Cap and Trade Rules
BC Introduces Cap-and-Trade Legislation to Complement Carbon Tax

Davis LLP
April 2008

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Having introduced a significant carbon tax earlier this year, the BC government
unveiled a second plank in its aggressive effort to tackle climate change. On
April 3, 2008, the BC government introduced Bill 18, Greenhouse Gas Reduction
(Cap and Trade) Act (the "Act"). The Act would create a cap-and-trade system for
greenhouse gas emissions in the province that could be an effective complement
to the carbon tax.

Under the Act, the BC government would issue B.C. Allowance Units ("BCAUs"),
each corresponding to a right to emit one tonne of carbon dioxide equivalent, to
companies in designated sectors. Those companies would then only be permitted to
emit the amount of greenhouse gases for which they held BCAUs. This is the "cap"
that makes the policy environmentally effective. Those companies who emit more
than their assigned amount of BCAUs would have several alternative compliance
options, which together constitute the "trade" element that makes implementing
the cap more economically efficient. Such companies could do the following:

Purchase BCAUs from other companies who were able to cut their emissions below
their assigned amounts;

Purchase Recognized Compliance Units ("RCUs") from other jurisdictions
(discussed below);

Create or acquire BC Emissions Reductions Units ("BCERUs"), which will be
generated by projects that avoid or sequester emissions, to offset their
excess emissions; or

Pay an administrative penalty.

The details of the BC cap-and-trade system will be developed in parallel with
the Western Climate Initiative (the "WCI"). The WCI, whose signatories include
BC, Manitoba, California, Oregon, Washington, New Mexico, Arizona, Utah and
Montana, will implement a regional cap-and-trade system. By harmonizing the
systems, BC hopes to create increased liquidity for carbon instruments. The
Recognized Compliance Units mentioned above are expected to largely be sourced
from WCI members.

The Act will also establish the administrative apparatus required to track the
allocation and trading of the various units and to approve BCERUs and RCUs.
Carbon taxes and cap-and-trade systems are recognized as two ways of placing a
price on carbon. The two approaches are significantly different both in the way
they achieve the goal of reducing emissions and also in the breadth with which
they may be implemented. With respect to the way a emissions are reduced, carbon
taxes put a price on carbon in the expectation that consumers will shift demand
away from carbon-intensive products. That price incentive should result in
reduced emissions. However the result is not guaranteed, particularly if the
price signal is not strong enough. Cap-and-trade systems, by contrast, legislate
what amounts to a scarcity of emissions. Combined with measures to create a
liquid market, that scarcity results in a price for carbon. However it is the
legislated scarcity, and not the price signal, that controls the level of
emissions. Because that scarcity can be controlled directly, reduced emissions
can be guaranteed to a much greater extent than through carbon taxes. With
respect to the breadth with which the two approaches can be implemented, a
carbon tax can be implemented for all types of consumers, from big businesses to
individuals, and can thus drive down emissions across the economy. In contrast,
a cap-and-trade system is complex to administer and is thus better suited for
large emitters than for individual consumers.

These counterbalancing differences make a carbon tax and a cap-and-trade system
complementary. BC therefore appears to be undertaking a very sophisticated,
progressive, and hopefully effective approach to addressing the problem of
climate change. Check back here for updates as Bill 18 makes its way through the
BC Legislative Assembly.


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