Download Use Green Taxes and Market Instruments to Reduce Greenhouse Gas

Briefing February 2008
Use Green Taxes and Market Instruments to Reduce
Greenhouse Gas Emissions
At a Glance
 Tax measures, market forces, and efficient
regulation will be key to setting a price for
carbon and other greenhouse gas emissions.
 Green taxes and tax credits are needed by
Canadian firms to accelerate their technological
adaptation to a carbon-priced world.
 A cap and trade system should be implemented
as a complement to green taxes.
The Challenge: Greenhouse Gas
Emissions Still Rising
S
igns of global warming are evident everywhere—
mountain glaciers and the Arctic polar cap are
melting, the sea level is rising, key stages in plant
development are occurring earlier each year, and species
distribution is changing rapidly. The 20th century was
likely the warmest century in the past millennium, and
the 1980s and 1990s were the warmest decades since
record keeping began in the mid-1800s. The past 15 years
alone have seen 10 of the warmest years on record.
The scientific community has concluded with a high
degree of confidence that anthropogenic greenhouse gas
(GHG) emissions are responsible for the current warming
of the planet. This changing climate is likely to have negative repercussions on many aspects of the economy and
economic performance and trends
| The Conference Board of Canada
Overview: Canadian Tax Reform for Sustainable Prosperity
The overall Canadian taxation system is pivotal in determining the country’s
economic performance, productivity growth, international competitiveness,
and environmental sustainability. Taxes do more than collect monies for governments to spend—they establish relative incentives for work, savings, and
investment. Taxes can selectively encourage, or inhibit, behaviour by individuals
and firms—behaviour that has a direct impact on productivity growth and on
the environment. As such, it is important that all three levels of government in
Canada understand and take into account the interaction of the structures of
their respective tax regimes and related tax rates when designing the reforms
needed to enhance Canadian economic performance, competitiveness, and
sustainability.
In recent budgets and economic statements, our governments have taken steps
to restructure the tax system and to reduce tax rates. While many of these
steps are welcome, the fundamental issue is whether the evolving tax system as
a whole is being optimized to create sustainable wealth for Canadians.
Therefore, the objective of this briefing series is to consider specific reforms
to the Canadian tax system, guided by the concept of “sustainable prosperity.”
The theme of sustainable prosperity emerged from the Conference Board’s
Canada Project. This three-year research program will serve as a foundation for
the Conference Board’s new research program, CanCompete, as well as for the
Board’s work more broadly.
Our intention is to produce several tax reform briefings that will appear periodically during the coming year. All of them will adhere to a set of principles for
tax reform that are set out here and shall be included in each briefing.
the environment. There is great uncertainty and debate
about these repercussions, but scientists believe a relatively small change in average global temperatures could
have drastic impacts. These include an increase in costly
climatic events (such as flooding and drought) and potentially irreversible disruptions.
For example, critical infrastructure will be at greater
risk from extreme weather events and natural catastrophes.
Roads, harbours, bridges, and buildings will face more
extreme conditions than before, and existing infrastructure
may suffer damage or even destruction. Climate change
will likely exacerbate the problem of rising health spending. The aging population will be adversely affected—
especially by extreme heat. Urban air will become more
polluted since heat tends to increase smog, and this will
add to the problems of those suffering from respiratory
and cardiac diseases (among many other health concerns). Extreme weather events and natural disasters will lead to
injury and to illnesses related to such things as contamination of drinking water. There will be damage to civic
and public-health infrastructure. Mental health distress,
especially in populations whose way of life will be threatened (the Inuit, for example), will become more prevalent.
Under the Kyoto Protocol, Canada is supposed to
reduce GHG emissions to 6 per cent below 1990 levels,
on average, during the years 2008–12. However, little real
progress has been made by governments, businesses, or
individuals, and 2005 levels were 32.7 per cent higher than
Canada’s Kyoto benchmark. It was no surprise that the
federal government announced in the 2007 Speech from
the Throne that Canada’s emissions cannot be brought
to the level required under the Kyoto Protocol within
the compliance period.
Critical infrastructure will be at greater risk from extreme
weather events and natural catastrophes.
