What are we getting ourselves into with cap and trade?

We sometimes get the impression that the pump price of gasoline goes up just before the construction holidays, right when thousands of families are heading out onto Quebec’s highways.

These hikes are certainly annoying, although they don’t necessarily happen every year and prices usually come down later on. But I can predict with some certainty that in six months, the increases will be even more painful, and permanent this time.

We don’t hear much about it right now, yet as of next January 1, under the Western Climate Initiative, companies in Quebec that import or distribute fuels will come under a new cap-and-trade system for emissions allowances. This will result in increases in the price of gas and many other products in Quebec. This will deal a direct blow to our wallets — and to the Quebec economy.

The result of the higher fuel prices will be a loss of competitiveness for businesses located here and a slowdown of the economy. Indeed, the Western Climate Initiative was initially launched by seven American states and four Canadian provinces, including Ontario. However, only Quebec and California have decided to implement this agreement for the time being, with a view to higher fuel prices in 2015. Meanwhile, across the Ottawa River and south of the border, the costs of fossil fuels will become more attractive.

The idea behind a carbon market is not bad in itself; it is a market mechanism for reducing greenhouse gas (GHG) emissions that allows organizations to buy and sell “pollution permits.”

If a given polluter emits more GHGs than expected, it must buy such permits, whereas it can sell them if it lowers emissions below the prescribed limit, thereby rewarding good behaviour.

The total quantity of permits is determined by governments, and their price will rise so that businesses and individuals are encouraged to reduce their GHG emissions. Among other things, the use of a similar mechanism allowed us to deal with the problem of acid rain.

Unfortunately, as with many good ideas, the devil is in the carbon-market details. And so, come January, the price of a litre of gasoline will increase by some 3 cents as a result of this new tax.

One might imagine that Quebecers will readily agree to pay a little more to get around. But we mustn’t forget that Quebec already has some of the highest gasoline taxes. This new 3-cent-a-litre increase might not seem like much in itself, but it’s the total that hurts when you consider that a family with two cars easily pays more than $1,200 a year in gasoline taxes.

Quebec’s environment department prides itself on the fact that the price of a permit in our carbon market will be among the highest in the world. The government expects that by 2020, companies will have to pay more than $2.4 billion to purchase emissions permits — money that would otherwise go into their own corporate development. This estimate presupposes a minimum price for emissions permits, which could well be even higher.

Quebec is already at the head of the class among Canadian provinces when it comes to GHG emissions per capita. Even California has not adopted targets that are as ambitious as Quebec’s, in terms of reducing GHG emissions. We are proud to be at the forefront of sustainable development in Quebec, which is commendable. But in the case of cap and trade, no one is following.

Couldn’t we work to get other partners like Ontario on board, and row in the same direction, instead of heading out into choppy waters in Canada all by ourselves?

Youri Chassin est économiste et directeur de la recherche à l'Institut économique de Montréal. Il signe ce texte à titre personnel.