The Establishment of Emissions Trading

Climate change is becoming an increasingly pertinent issue in Saskatchewan and can largely be attributed to high concentrations of greenhouse gas emissions. The province of Saskatchewan is especially vulnerable to a fluctuating climate given the dependence of its economy on the agriculture industry; therefore, an effective policy mechanism must be implemented as soon as possible in order to mitigate future harm. One third of Saskatchewan’s greenhouse gas emissions are produced by oil and gas extraction and refining, and by mining (1). The next leading producers of greenhouse gas emissions are the energy generation sector, the transport sector, and the agriculture sector. Coal and gas are the two main sources of energy production in Saskatchewan and are both responsible for a large portion of the province’s total emissions (1). Technological innovation is required in order to make alternative, less polluting sources of energy efficient enough to further develop. Saskatchewan’s economic dependence on the sectors that are largely responsible for its greenhouse gas pollution is the most sensible explanation as to why addressing the problem has proven to be such an arduous task. This paper will discuss the environmental risk associated with high concentrations of greenhouse gas and whether or not the establishment of emissions trading in Saskatchewan is a worthwhile pursuit for policy-makers as they attempt to address the pressures that are facilitating climate change in the province. In order to properly approach this problem we must first examine how significant of an issue general emissions are in the province of Saskatchewan and what the costs and benefits associated with those emissions are. Saskatchewan has the highest per capita emissions of any province (6); this isn’t difficult to fathom due to the industrial based economy and small population of the province. One third of Saskatchewan’s greenhouse gas emissions are produced by oil and gas extraction and refining, and by mining (1). The next leading producers of greenhouse gas pollution in the province are the energy generation and transport sectors, which are each responsible for 21% of the province’s total emissions. Finally, the agriculture sector is responsible for 16% of the province’s greenhouse gas emissions. At 52% and 22% respectively, coal and gas are the two main sources of energy production in Saskatchewan, both of which greatly contribute to greenhouse gas pollution in the province (1). One could argue the two most significant negative externalities associated with emissions are the facilitation of climate change and poor air quality in highly populated urban areas. Some of the detrimental effects of climate change include extreme weather events, decreased ecosystem resiliency and the spread of crop disease and invasive species (4). These negative externalities are a threat to Saskatchewan’s economic productivity (3) and most importantly the health of current and future generations. Excess concentrations of atmospheric greenhouse gas provide no direct benefits to society; however, numerous benefits are derived via the creation of this atmospheric pollution. Some of these benefits include the energy, wealth and jobs that are injected into the province by the polluting industries. Considering how significant these benefits are to the province, a solution to mitigating greenhouse gas emissions that has minimal economic impact appears to be best suited for Saskatchewan.
Saskatchewan has the highest per-capita greenhouse gas emissions in Canada, and one approach the provincial government has pursued to address this issue is through “The Management and Reduction of Greenhouse Gases Act” (6). The act, which is a part of the “Provincial Climate Change Plan”, aims to reduce greenhouse gas emissions by setting annual reduction targets for industry. All facilities that emit greater than 50,000 tonnes of greenhouse gas per year are considered to be “regulated emitters”. Regulated emitters are required to reduce annual greenhouse gas emissions to meet the provincial target. Furthermore, facilities that emit less than 50,000 tones of greenhouse gas annually are considered to be “non-regulated emitters”. Emissions from these facilities will be reduced through policies and programs that promote the adoption of low-carbon technologies, renewable energy sources, and energy efficiency and conservation. Finally, the plan states that emissions trading will be established in order to provide flexibility for regulated emitters to meet their emissions reduction obligations (6).
Emissions trading is a market-based approach to pollution control whereby economic incentives are created in order to motivate polluting firms to reduce their levels of emissions (5). This mechanism requires an emissions cap or limit to be set in place by the government or central authority. Emissions permits, also known as credits, are then distributed by the government to polluting firms. The firms are free to sell and trade these permits amongst themselves. Firms are required to hold an amount of permits or credits that is equal to or greater than their level of emissions (5). In essence, if a firm wishes to pollute more, they must buy more permits. On the contrary, if a firm has additional permits than what they require, they are free to sell these permits to firms in need, so long as total combined emissions do not exceed the aggregate limit or cap that is in place. This mechanism rewards firms with low emissions by giving them the opportunity to sell their “unused right to pollute” for financial gain, providing incentive for other firms to lower their emissions and do the same.
One unique feature of emissions trading is the fact that it provides the opportunity for a province, country, or continent to reduce its level of greenhouse gas emissions while preserving economic productivity. It is a cost efficient mechanism in that the trading of permits decreases the abatement costs of emission reduction (10). Figure 1 (9) illustrates the gain and saving incurred from the trading of emissions. This reveals that the emissions trading mechanism has the potential to reduce greenhouse gas emissions at a lower cost. The fact that emissions trading is such a cost effective approach to mitigating greenhouse gas emissions enables the government to increase its expenditure on forms of public investment other than pollution reduction (10). Furthermore, emissions trading provides flexibility for polluting industries. Under this mechanism, firms do not have to reduce production, and potentially lay off workers, in order to meet emissions standards. The mechanism also accommodates for firms who may require additional emission allowance due to increased production during a peak season every year. These firms can acquire additional permits and increase their production without jeopardizing the ability of the polluting firms as a whole to meet the target level of emissions. Finally, the emissions trading mechanism has the capacity to ensure environmental outcomes. Unlike a carbon tax, which simply determines the cost of pollution, emissions trading enables authorities to directly control the amount of pollution through enforcement of the cap that is set at the outset of its implementation (10).
Perhaps the most glaring flaw of the emissions trading mechanism is the lack of incentives provided to encourage firms to innovate new emission control technology (11). Under an emissions trading scheme, large polluters will likely find it easier to simply acquire more emission permits rather than come up with innovative ways to lower their emissions. This lack of incentive for innovation will make it difficult to reduce emissions in the long run and reach future reduction targets. Considering the large number of parties involved and elaborate nature of the system, effectively establishing emissions trading is a complicated and costly process. Furthermore, the government will not generate any tax revenue from the mechanism given the fact that all transactions will occur between private firms.
The first large-scale attempt to implement emissions trading was done by the European Union and thus far they have struggled to generate results under the mechanism. This is largely due to the establishment of lax standards and the creation and distribution of too many emissions permits (7). The establishment of the aforementioned was often the result of pressure from large enterprises and other forms of lobbying. Another flaw that was recognized in the early stages of the European Emissions Trading System is that the trading scheme did not apply to all emissions, creating potential inefficiencies between trade and nontrade sectors (8). Finally, Convery notes that the highly decentralized nature of the European Emissions Trading System led to perverse incentive effects (8). It appears to be quite apparent that other than being too decentralized, the European Union’s initial emissions trading scheme was not planned nearly diligently enough. This led to the creation and distribution of a surplus of permits that greatly hindered the ability of the collective to reach the target level of emissions. The goal of the European Emissions Trading System was to create unique economic incentives for polluting firms to lower their levels of emissions; however, it has resulted in a system that enables the largest polluting firms to successfully push for rules that allow them to escape their responsibility to change industrial practices (7).
High concentrations of atmospheric greenhouse gas and the climate change associated is becoming an increasingly pertinent issue in Saskatchewan and provincial policy-makers are faced with the formidable challenge of developing and implementing a strategy that will effectively mitigate its effects. The emissions trading approach to mitigating atmospheric greenhouse gas concentrations has proven to be unsuccessful in past applications; however, various adjustments may facilitate future results. An increase in the provision of incentive for innovation and stricter regulations surrounding the mechanism appear to be paramount requirements of an effectively functioning emissions trading system. If an emissions trading system is to ever be successfully implemented in Saskatchewan, it must be more centralized than Europe’s system, including strict standards and strict regulations that ensure these standards are met. The aforementioned will provide polluting firms with increased incentive to innovate, as they will have no alternative way to maintain their level of productivity under these more strict rules. The initial establishment of lax standards, often due to lobbying, has greatly facilitated the failure of Europe’s emissions trading system. If lax standards are set in place, too many emissions permits will be created and distributed, enabling firms and governments to delay making the structural changes necessary to address climate change (7). It is crucial that those responsible for setting the standards engage in extensive research about past emissions and remain free from the influence of lobbyists. Finally, increased government involvement is integral to the emissions trading mechanism in order to avoid the creation of perverse incentives and ensure the goals of the policy. The emissions trading approach to mitigating greenhouse gas concentrations boasts both a unique and promising framework; however, if it is to ever be effectively established it must be delivered in the form of a more highly centralized mechanism than in the past, with strict rules governing the obligations of polluting firms to meet emissions standards.

