsustainable energy generation and
use patterns. 21
2.5.3

World Business Council for Sustainable Development

The World Business Council for Sustainable Development (WBCSD) is a coalition of 180
international companies united by a shared commitment to sustainable development via
the three pillars of economic growth, ecological balance and social progress. Members
are drawn from more than 30 countries and 20 major industrial sectors, and the
organization also benefits from a global network of 50+ national and regional business
councils and partner organizations.

20

Tyndall Centre for Climate Change Research, Decarbonising the UK: Energy for a Climate Conscious
Future. (no date) At www.tyndall.ac.uk/media/news/tyndall_decarbonising_the_uk.pdf
21
Wuppertal Institute for Climate, Materials, and Energy. Target 2020: Policies and Measures to Reduce
Greenhouse Gas Emissions in the EU. A report on behalf of the WWF European Policy Office. Wuppertal,
September 2005.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research
August 4, 2006. Wrangellia Consulting – Final Report

8

In 2005 the WBCSD released “Pathways to 2050”, an illustration of the extent of change
needed in our energy infrastructure in order to reach an atmospheric stabilization level of
550 ppm of CO2 in 2050. It considers current energy infrastructure and how it has to
develop in the illustrated sectors and regions to stabilize in 2050 ; looks at the five main
energy consuming and emission emitting sectors (power generation, indsutry and
manufacturing, mobility, buildings, and consumer choices) which would have to achieve
a « megatrend » shift by 2050 ; and breaks the analysis down for four different economic
regions, including the USA and Canada. The USA and Canada regional scenario
presents two extreme pathways to the same 2050 emissions level: an extreme focus on
energy efficiency improvements (78% improvement in energy efficiency across the
economy, or over 3% per year), with no decarbonization, or an extreme focus on
decarbonization (energy decarbonization of 80%, meaning an almost total renewable /
nuclear / carbon sequestration based economy), with no energy efficiency
improvements. 22
In considering the implications of this research, the WBCSD’s interventions at the
December 2005 COP 11 included a call for a longer term policy and framework to match
the 20-50 year investment horizons of investment decisions in the global energy system.
Market based mechanisms and instruments were seen as key to establishing a longterm value for carbon. They recommended that policy tools and fiscal incentives focus
on providing the greatest flexibility to investors. One proposal was for policy reforms
incorporating quantified objectives for low GHG emission technologies, in order to
stimulate capital flows toward energy efficiency, renewable energy and low emission
energy sources. 23
The WBCSD also called for mechanisms and instruments to send economic signals
strong enough to engage capital markets, and entice investors and financiers to allocate
capital to low carbon infrastructure, products and services including support to
adaptation strategies.
2.5.4

Pew Center on Global Climate Change

The U.S.-based Pew Center on Global Climate Change has a project entitled “The 10-50
Solution: Options for a Low Carbon Future.” The project has many parallels to the
NRTEE’s Wedges program—the overall goal is to articulate a long-term vision of the
technologies and industrial process changes that would have to be in place 50 years
from now to address climate change effectively, as well as the policies that would have
to be initiated in the short, medium, and long term to achieve this vision.

22

World Business Council on Sustainable Development, Pathways to 2050: Energy and Climate Change.
November 2005.
23
World Business Council on Sustainable Development, COP 11: Sharpening The Focus For Action: A
Business Perspective. November 2005.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research
August 4, 2006. Wrangellia Consulting – Final Report

9

The Pew Center, along with the National Commission on Energy Policy hosted a
workshop entitled “The 10-50 Solution: Technologies and Policies for a Low-Carbon
Future” in March 2004. Among the workshops goals were to “identify policies and
investments that could facilitate the development and deployment of these
technologies.” Many of the background workshop papers prepared for the workshop, as
well as the themes and policy recommendations arising from the workshop, are relevant
to the next phase of the NRTEE’s wedges program.
2.5.5

Suzuki Foundation

The Vancouver-based Suzuki Foundation was the first, and possibly only other,
organization to produce a 2050 low emission scenario. The Foundation relies on
consultants to conduct its research work. The consultants for this project were Torrie,
Smith and Associates, the same principal who prepared the ICF International wedges
scenario.
2.5.6

Simon Fraser School of Resource and Environmental Management

Mark Jaccard at the Simon Fraser School of Resource and Environmental Management
is the principal author of The Morning After: Greenhouse Gas Policies for Canada’s
Kyoto Obligations and Beyond, published by the C.D. Howe Institute in March 2004. This
publication is particularly relevant to Phase II of the NRTEE’s wedges work because of
its emphasis on market-oriented regulations, both broad-based (cap and trade) and
sector-based (for the adoption of specific technologies).

3

GENERAL
PRINCIPLES
FOR
EVALUATING
AND
COMPARING
ENVIRONMENTAL POLICY OPTIONS, INCLUDING PRICE SIGNALS

The criteria used to evaluate and compare environmental policy measures, including
both broad-based and targeted price signals, contain some fairly common criteria:
effectiveness, efficiency, political acceptability (akin to equity), and impacts on
competitiveness and trade. The following section summarizes research conducted by
the International Institute for Sustainable Development, the Organization for Economic
Cooperation and Development, and the European Environment Agency. 24

24

More extensive discussion of these criteria can be found in Barg, Stephan, C. Guertin, E.S. Troutt, and
L.K. Brown, Ecological Fiscal Reform. Context Paper. International Institute for Sustainable Development,
National Round Table on the Environment and the Economy, Ottawa, December 2000; Organization for
Economic Cooperation and Development, Environmentally Related Taxes: Issues and Strategies,
Organization for Economic Cooperation and Development, Paris, 2001; European Environment Agency,
Environmental Taxes: Recent Developments in Tools for Integration, November 2000. European
Environment Agency, Copenhagen, 2000.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research 10
August 4, 2006. Wrangellia Consulting – Final Report

3.1.1

Effectiveness

Effectiveness refers to the extent to which the measure will deliver its ecological
objective. There are four dimensions to effectiveness:
•

Linkage and targeting: is the signal precisely targeted to the behaviour that needs
to be modified in order to achieve emission reductions? Achieving this first requires a
sound understanding of the cause-effect linkage between the emissions, and the
environmental aspects of the activities, products, or processes that are causing the
enissions and therefore need to be targeted. Targeting the choices leading to these
emissions as directly as possible will enhance the effectiveness of the measure.
Careful targeting will also reduce the unintended consequences of the measure, and
prevent transfers from government or firms/individuals greater than those necessary
for achieving the identified objective.

•

Point of application: Measures can be applied at many points in the supply and
demand chain. Targeting the actor(s) who has(have) the most ability to offer
substitutes or alternatives, or to enable the change in behaviour desired, will
increase the effectiveness of the measure. The choice of point of application will
create incentives for different responses—for example, if the point of application is at
the consumer stage (through a charge or incentive), the behavioural response may
be to switch products if competitively-priced, lower emission substitutes are readily
available, or to reduce consumption. If the point of application is at the production
stage (through a charge, tax incentive, or tradable permit), a technology-based
emissions abatement or pollution prevention response would be expected.

•

Life cycle effectiveness: The measure should be designed to avoid leakage ---the
shifting of emission burdens between parties or jurisdictions.

•

Policy Coherence: The proposed measure needs to be implemented within a
coherent policy framework. Any existing fiscal provisions that apply to the activities in
question should be assessed to evaluate whether there are any existing provisions
(e.g. tax incentives or subsidies) that have unintentionally introduced distortionary
incentives contributing to the emssions. These so-called “perverse incentives” need
to be restructured or removed in order to create an integrated set of incentives
pointing towards emission reductions. This restructuring or removal should give due
attention to the non-environmental objectives that the provisions were originally
meant to serve.