At a global level, thanks to the economic boom led by India and China and their reliance on fossil fuels as
energy sources, GHG emissions have been growing much
faster since 1990 than anticipated. Current concentration
levels in the atmosphere (and their consequences) were
expected 10 years from now. Many scientists believe that
we are near or at a tipping point. Mitigation measures are
urgently needed in order to curb future emissions and to
capture carbon before it enters the atmosphere. Investing
in adaptation measures is also required, since climate
change is occurring faster than expected, and global
emissions are likely to continue growing for several
more years.
Moreover, climate change would continue to occur over
the coming decades even if global GHG emissions were
reduced significantly in the near future. Even with early
concerted action, the concentration of GHGs already in the
atmosphere would not diminish enough to make a difference over the next couple of decades. Reducing emissions
significantly in the near term is critically important, but
it will take time to reverse the concentration of greenhouse gases.
The Conference Board of Canada | Canada produces about 2 per cent of the world’s annual
GHG emissions. Whether or not we reduce GHG emissions matters only a little in global terms. However,
reducing GHG emissions requires the global participation
of as many countries as possible. Decisive domestic policy
action and a commitment to develop and deploy leadingedge technologies that improve both our environmental
and economic performance will have a dual benefit: it will
help position Canada as a leader in global negotiations
and build a consensus for effective global action, and it
will support domestic technological innovation. Specific Tax Reforms for
Sustainability
On January 7, the National Roundtable on the Environ­
ment and the Economy (NRTEE) released its path-breaking
report Getting to 2050: Canada’s Transition to a LowEmission Future. The report calls for a market-based policy
on climate change that takes the form of a green tax, a
cap and trade system, or a combination of the two.
The Conference Board of Canada, working independently
from the NRTEE, has reached essentially the same policy
conclusions (although in greater detail). We believe that
price signals via the tax system, coupled with market
forces and efficient regulation, will be central to successful climate change adjustment by Canadian firms and the
Canadian economy. We also believe that Canadian firms
need other tax incentives to accelerate their technological adaptation to a carbon-priced world.
Use Taxes and Markets to Put
a Price on Carbon
GHG emissions are a negative consequence of economic
activity, or what economists call a “negative externality.”
Since there is no price on these negative consequences,
consumers and producers have no need to factor the cost
of GHG emissions into their decision-making. The challenge, therefore, is to derive a price for carbon and GHGs,
which consumers and producers would then take into
account. The answer is to establish the long-term price
of carbon and other greenhouse gases, and build that
price into business and consumer decision-making.
There are essentially two options for determining the
price of carbon and other GHGs: a market-based “cap
and trade” system (also called a tradable permits system);
and green taxes. Under the cap and trade option, governments issue permits that cap overall GHG production for
specific emissions sources (for example, power stations
or industrial plants). The cap and trade option would also
include a market for emissions permits in which emitters
that have more efficient systems or technology in place, or
adjust faster, have the opportunity to sell “carbon credits”
to firms that cannot meet their cap targets as quickly. A spot price for carbon will emerge from these trades.
There are essentially two options for determining the
price of carbon and other GHGs: a market-based “cap and
trade” system (also called a tradable permits system);
and green taxes.
The green tax option would see the government directly
set a benchmark price for carbon and other GHGs by
introducing taxes on GHG producers and consumers. The
challenge is to set a GHG emission or “green” tax at a
level that encourages changed behaviour by producers and
consumers. (The newly introduced rebate and tax system
for automobiles purchased in Canada is a specific variation of a green tax—it is based on a given vehicle’s fuel
efficiency, which translates into its potential emission
levels.)
The economic literature and experience elsewhere suggest
that the current average price of carbon is US$20–30 per
tonne. However, to quote the British government’s
acclaimed report Stern Review: The Economics of Climate
Change, “the pricing signal should reflect the marginal
damage caused by emissions, and rise over time to reflect
the increasing damages as the stock of GHGs grows.”
The price for EU emissions permits for the next EU trading
period (2008–12) is about $25 per tonne. See David Victor and
Danny Cullenward, “Making Carbon Markets Work,” Scientific
American, December 2007. We used the online version, dated
September 24, 2007.
