By Ayoub A. Ali, M.Sc., LL.B.,
Ali, Cook LLP,
Barristers & Solicitors
After operating in a regulated market for many years, electricity generators in Ontario are facing shifting government perspectives with respect to increased competition and deregulation. A concern is whether these changes will increase air pollution. The Ontario government has responded to this by proposing regulations for electricity generation under the Environmental Protection Act. These establish an emissions reduction-trading program to help electricity generators reduce the emissions of contaminants that cause smog and acid rain.
Emissions reduction-trading is a market-based approach to environmental management that uses "pollution credits" as the currency of exchange. The government creates pollution credits by capping emissions at specified levels and auctioning off rights to pollute the airshed ("allowances") up to this level. Polluters purchase the allowances that they need for their operations. A polluter achieving a level of emission that is below its allowance creates a pollution credit. Polluters that have earned credits can sell them to others that did not meet their allowances.
The policy claim behind the regulations is that the government should define an airshed, determine the maximum levels of SOX and NOX emissions that are allowed to electricity generators, divide that level into a number of rights, and auction off these rights to the highest bidder as private property. After the initial auction has been held, electricity generators can buy and sell these rights from one another in an open market system.
The information on which the claim is based is that the intelligent deployment of market mechanisms is needed for efficient environmental management of the airshed by Ontario's electricity generators. This is abstracted from the Ministry of Environment's document entitled In Brief: Emissions Reduction Trading, which reads in part that, "the government believes that emissions reduction trading will unleash the power of market forces to develop innovative, cost-effective opportunities to reduce air pollution." This suggests that the government's information is that market forces cause the development of innovative, cost-effective opportunities to reduce pollution.
Reliance on markets carries judgments that are based on values and ethics because private property rights constitute the currency of markets. In A Theory of Legislation, the 18th century philosopher Jeremy Bentham expressed the view that property is designed to do something, and what it is supposed to do is tap individual energies in order to make us all more prosperous.
In Economic Analysis of Law, the modern-day economist Richard Posner submits that property does this by creating private property rights that encourage people to invest their efforts in things they own (since each owner reaps the reward of investment decisions as well as bearing the costs) and because they encourage trade (since clear entitlements are a precondition to trade). This, he argues, is desirable because investment and trade make us collectively wealthier.
So if we want to reach that result of collective well-being, we need to have clear and secure property rights and open markets in which to trade them. The value or ethical consideration that is contained implicitly in this analysis is justice -- both individual justice (just rewards based on work ethic) and social justice (collective well-being).
Since reducing air pollution is the government's objective and its information is that "unleashing" market forces will achieve this, its argument transformed market forces into emissions reduction-trading. This argument is based on the assumption that electricity generators are motivated by the desire to achieve production efficiency. That this is the argument is evidenced by the statement in the In Brief document that, "in helping Ontario companies to meet the Province's stricter emission limits at the lowest cost, the government is working to ensure the continued health and competitiveness of the provincial economy." Thus, the cost-effectiveness of emissions reduction-trading for electricity generators is important because this helps them remain healthy and competitive.
Production efficiency is essential because it results in lower operating costs and consumer prices. The cost of compliance with the air pollution caps will be an operating cost because of the desire of the electricity generators to achieve goodwill, which maximizes profits and the returns on investment to shareholders through higher consumer sales. The emissions monitoring and reporting strategy will create public awareness of the environmental performance of electricity generators. Consumers will set the acceptable level of environmental performance through their buying powers, and consumer pressures will motivate electricity generators to achieve this level.
Pollution rights will provide electricity generators with flexibility in timing the investments they need to make in order to meet the emission limits. Those for which it is easy and cheap to reduce emissions will cut back rather than pay for pollution rights, whereas those for which emissions reduction is expensive will purchase pollution rights. Environmentalists who believe that abatement should be greater still can purchase pollution rights themselves and leave them unused.
A parallel case is unavailable to support this argument because emissions reduction-trading does not have a track record. The United States has experimented with pollution rights to a limited extent. For example, the 1990 US Clean Air Act Amendments allow for emissions trading for SOX from coal fired power plants. It is too early to assess the results of the initiative. The United States is ahead of other countries on such measures. On a larger scale, the 1987 Montreal Protocol for the protection of the ozone layer provided for trades between countries in quotas for the emission of CFCs. No such mechanism, however, has as yet been established.
An analogy is also unavailable to support the argument for the same reason. Quasi-market incentives (or "green taxes") found official favour rhetorically in England, but have not found their way into policy-making.
Other countries have made more progress in actually implementing green taxes, especially on water pollution. Most notably, France, Germany, and the Netherlands make use of per-unit pollution charges in their repertoire of environmental policy instruments, but the experiences of these countries is decidedly mixed. In France, charges are used mainly as a revenue-raising device, and are not set high enough to affect dramatically the environmental behaviour of polluters. In the Netherlands, charges are successful and widely supported by environmentalists. In Germany, green taxes play only a secondary role within a more traditional regulatory system.
In the absence of parallel case and analogy to support the argument, the government can point to the desire of influential organizations to follow its proposed course of action. For example, the Organization for Economic Cooperation and Development and the European Community have, in recent years, been promoting market-type policy instruments. These instruments were endorsed by the 1987 Brundtland Report, Our Common Future, which launched the era of sustainable development on the international stage.
The government qualified its policy claim by noting that correlative and harmonized actions must also be taken throughout the regional airshed, which stretches beyond the Province. This qualifier is explicit in the Media Backgrounder for the government's press release, which points out that, "over half of Ontario's smog problem is caused by emissions from the US. In border areas, the contribution from US sources is much higher. Any long-term solution to Ontario's air quality problem requires actions to be taken throughout the regional airshed. Ontario emissions reduction actions must be coordinated and harmonized with actions taken throughout the regional airshed, which stretches beyond the province."
The policy claim behind the proposed regulations describes the actions that are prescribed by the regulations, which is the creation of an emissions reduction-trading program. It is not concerned with the outcomes of the action. These are not fully known in advance. Only the maximum level of air pollution is prescribed. How the emissions reduction-trading program will play out is unknown and will be determined by market forces alone. This jump into the unknown is not reckless. It is based on values and ethics, and assumptions about the motivating power of intentions, goals or values of electricity generators after deregulation.
Many environmentalists challenge these values and ethics. For example, they argue that the environment has intrinsic value or is a common property resource and, as such, is not a commodity to be bought and sold. Another rebuttal is that people not only have consumer and producer preferences, as is presumed by advocates of market-based approaches to environmental management, but also citizen preferences. Furthermore, these may point in different directions.
For example, as a consumer I may want to have free municipal water, but as a citizen I may want to externalize the cost of producing clean water through consumption charges.
The result is that the arguments for and against an emissions reductions-trading system in Ontario's energy sector are essentially arguments for and against a set of values that are being given predominance by the present Ontario government. The emissions reduction trading system is only the forum in which these conflicting values are being contested.
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