On targets

With the Greens apparently joining the Libs in refusing to take a stand against "intensity" non-targets for greenhouse gas emissions (leaving the NDP as the only party firmly backing the concept of real reduction targets), one of the most important issues in the climate change debate seems to be on the verge of tipping in the wrong direction. And on the surface, the TD Bank's influential call for environmental action doesn't help matters either in its failure to specify the type of targets required for an effective emission trading system.

But reading between the lines of the TD analysis, much of the argument for an emissions trading plan ultimately supports the need for firm targets rather than "intensity" ones. Let's take a closer look at what the TD analysis calls for - and why an "intensity" structure would fail to meet the requirements.

According to TD (at p. 12), the following two factors are musts for any effective permit trading system:

(R)egulation that imposes reasonable emissions caps on industries. Without a supply constraint to emissions, permit prices would trend to zero, making the program completely ineffective.

What goes unsaid is that under an intensity-based system, an industry can generate a limitless supply of emissions credits to the extent that it's able to increase production without a fully corresponding increase in emissions. In contrast, the supply constraint under a hard cap system is obvious, as the maximum number of available emissions credits is set from the outset.

Effective and timely monitoring mechanisms of emissions. This requires the installation of costly monitoring technology as well as the development of administrative programs for audit and repair.

What's missing here is the fact that under an intensity system, any monitoring is bound to become all the more difficult and costly. After all, an additional variable is added to the mix in the form of units produced - and a company's permitted emission level for a given time period isn't even known until this factor is first measured. Moreover, any audit process is bound to be more complex when it has to accurately determine precisely which units were manufactured by a given industry, rather than merely having to ensure the accuracy of emission measurements.

The TD analysis goes on at p. 13 to discuss targets in somewhat more detail:

(D)etermining the target reduction in GHG is very important. This requires getting the science right. Some factors that complicate the baseline estimate are the state of the economy, technological innovation, and weather patterns. Emissions are influenced by economic activity as first produce more when demand for their products intensifies. Accordingly, the sample period must be chosen with care to include a complete business cycle.

In addition to this, if the emission target is established during a period prior to any major innovation, the result may be a target that is too easily reached - with the effect of too many permits being issued which in turn will drive down their value and be less of an incentive to reduce emissions.

Once again, the introduction of another variable into the mix only complicates matters: it's not hard to anticipate an extensive lobbying effort on the part of each industry to set its target based on a low-production, high-emission period for that industry - while a target related only to emissions would instead lend itself to simply taking the same baseline for all industries, and letting the trading system sort out any changes in the interim.

Meanwhile, the problem pointed out in the second paragraph is again only amplified if a firm can not only reduce its emissions for a given output too easily due to an industry-specific technological innovation, but can also take advantage of that innovation to ramp up its production in order to generate more credits for sale.

Finally, it's worth noting that the TD repeatedly mentions the U.S.' cap-and-trade system as its example of an effective trading regime, as that system couldn't be more clear in emphasizing the need for "an overall cap, or maximum amount of emissions per compliance period, for all sources under the program".

Again, it's a shame that the TD report doesn't say in so many words what kind of targets would be preferred. But on a close look, it's clear that hard targets are necessary both to the TD's suggestions for an effective emissions trading market, and for any real environmental improvement. And it isn't too late for the parties who have been on the wrong side of the issue to agree that hard targets are needed.