Sir Nicholas Stern, Stern Review: The Economics of Climate Change,
(London: Cambridge University Press, 2007), p. 309. This report was
released by the U.K. government in October 2006 and published
by Cambridge University Press the following year.
| The Conference Board of Canada
In more concrete terms, the green tax level that would spur
adjustment by carbon dioxide (CO2) producers will need
to be at least as high as the cost of “abatement” for a given
sector or firm. In the short term, abatement may mean a
different mix and level of outputs; in the longer term, it
means switching to new technologies or systems. Over
time, therefore, green taxes will need to increase, since
GHG abatement costs rise along a cost curve for most
emitters.
Abatement costs in some sectors are well above the current estimated average price for GHGs. A tax around
$25 per tonne might encourage short-term adjustment,
but it will not on its own induce significant change in
behaviour in those sectors. The same rationale applies for
consumers—a low carbon price might not trigger the
change in goods consumed (e.g., more efficient vehicles
and appliances, upgraded furnaces and insulation) or
behaviour modification (e.g., driving less, using public
transit, lowering the thermostat) that would result in
significantly lower consumer-related emissions.
Direct GHG taxation is less politically appealing than a cap and trade system that can be positioned as a marketbased approach in which governments set GHG targets
via regulation and then let market forces work. A cap
and trade system would determine the short-term spot
price of GHGs and can be readily adapted to international
circumstances through cross-border trading of emissions
permits, as is currently occurring in Europe.
The current systems in Canada for constraining GHG emissions tend to blend aspects of both approaches. Alberta’s
system (discussed briefly here) might be considered a
hybrid of the tax and cap systems. The coming federal program to cap the intensity of emissions is another variation
and may or may not lead to lower overall emissions.
(See box “A Work in Progress: The Federal Plan for
Emissions” on page 9.)
Introduce Green Taxes
Green taxes should be introduced for industrial and
consumer emitters in order to establish in the public’s
mind a visible price for carbon. The whole point of a
green tax is to put a price on “negative externalities” that
are not captured by the market price system. That means
raising the price of goods and services that produce more
GHGs (of which carbon dioxide is the most important).
The change in relative prices, based on the added cost
of GHGs, will influence long-term decision-making by
businesses and consumers, and gradually reduce the
level of GHG emissions.
The simplest system would set a common initial tax rate for all emitters—for example, $25 per tonne of
GHGs emitted. As discussed here, the tax would need to rise gradually over time to encourage switching to new
technologies and systems that will permit the ongoing
reduction of GHGs from higher-cost sources of emissions.
Canada’s 2005 level of CO2-equivalent GHG emissions
was 747 megatonnes. That implies an initial potential
tax revenue of just under $19 billion.
Since the primary purpose of a green tax is to change
behaviour, not to generate additional government revenues,
a national GHG tax system should be designed to be
either revenue neutral or fiscally neutral for governments
as a whole. To be revenue neutral, green tax revenues
should therefore be offset by cuts to other taxes, particularly taxes that impede Canada’s international competitiveness.
The whole point of a green tax is to put a price on
“negative externalities” that are not captured by the
market price system.
Fiscal neutrality would mean taking into account the fact
that a green tax would fall disproportionately on specific
regions and sectors. Alberta currently accounts for approximately 30 per cent of Canada’s GHG emissions, Ontario
26 per cent, and Quebec 12 per cent. The regional impacts
would depend in part on whether the green taxes were
For an excellent detailed description and analysis of the economic
advantages of using green taxes to price carbon, see William
Nordhaus, “The Challenge of Global Warming: Economic Models
and Environmental Policy,” [online]. New Haven: Yale University,
July 2007 [cited January 15, 2008].
http://nordhaus.econ.yale.edu/dice_mss_072407_all.pdf
The January 2008 report by the National Roundtable on the
Environment and the Economy, Getting to 2050: Canada’s Transition
to a Low-Emission Future, sets out four different carbon tax adjustment paths, with varying impacts on CO2 emissions and on the
economy according to their modelling.
The Conference Board of Canada | applied against all emission sources or focused on large,
final emitters. The latter approach would place a larger
burden on Alberta, because a large proportion of its economy is related to oil and gas development and production
and because of its reliance on coal-fired power generation.
Furthermore, a green tax that leads to intended reductions
in fossil fuel consumption would adversely impact fossil
fuel producers and provinces. Adjustments, therefore,
should be made to other taxes, expenditures, and transfers
to minimize the overall financial burden and impact of a green tax on any one region or sector. This would go
a long way toward making the implementation of green
taxes more politically palatable in regions and sectors
where emissions are highest.
