Should Canada have a cap-and-trade system?

Three parties support a cap-and-trade system to control carbon emissions. But few Canadians understand how it would work - and some provinces see it as an excuse for Ottawa to tax their energy industries.

Cap and trade explained

12 years ago
Duration 6:20
University of Alberta business Prof. Andrew Leach explains cap and trade emissions system basics

Three out of four parties in the House of Commons support introducing a cap-and-trade system to control carbon emissions. But very few Canadians understand how such a system would work and some provincial leaders think it is just an excuse for the federal government to tax their energy industries. 

In its simplest form, cap-and-trade is a market-based system where the government puts a cap on the total amount of pollution industry is allowed to emit. Each company would receive permits for how much pollution it could produce. If a company produced less than its limit, it could sell — or trade — permits to other companies that have gone over their limit.

Cap-and-trade is not an untested — nor unsuccessful — system of reducing emissions. The United States introduced a cap and trade system as part of the Clean Air Act amendments of 1990. It aimed to control industrial emissions that cause acid rain. According to the U.S. Environmental Protection Agency, "The Acid Rain Program introduces an allowance trading system that harnesses the incentives of the free market to reduce pollution." According to the Pacific Research Institute, an American free-market think tank, acid rain levels in the U.S. have dropped by 65 per cent since 1976.

"My concern is that if there is going to be a new environmental policy like cap and trade, which has questionable results in terms of reducing CO2 but has an unintended consequence of effectively knee-capping the parts of our economy that are working well. How is that good policy?" asked Saskatchewan Premier Brad Wall. 

According to some experts, a cap-and-trade system — if properly designed — should not have that effect on the economy. 

"Right now, more of the emissions in Canada are in the Western provinces. So if the government, initially, allocates some of those permits here, that valuable property stays here," said Andrew Leach, a professor of environmental management at the University of Alberta's School of Business. 

Alternatively, Leach said, Ottawa could give provincial governments the right to issue emissions permits. 

"It's a complex system," he said. "Simple in theory, but when you start to implement it, it does become quite complex."   

The Liberals, NDP and Bloc Québécois all included a cap-and-trade system as a plank in their environmental platforms. The Conservatives said they would introduce one in their 2008 budget, but have since backed away from the idea of cap-and-trade in favour of a rules-based industry-specific emissions. 

British Columbia has no such qualms about cap-and-trade. The province is a full member of the Western Climate Initiative — a union of seven American States, including California, and four Canadian provinces that hope to have a cap-and-trade system up and running in 2012. 

"Cap-and-trade really provides certainty over targets," said B.C. Environment Minister Terry Lake. "So, when you're dealing with industry, when you provide certainty over the targets that you hope they will achieve and a market in which they can achieve that, then they can make long term plans." 

While WCI hopes to have its system up and running next year, there is already a cap-and-trade system for power utilities in the northeastern United States.

But the only jurisdiction in North America with a cap-and-trade-like regime for all industries is Alberta, which has intensity targets on all industrial emissions. 

Companies in the province must achieve a 12 per cent yearly reduction in the amount of energy they use to produce a product. To hit these targets, businesses can trade credits among themselves.