Some form of taxation on carbon emissions may be coming to the United States and Canada. The province of British Columbia has already included such a plan in its 2008-2009 budget. Furthermore, both U.S. Presidential candidates are more inclined to tackle climate-change issues than the current administration.

What has gained the most attention and, in fact, is already in place in Europe, is a “cap and trade” system. The following is my understanding of what this might entail and what the key issues will be. Where this gets really interesting, I think, is in terms of international offsets. But that’s a topic for tomorrow. Today, let’s just set the groundwork.

For starters, polluting industries will be informed as to the number of tonnes of carbon that they will be able to emit before having to pay a penalty. This is the “cap” portion of the overall program. That “cap” figure will be gradually lowered over time in order to achieve certain clean-air targets.

For emissions above the “capped” level, firms will be able to purchase permits from the government at a cost per tonne of carbon. Initially, the price of these permits will be set by government (say $20 per tonne) in a public sale. Care has to be taken that there aren’t so many permits issued that the price drops in the secondary market, as described below.

By the way, most analysts seem to think that a tax of at least $40 per tonne will be needed to bring about real change to emission levels. The biggest polluters are generally coal- and other fossil-fuel-fired electric power stations, as well as some primary metal manufacturers, non-metallic mineral producers and Tar Sands plants.

If companies find that they need additional permits, these can be obtained in two ways: (1) they can trade with other companies; and/or (2) as is the case in Europe, they can purchase them on an open market. A lively secondary trade in permits is expected on commodity exchanges, with the consequence that the price may well go up considerably.

These are the “trade” components of the overall initiative. As proposed by environmentalists, the hope and theory is that the cost of the permits will eventually cause firms to lower their greenhouse gas emissions. This provides an economic or “dollars and cents” incentive for firms to get really serious about lowering their carbon footprints.

Nor does this come without a price tag for the rest of society. The extra cost of paying for fewer carbon emissions is likely to be passed on to other businesses and consumers. This will drive up costs, lower productivity and reduce competitiveness.

In terms of investment and construction activity, firms are going to have to start factoring in the possibility of a carbon tax when it comes to making their investment plans. Furthermore, the uncertainty about the size and scope of any carbon tax may hinder some investment thinking. “Uncertainty” is anathema to business managers.

Let’s stop here for today. Tomorrow, I’ll get into the subject of “international offsets” and how this has further implications for investment decisions.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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06/24/2008 - posted by Alex Carrick

06/24/2008 - posted by marcus

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