For all industrial emitters, a benchmark green tax could be
introduced on their emissions resulting from production.
If a trading system were then introduced, the green tax
could be rebated to those firms that make use of the tradable permits system. Sellers and buyers of GHG permits
should both be eligible for tax rebates on GHGs that are traded at or above the GHG tax rate.
Transportation is another important source of GHG emissions. Hence, consumers of fossil fuel for transportation
should pay an identified green consumption tax, so that
the end price of fuel for consumers would reflect the
cost of emitting GHGs into the atmosphere.
In addition to a green tax on fuel consumption, a combination of regulations that promote ongoing improvement
in fuel efficiency, and other price signals, should be
adopted. For example, the recently introduced federal
auto “feebate” system (fees and rebates on new cars
Achieving Global Consensus: Carrots or Sticks?
One of the many unresolved issues in the development of a global
strategy on climate change is how to create an international level playing field. From the perspective of fair international business competition, there should be no “free riders”—firms and countries that keep
producing GHGs for free. In order to avoid a “race to the bottom,”
major trading countries must be included in a consensus on climatechange policy. This means that all major emitting countries (including
not only the United States, but China and India, as well) should be
part of any international agreement on climate change.
As the Stern Review pointed out, in the struggle to stabilize and
reduce emissions we no longer have the luxury of time. The next two
or three decades are expected to be critical in determining the extent
and duration of the impacts of a warming climate. Losing another
decade to squabbling over a global consensus will result in much
higher long-term costs. The nations that have taken action must
redouble their efforts. Nations such as Canada that participated in
the Kyoto process but are unlikely to meet their commitments still
need to introduce policy instruments to curb emissions growth. They
must then reach the point of reducing emissions levels as soon as
possible—certainly within the next two decades. Countries such as
China, India, and the United States must also commit to action.
So what happens if certain countries refuse to join a global consensus
for action on climate change? Up to now, there has been insufficient
discussion of “carrots and sticks”—the combination of positive incentives for change and punitive action against countries (and goods and
services from those countries) that are not part of a global consensus
on climate change. Positive incentives—such as providing emerging markets with special access to state-of-the-art environmental
technology— would be encouraged. But punitive actions must also
be considered. International trade mechanisms—such as a system
of green tariffs—may emerge. These would be needed to ensure that
footing the bill for GHG reduction does not leave countries less competitive than their trade competitors that refuse to join in.
This issue deserves to be debated at length in international organizations such as the World Trade Organization, International Monetary
Fund, and World Bank. French Prime Minister Nicolas Sarkozy has
already threatened to impose green tariffs on China if it does not
introduce GHG taxes on its industries. Conversely, exporters from
countries that put a price on GHGs could receive green tax credits
to ensure they do not face a competitive disadvantage.
The Conference Board of Canada has been a long-time champion of
free trade, a position based upon the significant evidence of trade’s
positive effect on living standards. We are certainly not advocating
arbitrary barriers to trade in any form. However, there is logic to using
a combination of positive incentives and green tariffs, if required, to
ensure compliance with international climate agreements and a level
playing field internationally for business. In the absence of a global
consensus on using GHG taxes or other mechanisms to price GHGs,
a green tariff could be an efficient mechanism for pricing GHGs on
imports from countries that are not complying. Any green tariff regime
would have to be simple and include safeguards to ensure such tariffs
were not used as protectionist measures.
The bottom line is that we see this “carrots and sticks” debate as
unavoidable in a world of GHG pricing where all countries do not
meet international norms.
| The Conference Board of Canada
linked to fuel efficiency) should be expanded and
refined. Instead of trigger and cutoff points at specific
average fuel consumption levels, as is currently the case,
the adjustments in the rebates or fees should be more
gradual across the full range of vehicles, with the zero
point (no fee or rebate) set at the desired level of average
fuel consumption (and GHG emissions) per vehicle.
Such a policy would more effectively encourage the
purchase of fuel-efficient cars and eliminate the sharp
adjustment points that exist under the current system.