3.1.2

Efficiency

Efficiency refers to the extent to which emission reductions will be reached with the
lowest marginal economic costs, considered from the perspectives of the government
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August 4, 2006. Wrangellia Consulting – Final Report

administrator and the firms/households subject to the measure. Efficiency should be
considered on both a static and a dynamic basis.
ƒ

Instrument choice efficiency is the extent to which is the compliance/participation
cost (technological plus administrative) for businesses and households is lower than
it would be under an alternative policy instrument.

ƒ

Economic efficiency is the extent to which the measure tends to equalize
compliance/participation costs across all targeted parties, thus reducing society’s
overall cost of meeting the ecological objective.

ƒ

Administrative efficiency is the burden of administration, reporting, monitoring and
enforcement of the measure—in other words, the transaction costs of
compliance/participation. This should be designed to minimize both government and
firm/household costs.
The administrative efficiency of a measure will strongly influence public acceptance of
the measure, as well as public perceptions of fairness linked to the practical
enforceability of the measure. Experience has shown that a fiscal initiative that is
added to or a modification of existing fiscal instruments (taxes, charges, or subsidies),
which already have an administrative infrastructure, improves administrative
efficiency. Administrative efficiency decreases as the number of exemptions, rebates,
or other special treatments rises.

ƒ

Adjustment efficiency is the degree to which the measure minimizes the
unproductive costs incurred by firms/households during the transition stage when the
measure is first introduced.

ƒ

Dynamic efficiency: refers to the type and cost of abatement before and after the
measure is introduced. In other words, has the measure catalyzed new technologies
and techniques, or lowered the cost of existing ones?

3.1.3

Equity/Political acceptability

The design of the measure should take into account the effects between sectors,
regions, individuals, and generations. In the absence of mitigation or compensation
measures, charges will be regressive—that is, they will constitute a larger portion of a
low-income households’ income than of a higher-income households’. In principle, no
measure should be constructed in such as way that inequality is worsened for the
disadvantaged.
A balanced assessment of distributional effects must also include the secondary impact
of any compensation payments, tax reductions, and the induced employment effects, as
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research 12
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well as the distributional effects of the environmental benefits resulting from the
measure.
3.1.4

Competitiveness

Maintaining the international competitiveness of industries producing goods that are
traded in the international marketplace is a key consideration when designing a charge
or emissions trading measure, which raise the marginal costs of production for polluting
firms.

4

LONG TERM SIGNALS FOR DEEP EMISSION REDUCTIONS: DISTINCTIVE
NEEDS

The lens on long term, deep emission reductions through the deployment of existing and
near-term technologies highlights several essential characteristics that are needed from
the policy framework, distinctive from what could be sufficient to drive smaller, near term
reductions.
ƒ

Breadth of coverage: There is no one “magic” wedge—many or even all of the
potential GHG reduction technologies need to be deployed at unprecedented rates.
Furthermore, significant reductions can only be achieved by addressing both the
efficiency with which we use energy and the carbon intensity of energy production.
Policy packages therefore need to consider how to effectively deploy many different
technologies, across many different sectors. This suggests that it will be necessary
to use broad-based signals to reduce GHG emissions across the economy (charges
and broad-based tradable emission permits among more technology or sectorally
targeted measures). But such signals will not be sufficient: companion signals (fiscal
and/or regulatory) tailored to the specific needs of priority technologies will also be
required.

ƒ

Breadth of leverage: The magnitude of the investment needed overwhelms
This suggests a shift from what might be
government funding capacity. 25
categorized as governmental expenditures (be they direct program expenditures or
forms of subsidies) to support emission reduction costs that are considered
secondary to the main purpose of an investment, to an expanded consideration of
measures to leverage the massive private investment now directed at conventional
technologies and development into low carbon technologies and development, on
both the demand and supply sides.

25

Lambert, Gord, V.P. Sustainable Development, Suncor Energy Inc. “Our Energy Dilemma: reconciling
Societal Expectations for Energy and the Environment. An Energy Producer Perspective”. Presentation to
NRTEE Plenary, For McMurray, November 8 2005.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research 13
August 4, 2006. Wrangellia Consulting – Final Report

ƒ

Durability: Potential signals need to be assessed as to whether they are durable—
politically, fiscally, administratively—on a multi-decade timeframe, and hence
whether they can be predictable and consistent signals to capital investment
decisions. Investors in long-lived capital projects need this, particularly if they are to
take on risk and higher capital expenditure by investing in low carbon infrastructure
(new equipment, new processes, new power plants and new buildings). Most policy
tools for reducing greenhouse gas emissions have been developed within the
context of the Kyoto Protocol’s 2012 timeframe and of modest reduction targets. In
contrast, the life cycle of capital projects on which investment decisions are being
made today may often be in the 25-50 year range, and it is generally expected that
reduction target will tighten over the life span of that capital. The future return on low
carbon capital projects, the future value of tradable emissions credits and the value
of investment in low carbon infrastructure in emerging markets is very uncertain,
representing a considerable disincentive to investment in long-lived, low carbon
capital projects. Regulatory uncertainty and market risk cost money. For these
reason, a roundtable convened by the World Economic Forum called for the
establishment of a long term, market-based policy framework extending to 2030 that
will give investors in climate change mitigation confidence in the long term value of
their investments, and even for indicative signals extending to 2050. 26

ƒ

Reflect uncertainty: Uncertainty is the only certain feature of the fifty-year time
frame of this scenario. The policy framework thus needs to acknowledge and reflect
uncertainty. Choices between technologies will depend upon many factors:
technology costs, innovation and technical change, and social costs, values and
perceptions, inter alia. Thus the importance of pursuing multiple technology options
and avoiding an excessive focus on one or two. 27

Some tension is inherent between the need for durability and the need to accommodate
uncertainty in this multi-decade timeframe. One approach to acknowledging this is to
maintain consistency on generally agreed objectives (the commitment to 60% reductions
in CO2 emissions by 2050) but practice adaptive management and learning by doing
around the specifics of the policies and signals that will be used to achieve this
objective. 28 The UK government has adopted this approach.

26

G8 Climate Change Roundtable, Statement Of G8 Climate Change Roundtable Convened by the World
Economic Forum in Collaboration With Her Majesty’s Government, United Kingdom 9 June 2005.
27
Köhler, Jonathan, et.al. New Lessons for Technology Policy and Climate Change, Investment for
Innovation: a Briefing Document for Policymakers. Tyndall Centre for Climate Change Research, Briefing
Note 13. April 2005.
28
For more discussion, see Tyndall Centre for Climate Change Research, Decarbonising the UK: Energy
for a Climate Conscious Future, op.cit, p. 75.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research 14
August 4, 2006. Wrangellia Consulting – Final Report

5

BROAD-BASED INSTRUMENTS FOR ECONOMY-WIDE SIGNALS

5.1. GETTING THE CONTEXT RIGHT
Carbon charges and emissions trading are price signals designed with an explicit
intention of abating CO2 emissions.
However, the context within which these new instruments are introduced may be as
influential in determining their success as the instruments themselves. One conclusion of
the NRTEE’s early work on Ecological Fiscal Reform (EFR) was that:
EFR includes not only the introduction of new fiscal measures, but also an
examination of the influence of the present fiscal framework on sustainable
development policy objectives. This requires a coherent, systemic approach to
fiscal policy design, and the injection of sustainable development concerns into
mainstream fiscal policy. 29
The identification and redirection or redesign of long term signals (fiscal and regulatory)
which create incentives counter to long term deep emission reduction objective is
essential to establishing coherent long-term signals to drive the ongoing renewal and
expansion of the large infrastructure along a low-carbon pathway.
5.2. BROAD-BASED PRICE SIGNALS
5.2.1

Why Include A Broad-Based Price Signal?