Figure 1 Marginal Abatement Curves Used for Trade Studies

Table 1

References (1) Saskatchewan Citizens’ Hearings on Climate Change, Maria Campbell, Harry Lafond, Marcia Mackenzie Willard Metzger, Peter Prebble, Darrin Qualman, Davida Bentham, Mark Bigland-Pritchard, Matt Dow, Sarina Gersher, Bonnie Lawrence, Julie Maxwell, Rick Morrell, Janelle Pewapsconias, Karen Rooney, Rasheed Soomro, Jonathan Stockdale and Megan Van Buskirk (eds.), Saskatoon, Saskatchewan, Canada, 2014. (2) United States of America. Environmental Protection Agency. Human Health. Government of the United States of America, 9 Sept. 2013. Web. 26 Feb. 2015. (3) Henderson, Norm. "Climate Change Impacts on Canada's Prairie Provinces." A Summary of Our State of Knowledge (2008): 1-19. Web. 26 Feb. 2015. (4) United States of America. Environmental Protection Agency. Forests. Government of the United States of America, 9 Sept. 2013. Web. 26 Feb. 2015. (5) Stavins, Robert N. Experience with Market-Based Environmental Policy Instruments. N.p.: n.p., n.d. Nov. 2001. Web. 26 Feb. 2015. (6) "Climate Change." Ministry of Environment. Government of Saskatchewan, 2013. Web. 26 Feb. 2015. (7) Reyes, Oscar. EU Emissions Trading System: Failing At The Third Attempt (2011): 1-11. Carbon Trade Watch. Web. 20 Mar. 2015. (8) Convery, Frank J. The Emerging Literature on Emissions Trading in Europe. Review of Environmental Ethics and Policy. Oxford University Press, 15 Dec. 2008. Web. 20 Mar. 2015. (9) Ellerman, A. D., & Decaux, A. Analysis of Post-Kyoto CO2 Emissions Trading Using Marginal Abatement Curves. (10) Lynette Molyneaux, John Foster, Liam Wagner. An Alternative to Emissions Trading and Carbon Taxation. Energy Economics and
Management Group. University of Queensland, Dec. 2010. (11) Aldy, Joseph E., & Stavins, Robert N. Addressing Global Climate Change in the Post-Kyoto World. Cambridge University Press, 2007.