Cars that have been on the road awhile generally produce more GHGs per kilometre than new vehicles. Older
vehicles should have a fee price on emissions, too. A
GHG-based fee system could be progressively introduced for all vehicles as part of the provincially-run
licence permit system, to encourage consumers to
accelerate their purchase of newer, cleaner-running
vehicles.
Fossil fuels used in home, industrial, and office heating
systems could also be taxed based on GHGs generated.
Since the consumer will ultimately pay most of the green
tax on all emissions, GHG tax credits could be used to
mitigate the impact on lower income consumers.
Current Status
Canada does not yet have a national system of greenhouse gas taxes covering the full range of GHG emissions.
Cautious initial steps have been taken, such as introducing
a federal feebate program for new vehicles, based on fuel
efficiency—but this is only a start.
Conference Board of Canada Advice
Canada needs to go much further, must faster, in introducing a national, comprehensive, and coordinated system
of green taxes that would set a price on greenhouse gas
emissions. This GHG tax system should be implemented
in tandem with a cap and trade system.
As a first principle, the national GHG tax system should
be revenue neutral or fiscally neutral. Green tax revenues
should be offset, either with cuts to other taxes (particularly taxes that impede Canada’s international competitiveness) or through increases to program spending or tax
incentives that promote the development and adoption
of clean technologies.
Implement a “Cap and Trade” System
for Major Emitters
As a complement to green taxes across all sources of
GHGs, a cap and trade system should be implemented
for major emitters and others that want to access a trading
system. Such a system combines regulation (a determination by government of the permitted level of greenhouse
gas emissions and the desired distribution of permits
among emitters) with market forces, via trading among
emitters to determine a price for carbon and other
greenhouse gases.
In Canada, major emitters—those with facilities that emit
at least 100,000 tonnes of CO2 per year—represent about
35 per cent of GHG emissions, according to Environment
Canada data for 2005. Most major emitters are in the
energy sector (concentrated in electricity production and
extraction of fossil fuels) and in energy-intensive sectors
such as steel, aluminum, chemicals, mining, cement,
and forest products.
The economic literature suggests that a cap and trade
system may be preferable to a green tax for major emitters. The actual costs of GHG emissions abatement are
unknown, as is the impact that taxes at a given level would
have on overall emissions. It will take time to find the
appropriate level and path for green taxes. We argued earlier that a green tax should be revenue or fiscally neutral,
meaning it should be offset by a decrease in other existing
taxes. However, for major emitters, much of the benefit
of any reduction in general business taxation would be
captured by businesses outside the energy and energyintensive sectors. This would take net revenues away from
the energy-based sectors—revenues that could otherwise
be invested in energy research and development and
new technology.
In comparison, a cap and trade system could start to
reduce GHG emissions as soon as permits were distributed and a trading system established. The market price
would vary depending on changes to the supply of and
demand for permits. The allocation of GHG permits will
therefore need to be fair-minded in order to build business
and popular support and be consistent with declining
The Conference Board of Canada | GHG emissions. There are many feasible options and
mechanisms for distributing emissions permits.
A cap and trade system would have the advantage of
keeping revenues within the energy and energy-intensive
sectors. As firms in the energy and energy-intensive sectors buy and sell permits among themselves, they would
have both the incentive and the financing needed to play
a central role in energy and technological innovation.
As suggested earlier in this briefing, green taxes could
be rebated to those firms making use of a tradable permits
system. Statistics Canada’s current efforts to measure
emissions would need to be supplemented by additional
reporting requirements.
out necessarily relying on a centralized trading system
or permit trading on an exchange, as is done elsewhere.
The liquidity of the Alberta credits market and its effectiveness at “discovering” the value of emissions will be
key success factors.
Current Status
Under the current GHG reduction plan, Canada has taken
the initial steps to promote the reduction of greenhouse
gas emissions. However, these steps are modest. More
needs to be done, including aggressively introducing
market-based instruments such as a cap and trade system.
Exhibit 1
Canadian GHG Emissions for 2005
(megatonnes CO2 equivalent)
As firms in the energy and energy-intensive sectors
buy and sell permits among themselves, they would
have both the incentive and the financing needed to play
a central role in energy and technological innovation.
Concrete examples of cap and trade systems include the
European Union’s carbon market and the U.S. market in
sulfur emissions. However, the European carbon market
has run into problems largely due to mismanagement of
the initial allocation of permits and insufficient information on the supply of, and demand for, carbon credits.