The analysis of case studies conducted for the NRTEE’s recent Economic Instruments
for Long-term Reductions in Energy-based Carbon Emissions program concluded that a
broad-based price signal (such as a charge or a permit market) is the most effective in
delivering on the carbon reduction policy objective, and the most cost-efficient to society
in that it allows for the greatest degree of flexibility in societal response. For this reason,
the NRTEE’s EFR and Energy Program recommended that the option of a broad-based
price signal should be given serious consideration.
A key advantage of broad-based price signals, compared to policy instruments such as
regulations or subsidies that might have equivalent environmental outcomes, is a greater
efficiency in the allocation of abatement costs and the creation of incentives for
continuous improvement.
One appeal of broad-based measures is that they are neutral to technology choice,
leaving the choice of response to the subject parties. Because these instruments are

29

National Round Table on the Environment and the Economy, Towards a Canadian Agenda for
Ecological Fiscal Reform: First Steps, Ottawa, 2002.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research 15
August 4, 2006. Wrangellia Consulting – Final Report

performance-based, they avoid the risks associated with picking winners and, instead,
enable winners to emerge through continuous improvement and innovation.
Improvement and innovation occur because it is always in a party’s interest to lower its
marginal cost of abatement. For these reasons, the NRTEE’s EFR and Energy Program
participants considered that broad-based signals offer a better approach than the
alternative array of complex and possibly arbitrary individual regulations, standards, and
targeted fiscal measures.
These instruments increase the relative cost of emission-intensive technologies and
products, creating a continuous incentive for innovation to improve emission efficiency or
to shift to lower-emission substitutes. Broad-based measures will stimulate the most
immediate response from mature, market-ready technologies; but applied in a
predictable and durable fashion, they will also gradually stimulate the uptake of
emerging technologies and investments in the development of new ones.
Another key feature of such instruments is that they are also effective in ensuring that
some of a government’s other objectives—notably in the area of innovation and
technology development—are promoted. 30
5.2.2

Carbon Charge: General Characteristics and Experience

5.2.2.1
General Characteristics
Carbon charges use a fixed, government-set price for carbon as their primary policy tool,
and allow the market to determine the quantity of reductions. Governments may adjust
the charge to achieve a desired level of emission reductions, and may also adjust the
level of the charge for inflation and other changes. Because marginal abatement costs
are unknown to policy makers and likely to vary between sectors and actors, setting the
charge at the right level to achieve a desired level of abatement is a very challenging
task.
Carbon charges are typically collected at the point of sale of fossil fuels and fossil fuel
based electricity, based (albeit sometimes only loosely) on the carbon content of the
fuel. Although much depends on the design of individual programs, this ready collection
system generally makes carbon charges administratively simpler than emissions trading
systems, making them better suited to broad application across the full economy
(including for example small and medium sized enterprises, transportation sources, and
households).
Revenue from a carbon charge accrues to government. This sum can be substantial—
by illustration, a straightforward $10/tonne CO2e applied to Canada’s current 740 million
30

National Round Table on the Environment and the Economy, Economic Instruments for Long-term
Reductions in Energy-based Carbon Emissions, Ottawa, 2005.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research 16
August 4, 2006. Wrangellia Consulting – Final Report

tonnes of emissions would raise $7.4 billion in revenue. 31 In existing carbon charges
programs, revenue has been redistributed to address distributional effects, to provide
transitional support for the adoption and development of new low carbon technologies,
and to reduce distortionary taxes in other parts of the fiscal system, such as payroll
taxes and income taxes.
5.2.2.2
International Experience
Since 1991 eight countries (Denmark, Finland, Germany, Italy, the Netherlands,
Sweden, and the United Kingdom) have introduced CO2-based charges with the explicit
intention of abating CO2 emissions. For a summary of each of these taxes, the reader is
referred to Ex Post Evaluations of CO2-based Taxes: A Survey, by Paolo Agnolucci,
published by Tyndall Centre for Climate Change Research (www.tyndall.ac.uk).
A 2004 ex-post evaluation of the eight systems of CO2 based taxes reached the
following conclusions: 32
ƒ They bear little relation to textbook examples of optimal environmental taxes, and
differ substantially from each other, having been designed to take account of
local conditions…
ƒ CO2 based taxes, either on their own or as part of a wider package, do reduce
emissions. However, where the tax is part of a package of measures, the
individual contribution of the component parts of the package is very uncertain.
ƒ CO2 based taxes seem to have been cost-efficient, in terms of the cost of
collecting them, but because the packages have involved widely varying marginal
costs being imposed on different emitters (due to agreements and subsidies). It
is unlikely that they have been cost-effective in the sense of attaining their
environmental benefit at the least possible cost.
ƒ Revenues seem to have been broadly stable, and in no country did the taxes
result in a precipitous decline in the use of carbon-based energy.
ƒ Fears about competitiveness have resulted, in most countries, in the industrial
sector and especially energy-intensive industries within it, being taxed less
heavily than households. The exception is the UK’s Climate Change Levy, from
which households are exempt.

31

This is mentioned for illustrative purposes only. A pure carbon tax of this form is politically extremely
unlikely. The carbon charge systems that have been adopted internationally all contain important
exemptions and discounts for certain sectors of the economy. One barrier to discussion of a carbon charge
in the North American context has been the public’s resistance to new taxes and suspicion of government
competence in wisely managing public expenditures, a perspective which seems to be less prevalent in
Europe.
32
Agnolucci, Paolo, Ex Post Evaluations of CO2-based Taxes: A Survey. Tyndall Centre for Climate
Change Research, June 2004.
Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research 17
August 4, 2006. Wrangellia Consulting – Final Report

5.2.2.3
Canadian Experience
Discussion of this instrument in Canada has been stifled by regional and historical
sensitivities connected to the 1980 National Energy Program, and there has been
virtually no analysis of the potential role and niche for a carbon charge within Canada’s
national climate change plan. However, this last June the Quebec government
announced plans to levy oil and gas companies for hydrocarbon products (heavy oil,
gas, natural gas and propane) sold in bulk to retailers. The Quebec Energy Board has
been asked to work out tax rates and other details. The estimated $1.2 billion revenue
will be used to finance a “Green Fund” for projects such as improvements to public
transportation, education about emission cuts and ways to make buildings more energy
efficient.
5.2.3

