Liberal and Conservative Party Platforms: Int'l Perspective, part II: Environment

I have been patiently waiting for the release of the Conservative party platform to continue with this series on the election issues in Canada from an international perspective, but it appears that I am waiting in vain. It's shocking that a party can run for re-election without a platform, but so be it. All I can say is that, given the popularity of part 1, even as the media focuses on the personality-cult of election campaigns, people are actively searching out the positions of the political parties on their own - that's encouraging.

So today I will be looking at the Liberal and Conservative positions on the environment & taxation - specifically, how each party plans to spread the cost of meeting emissions targets. Taxation and environmental policies are crucial both for Canada's economic competitiveness in attracting foreign investment and rebuilding its moral authority at multilateral negotiations. Also, regardless of which plan is implemented, it will serve as an important model for other countries to study, for better or worse.

The Conservatives
The Conservatives' environmental plan amounts to a cap-and-trade system. Andrew Coyne has an excellent summary of the plan here. Emissions are "capped" at a certain level; firms that cut emissions below the cap can earn credits on the surplus; firms that exceed the cap must buy up credits from the surplus market. Alternatively, firms buy credits on the international market or contribute to a "green technology fund."

The goal is to reduce emissions by 20% by 2020, using 2006 as the baseline. Make no mistake, said Stephen Harper in 2007, this regulatory framework will create "very real costs" and result in "noticeable price increases for consumer products such as vehicles, natural gas, electricity, and household appliances." As Coyne rightly points out, we're not hearing much about those costs anymore.

The Liberals
In a nutshell, the Grits' Green Shift amounts to a carbon tax: greenhouse gas (GHG) emissions will be priced at $10/tonne, rising another $10/year until it reaches $40/tonne. To offset this carbon tax, the Liberals promise to cut income taxes for the lowest bracket from 15 to 13.5%, and the income taxes of the middle brackets from 22% and 26% to 21% and 25%, respectively. Small businesses get an additional 1% cut, and there will be further undefined incentives for green technology.

The Liberal target is also a 20% reduction by 2020, but they're using 1990 as the benchmark - so, a more ambitious target.

Analysis
As LSE's own maver-economist, Willem Buiter, points out: from an economic perspective, a cap-and-trade system is equivalent to a carbon tax. Both a market cap and a carbon tax raise the marginal cost of GHG emissions. Those with a low marginal cost will expand their activities, those with a high marginal cost will reduce them. The biggest difference is that, under a carbon tax, the price of carbon is set at X and firms trade amongst themselves. Under a cap & trade, the total amount of emissions is set, permits are auctioned off, the secondary market establishes a price, and the firms trade amongst themselves.

However, Buiter qualifies the equivalence:

An argument in favour of carbon taxes over cap & trade is that cap & trade requires an efficient secondary market. As we know from recent experience, financial market efficiency cannot be taken for granted.... In a world with uncertainty but incomplete markets, the carbon tax and cap & trade are similar but not equivalent; neither one obviously dominates the other under all circumstances.

The main trade-off is knowing the price of carbon vs. knowing the amount of GHG emissions. From a business perspective, I would imagine the prospect of a tax is discouraging, but the certainty of the costs allows for more accurate business modeling. On the other hand, the cap-and-trade system is more obscure than a tax, which makes it popular for politicians.

In both cases, revenue is generated for the government that can be used or abused as they see fit. I will finish by summarizing Andrew Coyne's analysis, which neatly outlines the flaws in both plans.

Conservatives

• The plan is "just as costly as the Liberals'... twice as complicated...and probably half as effective." Indeed, leading climate experts agree that even the modest targets set by the Tories will not be met.
• Ironically, given the Conservatives' 2006 platform, the cap & trade is less transparent than the carbon tax
• The plan is infinitely less politically risky than the Liberals', which also makes it more likely to be implemented

Liberals

• The plan is not radical enough, but costly enough to annoy everyone.
• Libs haven't explained how they will apply the carbon tax to provinces that already have one, and have not promised to cut income taxes by anything near enough to make this revenue neutral, as promised.
• The details are fuzzy, and a tax is politically unpalatable, making its implementation (especially in a minority government situation) far less likely.