The legislation that came into force this year for large
final emitters in Alberta is an example of an emissions
permits system that does not currently include permit
trading. Rather than creating a market for emissions, the Alberta system requires large final emitters to reduce
their emissions to the capped level, purchase offsets within
the province, or contribute $15 per tonne of excess emissions into a technology fund. Alberta companies whose
emissions are below the target level will be permitted to
sell credits, creating a form of market for emissions with
Options could include attaching the green tax for major emitters
directly to the distribution of emissions permits (e.g., emissions
permits would cost $25 per tonne annually), or auctioning the
permits to bidders with a pre-determined reservation price.
For an excellent assessment of the shortcomings of the current
EU carbon trading market, see Victor and Cullenward, Making
Carbon Markets Work.
Transportation
200 (27%)
Fossil fuel production and upgrading
154 (21%)
Electricity Generation
129 (17%)
Other Industries (incl. manufacturing)
100 (13%)
Residential and Commercial
79 (10%)
Agriculture 57 (8%)
Waste 28 (4%)
Source: Environment Canada, National Inventory Report 1990–2005.
| The Conference Board of Canada
Conference Board of Canada Advice
For major emitters, a cap and trade system has considerable benefits and needs to be put in place immediately.
It should focus on actual reductions in GHGs by major
emitters. The Canadian cap and trade system should be
coordinated with world permit markets so that exchanges
across borders can happen if that is judged to be the
least costly solution to reducing carbon emissions.
Introduce an Environmental Investment
Tax Credit for Green Technologies
As part of the climate change and sustainability policy
agenda, governments should be prepared to help firms
accelerate the adoption of more environmentally friendly
Green Bonds—A Positive Idea,
But No Magic Solution
Government-backed “green bonds” have been proposed
as a means of raising new risk capital for environmental
investments. Proponents argue that, due to the riskier nature
of investing in new environmental technologies, financing
would be hard to come by. They say green bonds, supported
in whole or in part by the government, would help fill the
financing gap.
This new instrument would be similar to an environmental
investment tax credit in that the government’s fiscal capacity
would be used to support targeted investment in greener
technologies. Similar selection criteria would be needed to
determine which environmental technologies would qualify for
a green bond and which would qualify for an environmental
investment tax credit. The challenge in both cases would be
determining to what extent the bonds or credits actually support environmental investment (since investment in greener
technologies at some level would still have occurred without
government support).
A key weakness of green bonds is that, since the return
on investment in environmental technologies is unknown,
it would be impossible to determine in advance the cost to
government of covering its guarantees on the bonds. In comparison, the fiscal cost of an environmental investment tax
credit could be determined with greater certainty. Firms would
only qualify for the credit once they had actually made the
investment. The environmental investment tax credit could
be capped in total dollar terms or as a share of a given firm’s
revenues or costs. A green investment tax credit would also
be less complicated than a green bond to administer since
it could be managed under the existing tax system.
technologies. Therefore, The Conference Board of Canada
recommends the introduction of a targeted environmental
investment tax credit for green technologies. The credit
would be available to firms in all sectors that are adapting to an economy in which carbon has an explicit price.
Similar to the accelerated capital cost allowance that was
introduced in the February 2007 federal budget, an environmental investment tax credit would be available to firms
that actually spend cash on investments in green technologies. This would focus the use of such credits and
reduce the opportunity for abuse.
The environmental investment tax credit would be additional to the existing two-year accelerated capital cost
allowances (CCA) for manufacturing. To avoid accusations of favouritism, an eligibility list of new environmental
technologies that would qualify for the environmental
investment tax credit could be determined and managed
based on advice from an independent or arms-length
panel of experts. Investment in new environmental techniques, such as carbon capture and storage (or
“sequestration”), would be a top priority.
To contain the fiscal costs of these credits, the amount of
the credits available could be capped in total dollar terms,
or capped for individual firms as a share of business
revenues or expenses.
Current Status
Governments currently do not make aggressive use of
the tax system to favour new investment in environmentally friendly technologies.
Conference Board of Canada Advice
Governments should introduce an environmental investment tax credit that would be available to firms.
This would be similar to the accelerated CCA for
manufacturing.