Emissions Trading: General Characteristics and Experience

5.2.3.1
General Characteristics
Emissions trading sets a level of emissions as their primary policy tool, and allows the
market to determine the price. An emission trading system requires emitters of GHGs to
acquire emissions rights in the form of permits, and submit (“retire”) permits equal to
their emissions to an authority on a regular basis. Government issues these permits.
They are tradeable certificates denominated in tonnes of CO2e. The limit on the total
number of permits issued creates a cap on the total of emissions for the parts of the
economy covered by the emissions trading system. The requirement to submit permits
equal to GHG emissions creates a demand for permits.
An introduction to the issues in designing a greenhouse gas emissions trading program
can be found in NRTEE, Canada’s Options for a Domestic Greenhouse Gas Emissions
Trading Program, 1999, andTradable Permits Working Group, Using Tradable
Emissions Permits to Help Achieve Domestic Greenhouse Gas Objectives, Options
Report, April 2000.
5.2.3.2
International Experience
Two mandatory emissions trading schemes are in operation: the European Union
Emissions Trading Scheme (described above) is the world’s largest emissions market;
the New South Wales Greenhouse Gas Abatement Scheme operates in New Zealand. A
voluntary international GHG trading program, the Chicago Climate Exchange, has been
established among 129 companies that have committed to voluntary emission
reductions. In July 2006 the Montreal Exchange and the Chicago Climate Exchange
announced the establishment of the Montreal Climate Exchange.
Proposals exist for several other major emissions trading programs. Two competing
national level proposals were considered the U.S. Senate in 2005 (one by Senators
McCain and Lieberman, and one by Senator Bingaman) and are likely to be considered
again in the future. A Memorandum of Understanding to adopt a Regional Greenhouse
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Gas Initiative (RGGI) creating a cap and trade scheme was signed by seven north
eastern US States in December 2005. A state-based trading system is being designed in
Australia, with the aim of coming online by 2010.
For a summary of each of these taxes, the reader is referred to Consistency in Carbon
Markets: Linking Canada’s Domestic Market to International Markets, prepared for the
NRTEE by Doug Russell, GSCI-Natsource Consulting, Ottawa. April 2006.
5.2.3.3
Canadian Experience
Emissions trading is the price signal which has received the most discussion in the
Canadian context. Extensive consultations over more than 5 years led to a draft for a
Large Final Emitters’ emissions trading system in late 2005. The implementation of the
system was suspended by the election of the new government in January 2006, and the
future status of the program and any changes that may be made are not known at the
time of this writing.
The LFE system, as elaborated to date, is intended to achieve 45 Mt (million tonnes) of
CO2e (carbon dioxide equivalent) emission reductions annually in 2008-12. Its key
design elements include:
ƒ coverage of direct GHG emissions from large industrial emitters, which are forecast
to account for approximately 50% of Canada’s 2010 GHG emissions;
ƒ emissions intensity targets (rather than absolute emissions targets) based on a 1215% reduction in 2010 Business As Usual (BAU) emissions intensity;
ƒ a baseline-and-credit allocation approach in which LFEs do not receive allocations,
and receive LFE credits only after demonstrating that they have over-complied with
their targets;
ƒ a price cap of C$15 per tonne CO2e, which was a prior commitment of the previous
two Prime Ministers; and
ƒ a set of instruments that could be used to comply with LFE targets, including LFE
credits, contributions to the Technology Investment Fund (TIF) at the rate of one
compliance unit per C$15 contribution 33 , offsets created under the domestic offset
system, “green” Assigned Amount Units (AAUs), Certified Emission Reductions
(CERs) created from Clean Development Mechanism (CDM) projects in developing
countries, and Emission Reduction Units (ERUs) created from Joint Implementation
(JI) projects in countries with economies in transition. CERs and ERUs created from
land use, land use change and forestry (LULUCF) activities, and from large hydro
power projects, which are not eligible under the EU Emissions Trading Scheme (EU
ETS), would be usable for LFE compliance. 34

33

Total contribution for the TIF was capped at 9 Mt to be shared among all LFEs.
Extracted from National Round Table on the Environment and the Economy, Consistency in Carbon
Markets: Linking Canada’s Domestic Market to International Markets, prepared for the NRTEE by Doug
Russell, GSCI-Natsource Consulting, Ottawa. April 2006.
34

Long Term Energy and Climate Change Strategy--Advice on Scoping of Phase II Research 19
August 4, 2006. Wrangellia Consulting – Final Report

5.2.4

An Alternative Emission Trading Model—Domestic Tradable Quotas

Because of administrative efficiency and the high transaction costs associated with
administering tradable emissions markets, proposals for trading in carbon emissions
have focussed on large emitters rather than individuals or end users.
The Domestic Tradable Carbon Quota (DTQ) is a proposed policy instrument designed
to introduce emissions trading among energy end users. Because the NRTEE’s Wedges
scenario allocated emissions associated with the production of electricity and the
production of oil and gas to the domestic end-user, this proposal may merit the NRTEE’s
consideration as an alternative to a carbon charge.
Under this policy proposal, individuals would receive annual allocations of carbon units
on a free and equal per capita basis; organizations would purchase carbon units from a
national carbon market, also open to individuals wishing to buy additional carbon units.
Fuels and electricity would be assigned a carbon unit rating and when individuals or
organizations purchased fuel or electricity, they would surrender the number of carbon
units corresponding to their purchase. These units would be passed up the supply chain
and on reaching the primary energy producer or importer would be surrendered back to
the government.
The relationship between a DTQ system and a Large Final Emitters trading system
would be similar to those between the DTQ and the EU Emissions Trading Scheme.
Some initial thinking is available on the integration of those two schemes.
More information on DTQs can be found at www.dtqs.org and in Dr. David Fleming’s
Tradable Quotas: Using Information Technology To Cap National Carbon Emissions,
European Environment, 7 (5): 139-148 (1997).
5.2.5

Comparing Carbon Charges And Emissions Trading:

While carbon charges and emissions trading both set a price on carbon emissions, their
approach to doing so is fundamentally different: carbon charges fix the price, and
emissions trading fixes the quantity.
The theoretical properties of tradable permits and charges are to a large extent similar.
The optimal choice between the two theoretically depends on the degree of uncertainty
and the correlation between the marginal damage and the marginal abatement costs.
• Charges are preferable if the environmental damage is flat relative to the marginal
abatement cost curve. The lack of a clear, short-term threshold for severe climate
changes favours the use of taxes.

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•

Emissions trading, with its fixed quantity limit, is preferable if there is a steep
marginal damage curve, since this implies a threshold that should be avoided. 35

From a national perspective, the marginal benefit curve for carbon emission reductions
is relatively flat, therefore favouring the use of taxes. From a global perspective there
are, however, thresholds that should not be exceeded and the possibility of a
catastrophic development. This speaks clearly in favour of using a quantity-based
instrument as in a cap and trade system. 36 An international emissions trading system
also allows for the most cost effective emissions reductions; however, experience to
date with a mechanism such as the Clean Development Mechanism demonstrates that
the transaction costs of these systems can be significant.
But from the applied perspective of the real world, the differences between tradable
permits and charges can be striking. Although much depends on the specific design of
each policy (factors such as coverage [breadth, emission thresholds], point of imposition,
initial allocation models for permits, recycling of revenue), a number of generalities can
be made about the differences between carbon charges and emissions trading in
practice. These are summarized below:

Scope of
application

Environmental
effectiveness
Price/tonne
CO2e reduced
Cost-Efficiency
of abatement

Dynamic
efficiency
Emissions
fungibility
(among 6 GHGs)

Carbon Charge
Can apply to diffuse and point
source emissions.

Directional signal: actual
reductions dependent on market
response
Price is known

Greater dynamic efficiency:
permanent incentive to reduce
emissions
Each GHG needs its own tax;
administratively more complex to
apply to non-CO2 gases.

