Nova Scotia has implemented a “cap and trade” program in order to price emissions. Twice a year, the province auctions off emissions allowances, which give the purchasers the rights to emit a fixed amount of green house gases. Each allowance is equivalent to one ton of emitted CO2. As a business you may emit up to the limit of the allowances you purchased. Any emissions beyond that are priced at a stiff 3x price of the auction price. The funds from the auction are paid into the provincial Green Fund, which is then used to make investments into sustainability projects.
Over time, the allowances made available reduce in number, increasing the price of emissions and providing the emitters an incentive to run cleaner business. This paper from Osler has more details.
- 13,683,000 in 2019
- 12,725,000 in 2020
- 12,258,000 in 2021
- 12,148,000 in 2022
That’s how it works.
On Wednesday, the province announced the results of their July 9 auction, which is the third since the program was implemented. The headline was that the settlement price was C$36.71/ton, a premium of 74% over the reserve price of $21.09. Two other facts:
- 767,000 allowances were offered.
- There were an average of 1.23 bids per allowance.
Although this is an encouraging result, it is also a very limited experiment. Three ways that Nova Scotia could improve their program are:
- As mentioned above, Nova Scotia’s program creates a fixed number of allowance’s annually, but distributes most of them free of charge to qualifying companies. Only 6.25% of 2021’s allowances went to auction. However, this is also increasing over time. A year ago, at the July 10, 2020 auction, 640,000 allowances were offered which represented 5.1% of the annual allowances. It appears that the province is creating fewer allowances, and charging for more of them, which is driving the auction price to market competitive levels.
- Link their carbon market with other carbon markets like California and Quebec, so that a more open market for emissions can be created. Right now, Nova Scotia’s program is limited to the province.
- Expand the scope of companies covered. At this point, only businesses emitting more than 50,000 tons of CO2e in any year are required to participate.
Cap and trade programs make sense, versus carbon taxes. A carbon tax is a blunt tool, penalizing consumers for the emissions of the business they’re buying from. Proponents of carbon taxes like to point out that they can be used to fund governmental green energy initiatives, which is true. Cap and trade programs, however, create incentives for the business to reduce emissions directly and also raise money for green initiatives, which is a double benefit. Nova Scotia is moving in the right direction.