An eligibility list for the environmental investment tax credit could be determined and managed based on
advice from an expert panel. Such a credit would give
added emphasis to clean technologies that reduce GHG emissions.
The Conference Board of Canada | Conclusion
In order to place Canada on a path toward slowing the
growth of (and eventually reducing) greenhouse gas emissions, the time has come to put a price on CO2 and other
GHGs. Green taxes should be introduced for industrial
and consumer emitters. This would establish a visible
price for carbon. A national GHG tax system should be
designed to be either revenue neutral or fiscally neutral
for governments as a whole.
As a complement to green taxes across all sources of
GHGs, a cap and trade system should be implemented
for major emitters and others that want to access such a system. Green taxes could be rebated to those making
use of a cap and trade system. Governments should also
introduce an environmental investment tax credit. This
would be available to firms in addition to the accelerated
CCA for manufacturing.
Introducing a combination of green taxes, market
instruments, and efficient regulation at a national level
would be a significant step toward putting Canada on a
path to sustainability, and would have the added benefit
of strengthening Canada’s leadership position in the
coming international negotiations on climate change.
A Work in Progress: The Federal Plan for Emissions
Canada’s Regulatory Framework for Air Emissions, published
by the federal government in April of 2007, sets out “. . . the
cornerstone of the government’s broader efforts to address the
challenges of climate change and air pollution.” The framework
indicates that industrial sources account for 50 per cent of
Canada’s greenhouse gas emissions, and it targets the following
sectors for new regulations:
 Electricity generation produced by combustion
 Oil and gas
 Forest products
 Smelting and refining
 Iron and steel
 Some mining
 Cement, lime, and chemicals.
In December of 2007, Environment Minister John Baird
announced that those industries will be required to report
on and reduce emissions intensity. According to the framework, existing facilities will be required to reduce their emissions intensity by 18 per cent from the 2006 level by the end
of 2010. An additional 2 per cent intensity reduction will be
required each year thereafter through 2020. Firms will be permitted to meet these obligations through direct emissions
reduction, contributions to a technology fund, emissions
trading, credits from Kyoto clean development mechanisms,
and recognition of early actions between 1992 and 2006. The
details of each of these measures are being developed. For new
facilities, initial emissions standards must be met for a three-year
period, with a 2 per cent annual reduction required thereafter.
Government of Canada. Regulatory Framework for Air
Emissions. (Ottawa: Author, 2007.) p. iii.
According to data published for 2005, the selected industries
account for approximately one-third of Canada’s total GHG emissions. The group experienced an increase of 57.1 MtCO2e (mega
tonnes of carbon dioxide equivalent)—or 30 per cent in total
emissions—between 1990 and 2005. Most of this increase
was concentrated in electricity generation by combustion
(33.7 MtCO2e increase), oil and gas (21 MtCO2e increase),
and mining (9.42 MtCO2e increase). In a rapidly expanding
sector such as oil and gas, it remains to be seen how large
a reduction in total emissions will result from an 18 per cent
reduction in intensity for existing facilities over a three-year period, coupled with annual 2 per cent longer-term reductions
in intensity for all facilities.
Additional measures are included in the framework to increase
use of public transit, to improve average new vehicle fuel efficiency, and to encourage Canadians to use energy more efficiently. The overall objective is to reduce GHG emissions 20 per
cent from their 2006 level by 2020, and 60 percent to 70 percent by 2050. This compares with the Kyoto target of a 6 per
cent reduction from the 1990 level to be achieved on average
between 2008 and 2012. Given the 32.7 per cent growth in GHG
emissions between 1990 and 2005, the Kyoto target for emissions will be met at least a decade late. It is noteworthy that,
according to Environment Canada’s sustainability indicators,
emissions intensity for the economy as a whole fell by an average of 1.3 per cent per year between 1990 and 2005 while
total emissions rose 25 per cent.
Environment Canada. National Inventory Report, Greenhouse
Gas Sources and Sinks In Canada, 1990-2005. (Ottawa: Author,
2007.) Data extracted from Tables 2-2, 2-3, 3-3, 3-5, and 4-1.
Environment Canada. Canadian Environmental Sustainability
Indicators 2007. (Ottawa: Author, 2007.)