Emissions Trading
Best suited to large emissions
sources because of transaction
costs for trading, monitoring and
reporting. Difficult to apply in
SMEs, transportation, service,
and household sectors
Reduction target is assured

Price responds to market
demand and supply
Most economically efficient in
theory, although in practice
transaction costs may make
lowest abatement options less
attractive
Dynamic efficiency depends on
removal of permits from the
system
Best suited to addressing all six
GHGs in integrated strategy

35

Vattenfall, Curbing Climate Change: An Outline for a Framework Leading to a Low-Carbon Society.
January 2006. At: www.vattenfall.com/www/vf_com/vf_com/Gemeinsame_Inhalte/DOCUMENT/
360168vatt/386246envi/Curbing_climate_report.pdf. Accessed July 17 2006.
36
Ibid.
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Administrative
complexity/
transaction
costs

Revenue

Distributional
equity
Political
acceptability

Familiar instrument to policymakers and all consumers.
Monitoring and enforcement
mechanisms can build on
existing tax infrastructure. Low
transaction cost.
To government; often recycled
into companion GHG reduction
initiatives or reductions in other
taxes
Revenue recycling may address
distributional impacts
Strong political resistance in
North America

Administrative infrastructure
complex, many technical issues
and transaction costs related to
trading, monitoring,
enforcement.
May initially go to government if
allocation is by auction;
Retained by permit seller once
permits allocated; creates a
private market for reductions.
Equity can be addressed in
initial allocation.
Preferred price instrument in
North America

5.3. ADDRESSING CONCERNS ABOUT BROAD BASED SIGNALS
The broad-based application of emissions charges and emissions trading imposes a
high standard for “getting it right”. Many of the concerns raised about their application
can be addressed with careful design. Key among these concerns are impacts on
competitiveness, equity, and the overall tax burden.
5.3.1

Competitiveness

Maintaining the international competitiveness of industries producing goods that are
traded in the international marketplace is a key consideration when designing charge or
emissions trading measures, since these raise the marginal costs of production for
emitting firms. This concern is particularly strong where the climate change policies of
trading nations diverge, and where substitution options are limited. Concern about
reduced international competitiveness is highest among those industries that are the
most emissions intensive. The OECD has identified a number of design options to
reduce negative impacts on competitiveness of EFR measures, without erosion of the
environmental effectiveness of the EFR measure. These include: 37
•

Integration of environmental reforms within broader fiscal reform. Sectoral and
nation-wide competitiveness will be determined by the combined effects of the fiscal
regime within which firms operate, not by the environmentally-motivated incentives
alone. This form of broad based revenue recycling may enable revenue neutrality for
industry as a whole, but not necessarily for individual businesses. German
experience has shown that the introduction of environmental taxes works best when

37

OECD, Environmentally Related Taxes: Issues and Strategies, Policy Brief. OECD, Paris, November
2001.
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they are part of a policy package that includes tax reductions elsewhere in the
economy. 38
•

Two tier rate structures: The use of lower charges for more internationally exposed
sectors can maintain the incentive effect of the charge and the integrity of the polluter
pays principle, while reducing competitiveness impacts.

•

Conditional exemptions or lower charges: Exemptions from charges or lower
charges can be provided to firms adopting equivalent mitigation measures on a
voluntary agreement basis. If the firm does not honour the agreement, the full charge
is reinstated. Where appropriate monitoring, verification, and sanction systems
accompany these voluntary agreements, this approach can address international
competitiveness concerns while limiting the negative environmental effects of blanket
exemptions or rate reductions.

•

Rebates: the charge can be accompanied by measures to channel some or all of the
revenue back to the sector or individual firms in such a way that the marginal
abatement incentives are not reduced—for example under the Swedish NOx charge,
plants are charged per kg NOx emitted, and reimboursed based on total energy
output. However, the earmarking of revenue to specific programs may be a barrier to
the future re-evaluation and modification of the programs, since the spending
program becomes dependent on the revenue from the charge, and bureaucratic
inertia may prevail. To avoid this, the environmental and economic rationale of the
measures should be regularly evaluated. 39

•

Charge-ceilings: A maximum payment can be set.

•

Border charge adjustments: Border charge adjustments can be used to impose
equivalent charges on imported goods and redeem the charge for exported goods.
This is one method of avoiding ‘leakage’—that is, the unintended transfer of
environmental damage to jurisdictions that do not have equivalently rigorous
greenhouse gas emission reduction policies in place. An example is the US border
tax adjustment on ozone depleting substances. Border charge adjustments must be
designed to be consistent with international trade agreements, and consideration
must also be given to preventing smuggling.

38

Kai Schlegelmilch, German Ministry of the Environment, at the Supporting a Sustainable Future: Making
Dollars and Sense International Conference on the Use of Economic Incentives and Instruments in
Environmental Policy. December 2000.
39
Flip de Kam, Discussion Paper for the Conference on Environmental Fiscal Reform, OECD, Berlin June
27 2002.
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The competitiveness implications of the proposed measure should be considered in
comparison to those of alternative policy instruments for achieving the same emissions
reduction objective. Alternative policy instruments (command and control or voluntary
agreements) would also impose costs, but may do so with less equity or economic
efficiency.
5.3.2

Equity/Distributional Impacts

In the absence of mitigation or compensation measures, charges will be regressive—
that is, they will constitute a larger portion of a low-income households’ income than of a
higher-income households’. In principle, no charge should be constructed in such as way
that inequality is worsened for the disadvantaged.
This principle can also be considered from a regional perspective (a key political
consideration in Canada) and a sectoral perspective.
Distributional concerns may be addressed either through mitigation or through
compensation:
•

Mitigation alleviates the distributional impacts of the program itself through
strategies such as charge-free floors or reduced rates or exemptions for certain
populations/sectors. However, mitigation approaches dilute or cancel the price signal
of the measure, and hence its effectiveness.

•

Compensation offsets the distributional impact by providing aid through a separate
program—for example, reductions in other taxes (tax shifting) or transfer payments
targeted to the disadvantaged population/sector. For example, EFR measures in
northern Europe have been accompanied by a revision of fiscal brackets.
Compensation approaches maintain the price signal of the core EFR measure, while
leaving the individual party no worse off. Danish experience has been that the
information required to administer measures to address distributional effects
generally resides with income tax and welfare authorities, and therefore a
compensation approach through the income tax and social benefit system has a
lower administrative burden. 40

5.3.3

Impact On Overall Tax Burden

Key to public and political support for emission reduction measures will be acceptance of
how the revenue and expenditure aspects of the measure will be handled. This aspect
is particularly key in North America, where a distrust of governments’ abilities to

40

Hans Larsen, Comments on Discussion Paper, OECD Conference on Environmental Fiscal Reform,
Berlin, 27 June 2002. Ministry of Taxation, Denmark, 2002.
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responsibly manage public funds has presented a distinctive challenge to discussions
about emission charges and other cost-internalization tax measures.
Some jurisdictions, such as the U.K., have adopted a revenue-neutral tax reform model
for their climate change policy packages, along the principle has been that there should
be no increase to the overall tax burden. However, in the NRTEE’s former Ecological
Fiscal Reform Expert Advisory Group, the general feeling was that this would be too rigid
because the Canadian approach to EFR is broader than tax reform—it includes
restructuring, removal, or introduction of subsidy and expenditure-based programs.
The following approaches can be considered:
•

Revenue-recycling for revenue-generating programs: If the measure creates new
revenue, this should be recycled such that the implementation of the measure does
not result in an increase in overall government revenues.
There are many options for the use of carbon emission-derived revenues. A broadbased approach recycles the revenue back into reductions in other taxes. A sectorbased approach recycles the revenue back into the sector of origin, through the use
of credits, tax reductions, direct rebates, or program expenditures. Under the sectorbased approach, revenue-neutrality for the sector as a whole does not necessarily
mean revenue-neutrality for the individual firm. An entity-level approach recycles
revenues back to the individual firm/household such that the individual party, having
taken the desired environmental action, is no worse off than before.
Revenue-recycling constitutes a form of revenue earmarking. From a fiscal policy
perspective, earmarking is discouraged because it is seen to introduce rigidities into
the fiscal system. Earmarked expenditure programs are no longer evaluated on the
basis of their merits, and the result may be inefficient government spending.
Revenue-recycling can be used to alleviate concerns about the competitiveness and
equity/distributional impacts (see above two sections).

