Many critics have complained that the adoption of carbon pricing mechanisms - cap and trade or a tax - will leave Canadian firms vulnerable to competition from jurisdictions without such measures. While that’s true, both the Alberta and federal systems attempt to mitigate that through output-based allocations (OBAs). A recent paper from the University of Calgary puts some meat to the bones of OBAs.
Written by four professors at UCalgary’s School of Public Policy, the paper argues that a well designed OBA system can alleviate many of the competitiveness concerns opponents of carbon pricing raise. There are four guiding principles to a well designed OBA - OBAs are allocated equally to all companies; costs are transparent; companies in same product market are treated equally; and lastly there should be minimal administrative burden.
On the first point, allocations should be assigned in the same manner to companies regardless of the emissions at each facility and the same allocations should be assigned for the same activities. This was the problem with Alberta’s specific gas emitters regulation (SGER), note the authors, where the most emissions intensive facilities were given more free permits than those with lower emissions intensity.
By allocating permits on an independent and uniform basis, facilities that are less emissions intensive are rewarded while the more emissions intensive facilities are punished, argued the authors.
“This will incentivize greater expansion of low-intensity facilities relative to high-intensity ones. That is, it incentivizes an efficient reallocation of production across facilities in a way that lowers the overall GHG footprint of the oil sands sector as a whole,” states The Ground Rules for Effective OBAs: Principles for addressing carbon-pricing competitiveness concerns through the use of output-based allocations.
An effective OBA approach will also treat companies selling the same products in the same way. This is where standard industry classifications aren’t effective because they generally assign codes to firms in different industries. With the goal of OBAs being to eliminate competitiveness concerns for companies competing in the same industry, more nuanced definitions are needed. The paper argues definitions used by the Competition Bureau are more appropriate. In essence, competition policy is about protecting competition and not competitors.
“Under a product-based system, if firms produce identical — or very similar — products, they are classified as being in the same industry or market. Such a definition completely divorces a firm’s costs and related efficiency from its association with a specific industry or market,” says Ground Rules. “Under this type of industry or market classification, any support (such as a specific OBA rate) given to a specific firm is afforded to all of that firm’s direct competitors as well. This maintains a level playing field for all competitors.”
As well, an OBA system based on specific products or markets rather than the firms themselves also helps prevent carbon leakage.
“By protecting the competitiveness of an industry, as defined by the set of firms producing a specific product, a product-based OBA system will significantly reduce or eliminate the trading advantage that might otherwise be afforded to firms producing the same product in other jurisdictions,” says Ground Rules.
The OBA approach is also administratively less burdensome than other measures such as border carbon tax adjustments because it treats all firms producing the same product or competing in the same market the same.
“An OBA system is less administratively complex, as the ‘optimal’ system we are describing does not require firm- or facility-level data, as all firms/facilities receive the same allocation of output credits. In contrast, a system involving a border-tax adjustment requires information on the emissions content of each product,” states the paper.