10 | The Conference Board of Canada
Guiding Principles: Tax Reform for Sustainable Prosperity
Any fundamental reform of the Canadian tax system should
be guided by an understanding of the underlying principles of
taxation. The reform must also be workable within the existing
fiscal context of fiscal balance, or surplus, and declining public sector debt burdens.
Our analysis of the extensive economic literature on tax system design and implementation has led us to propose the
following eight principles for tax reform that would support
sustainable prosperity for Canada.
Principles
1. Implement any tax reform within a framework of long-term
fiscal sustainability.
2. Tax least what you value the most.
For example, if savings and investment are more beneficial
than consumption to the economy over the long term
(which is the consensus view in the economic literature),
then the tax system should have a bias toward lower rates
of taxation on employment earnings, savings, and investment, and higher rates on consumption.
3. Make the tax system as simple and transparent as possible.
It has been many decades since the Canadian tax system
underwent a comprehensive assessment. Successive governments at all levels have introduced special tax treatment
for specific sectors and interests, adding layer upon layer
of complexity to the system, usually without examining
the overall (and unintended) consequences for the economy. A strong case can therefore be made for tax reform
that simplifies the overall system and makes it more transparent and accessible for all Canadians.
4. Design business taxation so that Canadian businesses have
at least a level playing field with their major competitors.
In an era of globalization, businesses are able to move elements of production to whatever location offers the best competitive advantage. Therefore, business tax competitiveness
has become a critical factor in business decision-making.
5. When setting tax reform priorities, give priority treatment
to boosting productivity growth and the impact of taxes on
efficiency.
Given the strong evidence that Canada is an under-performer
on productivity, a desire to improve our productivity performance should be front and centre when establishing
tax reform priorities. Using productivity improvement as
a guide should help determine the relative weight given
to reform of business taxes versus personal taxes and to
broadly based reforms versus targeted intervention.
It should be further emphasized that all taxes dampen
economic activity, but some taxes have a more negative
impact than others. For example, cuts to corporate or personal income taxes boost gross domestic product many
times more than cuts to consumption taxes such as the
federal goods and services tax. Federal and provincial
governments should take the efficiency of different tax
instruments into account as they seek to promote economic and productivity growth.
6. Maximize tax harmonization across three levels of government to make tax application and administration efficient.
A patchwork quilt of tax regimes and rates spreads out
across the country. For reasons of efficiency (in terms of
tax administration) and, more importantly, to support a
strong and competitive national business environment,
tax harmonization should be pursued aggressively.
7. Use the tax system to price externalities.
The ever-expanding climate change debate has raised
public awareness of production of greenhouse gases in
general (and CO2—or carbon dioxide—in particular) as
a by-product of our everyday life. Production of CO2 and
other greenhouse gases is what economists call a “negative externality”—something that is a negative by-product
of our economy but which the market-pricing system has
so far been unable to capture. The tax system can address
this form of market failure by attaching a price to carbon
through the implementation of a specific tax on carbon
emissions. Similar taxes could be applied to other negative
externalities—such as waste water or soil depletion—to
ensure that the prices of products in the marketplace
reflect the full costs of their production.
8. Consider the distributional impacts of tax reform.
Tax reform can have significant impacts on the distribution
of after-tax income, whether it is between rich and not-sorich households, or among different types of households
(i.e., those with or without children). These differences
should be taken into account when considering major tax
reforms. Tax reforms that generate significant economic
gains would allow some of these gains to be used to compensate specific parts of society through such measures as
targeted tax credits or income transfers.
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About CanCompete: Competitiveness for Sustainable Prosperity
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national competitiveness. The program will help build a National Competitiveness Action Plan to give the public and private sectors a
common road map for collaborating to achieve their competitiveness goals.
CanCompete builds on five of the seven strategies presented in the Conference Board’s report, Mission Possible: Sustainable Prosperity
for Canada. The Board has created five new research centres, each focusing on turning a particular strategy into concrete outcomes.
1. Centre on Productivity—Productivity Strategy
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For more information about CanCompete, please visit the Conference Board website at www.conferenceboard.ca.
Use Green Taxes and Market Instruments to Reduce Greenhouse Gas Emissions
by Glen Hodgson, Gilles Rhéaume, and Len Coad
About The Conference Board of Canada
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