•

Expenditure-neutrality for subsidy and expenditure programs: Subsidy and
expenditure programs can be designed so as not to increase the general revenue
requirements of the government. This can be done by:
o Reforming subsidies: so that existing subsidy envelopes are redirected to
emission reduction initiatives;
o Expenditure reforms: where new expenditures in emission reductions lead to
a reduced need for expenditures in another; or

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o

•

Cross-funding from revenue-raising emission reduction measures: where a
new expenditure or subsidy program is funded from the revenue raised by a
revenue-raising program that is part of the same policy package.

Transparency: Whatever the final funding and revenue features of the final EFR
measure or package, transparency is essential for ongoing public and political
support. Any taxes or charges should be visible. Revenues raised and expenditures
made through the EFR measure should be publicly reported on a regular basis.

5.4. ENGAGING CAPITAL MARKETS
Broad based price signals such as carbon charges and emissions trading alone are not
likely to be sufficient to drive the adoption of low carbon options in the ongoing renewal
and expansion of the large infrastructure assets found in the energy and transport
systems. Broad-based price signals give only indirect incentives to innovation, by
indicating that low carbon technologies are likely to have higher value in the future if and
as emission targets are strengthened through successive negotiating rounds; but this is
unlikely to be sufficient to finance the degree of risky technology and innovation
investments required. Therefore more active policies to stimulate innovation directly,
across the full innovation chain from R&D to large-scale commercialisation, will continue
to be needed as a complement to carbon taxes or tradable permits.
Some of this can be achieved through measures targeted directly to priority
technologies, as discussed in section 6, below.
Some, however, will need to come from initiatives outside of government, through the
engagement of the capital markets that will be financing this ongoing renewal and
expansion of the large infrastructure assets in becoming promoters of low carbon
technologies and performance expectations, themselves.
UK research identifies this as a key area neglected by most policy research. Their
research suggests that asset managers can be stimulated to consider climate change by
measures such as the following: 41
ƒ Regulatory guidance that climate change is a material issue to corporate
reporting;
ƒ Defining the duties of investment professionals and trustees as including
consideration of long-term issues such as climate change.
The UK climate change plan has sought to leverage and engage capital markets by
giving a major role to the Carbon Trust, a business-led, Government backed
41

Dlugolecki, Andrew, and Mansley, Mark. Asset Management and Climate Change, Report on a
Workshop Sponsored by the Tyndall Centre. Technical Report no. 20 (London: Tyndall Centre for Climate
Change Research, 2004).
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independent not-for-profit company funded in part through the Climate Change Levy.
The rationale for the Carbon Trust has been to find a new business model for
broadening leadership on climate change beyond government to business, NGOs, the
research community, and trade unions. The trust deploys a range of financial and nonfinancial support both to develop new technologies and to deploy existing ones—for
example, an energy efficiency best practices program, managing the list of technologies
eligible for 100% first year capital cost allowances, an interest free loan scheme for
SMEs to invest in energy efficient equipment, and support for innovation through a Low
Carbon Innovation Fund. 42
5.5. ADVICE ON SCOPE AND FOCUS FOR RESEARCH INTO LONG TERM SIGNALS IN PHASE
II OF THE NRTEE’S “WEDGES” WORK
This advice assumes that Canada’s Large Final Emitters program will be proceeding,
perhaps with some modifications, and therefore its design up to 2012 should not be the
focus for the NRTEE’s work on long term signals for carbon emission reductions.
Three foci for research on long-term signals are proposed, listed by order of priority:
ƒ Broad-based price signals for those emissions not covered by the draft LFE program.
This would examine the application of a broad-based price signal to sectors such as
the household, transportation, manufacturing, and commercial sectors.
A carbon charge would be the key instrument investigated. For the purpose of
comparison, domestic tradable quotas should also be researched although they are
less likely to prove attractive.
The application of a price signal beyond the large final emitters’ group is vital to the
approach taken in the Wedge scenario, which emphasizes end use efficiency.
Because of the public/political resistance to carbon charges, it is recommended that
the research have a particular focus on the design choices that can be available to
respond to public concerns. This would be similar to the NRTEE’s early work on
emissions trading, summarized in Canada’s Options for a Domestic Greenhouse
Gas Emissions Trading Program (NRTEE, 1999).
•

Engaging capital markets in long term deep emission reductions. This would include
ground-truthing the measures mentioned directly above in a Canadian setting,
following up on some of the ideas put forth by Gord Lambert in his presentation to
the NRTEE plenary in Fort McMurray (particularly his recommendation to “follow the
money” and explore why capital is and isn’t flowing to desired activities), 43 and

42

Canada and Kyoto—a European Perspective. Presentation by Grubb, Michael, Associate Director of
Policy, The Carbon Trust. Hosted by IISD, Ottawa, October 2002.
43
Lambert, Gord, “Our Energy Dilemma: Reconciling Societal Expectations for Energy and the
Environment. An Energy Producer Perspective”, Presentation to NRTEE Plenary, Fort McMurray,
November 8 2005.
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exploring the idea of different business models for engaging capital markets in taking
leadership on deep emission reduction pathways.
•

6

As mentioned above, it is assumed that Canada’s Large Final Emitters program will
proceed in a relatively similar format. The focus for any NRTEE research on the LFE
program should therefore focus on the post-2012 period. Possible emphasis
includes:
o Lifting the price cap;
o Broadening coverage as an alternative to a carbon charge;
o Linking with other existing and emerging emission trading schemes.
The latter point is raised because of the high priority this is expected to have as the
LFE program rolls out. The key issues have already been identified in recent work by
the NRTEE (Doug Russell, GSCI-Natsource Consulting Consistency in Carbon
Markets: Linking Canada’s Domestic Market to International Markets. Ottawa. April
2006.) However it should be noted that the wedges scenario assumed entirely
domestic emission reductions, so fungibility with other trading schemes is not
essential to its implementation.

TARGETED MEASURES FOR THE THREE LARGEST WEDGES

6.1. INTRODUCTION: TARGETED MEASURES
The UK experience with broad-based instruments (the Climate Levy and Emissions
Trading) is that these are a key driver, but are in themselves too blunt to stand alone.
Effectiveness and efficiency are improved by combining these with targeted measures to
support innovation and take up of new technologies. 44
The challenge is to design policy packages that combine measures neutral enough to
promote the development and deployment of a suite of low carbon technologies, yet also
tailored enough to push and pull some specific technologies that might not enter the
market under a broad policy mechanism. New technologies come to the market through
an innovation chain that may require policy intervention at different points to overcome
institutional and market barriers. This policy intervention must be appropriate to the
phase of innovation and adequate to see the new technology through to commercial
competitiveness. 45

44

Canada and Kyoto, op.cit.
Alic, J, Mowery, D, and Rubin, E. U.S. Technology and Innovation Policies: Lessons for Climate
Change. (Arlington: Pew Centre on Global Climate Change, November 2003.)
45

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The targeted measures described below illustrate the types of measures that are needed
to support the adoption of new technologies, in complement to broad-based price signals
such as carbon charges and/or emissions trading.
6.2. RELEVANT LESSONS FROM THE NRTEE’S ECOLOGICAL FISCAL REFORM PROGRAM
In addition to the criteria outlined in Section 3, previous research in the NRTEE’s
Ecological Fiscal Reform program has identified some other factors that would be helpful
in screening whether generic classes of fiscal instruments will be appropriate to specific
wedges. These include:
• Nature of emission sources: are the emissions from large point sources or from
diffuse sources?
• Nature of actors—capacity: Do the actors have the capacity to engage in policy
instruments that are administratively complex and are they able to shoulder
transaction costs?
• Nature of actors—corporate: Does the corporate model of the actors make them
eligible/subject to the measure? Some actors, for example crown corporations and
municipalities, are not subject to the same tax regime as private corporations. This
influences the choice of fiscal instrument.
• Market setting: The size and structure of the Canadian market needs to be
considered in evaluating long-term signals.
o Is the Canadian market a technology taker? The comparatively modest size of
the Canadian market may make it difficult for Canada to adopt, on an
autonomous basis, technology forcing measures for technologies with no readily
available substitutes or alternatives—threshold levels of demand, higher than
Canada can create, may determine the market’s ability/willingness to supply
these technologies. 46
o Is the price that firms can charge for their product or service set in the global
market (price taker), or can costs of abatement be passed on to consumers? Is
there an ability to differentiate the product or service on the basis of emissions
performance, and to charge a “green premium”?
o How many actors are there, and how many sources of emissions? Instruments
such as emissions trading, and associated components such as banking and
averaging, require a critical mass of actors and emission sources to create a
competitive and dynamic market. Small numbers of actors in the Canadian
market and/or few sources of emissions can undermine the economic efficiency
that is a core rational for these instruments.
• Development stage of technology: How mature is the technology?
46

This was found to be a key issue in the NRTEE’s EFR Cleaner Transportation case study, which
considered fiscal instruments to facilitate the adoption of ultra-low sulphur diesel fuel and diesel freight and
mass transit engines. Dewees Consulting Limited, Fiscal Instruments for Diesel Emission Reduction: A
Preliminary Analysis”, Report to the Cleaner Transportation Working Group, NRTEE, October 1 2001.
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o

o

o

Mature technologies are at a market-ready or market-entry stage of
development; there is no appreciable cost difference between these technologies
and incumbent technologies. The focus should be on demand-pull instruments
that facilitate and promote the uptake of existing technologies.
Emerging technologies span demonstration to early market-entry stages, and
successfully addressed performance issues; there is a moderate price differential
versus incumbent technology. The focus on instruments that help bridge the
price gap between mature technologies and the emerging ones. The operating
assumption is that the price gap will close with increasing market penetration and
progressively favourable economies of scale.
Longer-term new technologies are still in fundamental research to demonstration
stages. They are characterized by large cost differential between the new
technology and incumbent technologies, and still have to resolve performance
issues. The focus for these should be on promoting R&D through R&D subsidies
and investment incentives. 47

6.3. NOTE RE: MEASURES PROPOSED FOR FURTHER RESEARCH
The measures listed under the “Advice to the NRTEE” section for each of the three
following wedges are proposed with the following caveats:
ƒ It is assumed that a broad-based price signal (charge or tradable permit) is also
in place;
ƒ The measures represent of menu of options to be considered based on a
review of relevant literature. They have not been screened for effectiveness,
efficiency, equity, or competitiveness concerns, however there has been some
consideration of development stage of the technology(ies) and nature of actors.
ƒ Subsequent analysis and screening should include the criteria outlined in
sections 3 and 6.2, with a particularly a firm eye to the emissions reduction
objective.
It is recommended that the analysis for each wedge include a preliminary assessment of
the extent to which any existing fiscal signals may be incenting carbon emissions.
6.4. FREIGHT TRANSPORTATION
6.4.1

Wedge 2050 Scenario Summary
•

Vehicle Efficiency (158 Mt CO2e reduction): triple Light and medium truck
vehicle efficiencies, and double Heavy truck efficiency. Fifty percent
reductions in rail energy intensity and 25 percent reductions in marine energy
intensity.

47

National Round Table on the Environment and the Economy, Economic Instruments for Long-term
Reductions in Energy-based Carbon Emissions, Ottawa, 2005.
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6.4.2

Analysis

For Small and Medium trucks, existing, demonstrated and cost-effective technologies to
increase energy efficiency by 50 percent exist today, through reduced vehicle weights,
increasing engine efficiency and aerodynamics, use of hybrid motors to allow recovery of
braking energy, and more appropriate engine sizing. 48 The development stage of the
technology can therefore be classified in the range from emerging technologies to
mature technologies.
This wedge is characterized by diffuse emissions from millions of sources. Actors range
from individual owners and small companies, to large private and public organizations
with corporate fleets. Certain portions of the market (e.g., long haul heavy trucks)
operate in highly competitive, bi-national markets with very small profit margins. Other
portions of the market (e.g., truck fleets for commercial operators) are less constrained.
Political resistance to fuel price increases, particularly in the highly-competitive and lowprofit long haul trucking sectors, needs to be considered in assessing politically realistic
options for influencing freight vehicle efficiency.
6.4.3
ƒ
ƒ
ƒ
ƒ

Advice on Measures to Investigate in Phase II of the NRTEE’s “Wedges” Work
Extent to which existing fiscal signals may be incenting purchase and retention
of less efficient trucks.
Carbon charge on diesel fuel (with advance notice of implementation and
gradual increase over time)
Extend LFE system to include tailpipe emissions from freight transport, indirectly
through diesel fuel suppliers. 49
Freight vehicle acquisition and ownership charges based on fuel efficiency:
o Sliding annual licensing fees based on fuel efficiency;
o Fee/rebate taking into account weight class and/or purpose of the truck to
encourage truck purchasers to buy the most efficient vehicles within their
desired market segment;
o Preferential capital cost allowance for most efficient/lowest emission
trucks per unit size or weight, for low rolling resistance tires, etc

48

Torrie Smith Associates Inc., Greening the Canadian Courier Fleet—Strategies for Improved Fleet
Efficiency, prepared for Sierra Legal Defence Fund and Greenpeace, 2001. Quoted in ICF International,
Energy-Related Greenhouse Gas Emissions in Canada in 2050 – A Low-Emission Scenario, prepared for
NRTEE, May 2006.
49
For a description of how this might work within the EU ETS, see Grayling, Tony, Gibbs, Tim, and
Castle, Ben. Tailpipe Trading: How to include road transport in the EU Emissions Trading Scheme.
London: Institute for Public Policy Research, June 2006. (www.ippr.org)
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Tax credits or subsidies to make most efficient vehicles price competitive
with incumbents.
Low emission freight vehicle portfolio standards:
o Vehicle emission portfolio standards for truck manufacturers: low
emission trucks.
o Corporate fleet emission portfolio standards for fleets above a certain
threshold.
o

ƒ

The lessons learned through two previous NRTEE projects, the Cleaner Transportation
Working group (2001) and the vehicle fee/rebate study (2005) should be considered.
6.5. CARBON CAPTURE AND GEOLOGICAL STORAGE
6.5.1

Wedge 2050 Scenario Summary

Combined reductions of 191 Mt CO2e, from:
• Electrical Generation: All fossil-fired electrical generation in Alberta,
Saskatchewan and Manitoba uses CO2 capture and storage by 2050 (90 per
cent emissions reduction);
• Oil and Gas industry: Emissions reduction of 30 percent by 2030, and 60
percent by 2050.
6.5.2

Analysis

The development stage of the technologies for carbon capture and sequestration vary: 50
ƒ Carbon capture in natural gas production is a mature technology;
ƒ Post-combustion carbon capture in power generation is a well developed
technology, but expensive and energy-intensive;
ƒ Pre-combustion carbon capture systems are at or near commerciall
demonstration stages for coal feed and petroleum coke;
ƒ Oxygen-combustion carbon capture in power generation is still in development
stages.

50

Benson, Sally. Carbon Dioxide Capture and Storage in Underground Geologic Formations, from
workshop proceedings, “The 10-50 Solution: Technologies and Policies for a Low-Carbon Future.” The
Pew Center on Global Climate Change and the National Commission on Energy Policy; and Griffiths,
Mary; Cobb, Paul; and Marr-Laing, Thomas. Carbon Capture and Storage: An Arrow in the Quiver or a
Silver Bullet to Combat Climate Change? Pembina Institute, November 2005; Intergovernmental Panel on
Climate Change, Special Report on Carbon Dioxide Capture and Storage; Summary for Policy-Makers.
Sept 25, 2005; keman, Brent; Gunter, Bill; and Mitchell, Bob. “A Technical Overview of CO2 Capture and
Geological Storage”. Paper commissioned for the NRTEE, Alberta Research Council, May 2005.

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ƒ

ƒ

Compression and transport of CO2 are well established technologies that are
used routinely today for enhanced oil recovery, beverage carbonation, and fire
suppression
The technology to inject CO2 underground is mature and practiced routinely in
CO2 enhanced oil recovery projects. Little to no new injection technology will be
required to enable CCS.

In sum, conventional technologies and industry practices are presently available for each
step in the production chain: the manufacture of hydrogen; the separation of pure CO2;
the pipeline transport and geological sequestration of CO, and the pipeline transport of
hydrogen. New technologies are under development to broaden the application of CCS
as a net emission reduction strategy. However, the integrated system remains untested,
particularly on the scale being considered, and key elements of the transport
infrastructure are not yet in place.
The development stage of the technology suggests a “technology pull” approach, with
modest targets commensurate at the initial stage with the potential of the mature and
well developed technologies, and growing in rigour over time as new technologies
emerge.
The ecological, human health and safety aspects of this technology are still under
debate, posing a distinctive dilemma to an aggressive policy push for CCS adoption. The
legal, regulatory, and liability framework for widespread CCS have not yet been
developed.
This wedge consists of large point source emissions. All actors are large firms, but with
substantially different corporate models—private corporations in the oil and gas sector
and some Alberta electricity generators, and crown corporations for much of the
electricity generating actors. This wide variation among the actors suggests that a taxbased measure would not be practical. Furthermore, new mines and major expansions
in the oil sands already receive high rates of capital cost allowance (eligible capital
expenditure for new mines or major expansions as well as capital costs exceeding 5% of gross
project revenue may be deducted to the extent of income from a particular mine), effectively
saturating tax-based incentive options even among the actors who could be influenced by a tax
measure.
Opportunities to derive income from CO2 in enhanced oil recovery will provide favourable
economics in the early phase of take-up of this technology.
6.5.3

Advice on Measures to Investigate in Phase II of the NRTEE’s “Wedges” Work

There are two different approaches that could be adopted to encourage the deployment
of CCS.
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The first targets CCS directly, through technology-based measures. As described above,
tax incentives are not likely suitable to this technology.
ƒ Technology-focussed quantity-based instrument: CCS standard, requiring a
minimum level of CCS across the oil and gas and electricity generation sectors.
This would be a tradable obligation, akin to the renewable portfolio standards. 51
The second targets CCS as part of a system of production, and would focus on
tightening emissions performance targets for the oil and gas and electricity generation
sectors. This latter approach is not technology prescriptive (ie other approaches such as
energy efficiency, renewables could also be used to meet the performance target), but
the target would be set knowing that it would most likely be met through CCS.
ƒ Post 2012 LFE targets for the oil and gas and electricity generation sectors, set
at a level that assumes certain levels of CCS.
As for the previous measure, analysis should begin with a consideration of the extent to
which any existing fiscal signals may be impeding the uptake of CCS.
In addition to resolving legal, regulatory, ecological and health and safety issues such as
that lie in the public policy domain, progress on CCS may be impeded without resolution
of the liability issues which lie in the private domain of the insurance industry. The
NRTEE may wish to examine the role of the insurance industry in creating a coherent
enabling framework for deployment of this technology.
6.6. COMMERCIAL BUILDINGS -- ENERGY EFFICIENCY
6.6.1

Wedge 2050 Scenario Summary
•

•
•

51

Existing Buildings Retrofits (28 Mt CO2e reduction): As of 2010, all retrofits
of commercial buildings would be designed to Leadership in Energy and
Environmental Design (LEED) Platinum standard;
New Buildings—Integrated Building Systems (26 Mt CO2e reduction): As
of 2010, all new commercial buildings are built to LEED Platinum standard.
New Buildings—Lighting and Equipment – Electrical efficiency (20 Mt
CO2e reduction): reduce lighting energy use by 50 percent by 2050; improve
auxiliary equipment efficiency by 25 percent; reduce water heating energy by
35 percent; reduce energy use by auxiliary motors by 20 percent; reduce
cooling requirements by 30 percent.

These are proposed in more detail in Jaccard, op.cit., p.18-20.
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6.6.2

Analysis

Technologies to achieve the wedges scenario are mature or emerging to mature
technologies. Some of these technologies already receive accelerated capital cost
allowance under Class 43.1.
This sector is characterized by thousands of small, medium and large sized actors. This
makes the use of market-based performance standards challenging, due to their
administrative burden.
Among the barriers that must be considered in implementing this measure is the culture
of the sector. The construction and commercial buildings management sectors are
conservative with low inherent innovation---the same basic set of technologies has been
in use for at least a half century. Lower-carbon technologies do not offer the marketing
incentive of product differentiation (insulation, or new generation technology, does not
change the product that final consumers see). 52
6.6.3

Advice on Measures to Investigate in Phase II of the NRTEE’s “Wedges” Work

The research conducted for this advisory note leads to the conclusion that command
and control regulations, via building codes and requirements for LEED performance
standards, should remain the major long term signal for improving energy efficiency in
commercial buildings.
Expansion of the grants already available under NRCan’s Energy Retrofit Assistance
Program and Commercial Buildings Incentive Program should also be investigated. This
may focus on the design of the program (participation rates) as much as on the amount
and eligibility of the incentive itself.
As with the previous wedges, the research should begin with a consideration of the
extent to which existing fiscal signals may be incenting the renovation and building of
commercial buildings to efficiency standards below best available technologies.

7

THE (EVEN) LONGER TERM PERSPECTIVE

While the wedges scenario (and the discussion of long term signals, below) is limited to
consideration of deployment of existing and near-term technologies, this is not to imply
that policies to support the research and development of new technologies can be
shelved.

52

Carbon Trust, Carbon Trust Submission to Consultation on Review of the UK Climate Change
Programme, March 2005.
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Over the course of the half-century considered in the wedge scenario, new and as yet
unproven technologies may emerge to provide more cost-effective and innovative
solutions to greenhouse gas emission reductions than the technologies available today.
The original wedge analysis at the international scale, conducted by Pacala and
Socolow, 53 pointed out that even if the carbon and climate problem of the first half of the
century can be managed simply by scaling up existing and near term technologies,
many of the wedge strategies saturate by mid-century (land for biofuels, formations for
CO2 storage, space for windfarms, etc). To maintain a less-than doubling trajectory
(stabilization at 450 ppmv or below) in the second half of the century, we will need to go
beyond emissions stabilization and to do this, revolutionary technologies will be required.
Therefore the need for an expanded R&D program for so-called revolutionary
technologies (such as space-based solar power satellites, deep-sea CO2 sequestration,
nuclear fusion and climate engineering) arguably remains. 54

53
54

Pacala and Socolow, Science vol 305, p. 968 (2004).
Hoffert et. al., Science vol 298, p. 981-987 (2002).
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