Why Create a Green Fund if You're Not Going to Use It? Nova Scotia’s New Cap and Trade Legislation

This morning Nova Scotia’s Minister of Environment introduced legislation required to create a cap and trade system. The federal climate plan will place all provinces under some form of carbon pricing. They can either let the federal government administer a carbon tax or they can set up their own systems. Nova Scotia is opting for cap and trade.

I took a quick read of the legislation and here are my thoughts.

What is the Cap?

Well first there are still lots of unanswered questions. The legislation gives the government the ability to set a GHG reduction target, but it does not say what that target will be. This is a funny issue in Nova Scotia because the province’s 2015 emissions are already 30% below 2005 levels, which is the federal target. Which leaves one wondering if the province will establish a cap that will be so high that there is no incentive to reduce emissions further – leading to a carbon price of zero or near-zero.

Of course, that would not be consistent with the federal plan which suggests provinces should mirror the federal carbon price levels, which start at $10 per tonne in 2018 and increase $10 each year. Ideally an emissions baseline should establish Nova Scotia’s declining emissions trajectory and then design a cap that reduces emissions even further, and creates an incentive for polluters to trade allowances. We still do not know what this baseline will be, and if Nova Scotia’s cap and trade system will have any environmental integrity.

In province’s like Ontario and Quebec this type of legislation is integrated into a forward-looking climate action plan, outlining how the cap and trade system is integrated into climate targets and other climate policy ambitions. Nova Scotia’s legislation gives the bare minimum legal architecture and does not really provide much guidance on what emission reductions can be expected, if any.

Emission Allowance Auctions and Green Fund

One interesting aspect of the legislation is that it gives the Minister the ability to either freely allocate or auction allowances. In the case of allowance auction the legislation establishes a Green Fund that is intended to be spent on climate policy related activities.

This is an interesting development because the earlier discussion on the system suggested the province would give the allowances away for free. Free allocations would provide a big subsidy to polluters and misses out on the opportunity to raise revenues that could support programs related to public transit, energy efficiency, climate adaptation, poverty reduction etc.

It is possible that the province might still opt to freely allocate most emissions and the fund is only reserved for compliance fees. However, it would be quite embarrassing to have a Green Fund with almost no money in it. Especially while other provinces are going to be doing something with this money – creating mission-oriented organizations that promote the energy transition and offer important services to citizens.

The actual administration of the Green Fund could however be improved. The legislation discusses appointing a “Green Fund Manager” and the cabinet is given lots of powers to determine how that money is spent. Other jurisdictions have set up a more thorough evaluation procedure. In Quebec, they have appointed a separate management board. If Nova Scotia is going to have a Green Fund, there should be some assurance these monies are used effectively.

The takeaway is that Nova Scotia needs to have a fuller discussion on the decision to freely allocate or auction, and what to do with the resulting revenue. This legislation seems to open the door to that discussion.

Nova Scotia is Going It Alone, but it might join up?

The legislation has language in it that says Nova Scotia system can link up with other jurisdictions. However, it is not the province’s intention to link up at this point.

It seems odd that the province would not link with other jurisdictions. Why would Nova Scotia want to take on all the administrative burden itself? Even with the potential to hold some emission allowances back in a “strategic reserve fund”, a few corporate decisions on whether to enter or exit, or change production lines, could dramatically increase or decrease the provincial carbon price. This potential volatility should be of concern to businesses in Nova Scotia.

The reason might be that the government thinks it can have a significantly lower carbon price in the short term and avoid any associated political costs. However, this decision could have long term consequences, and other jurisdictions might not want to link up with a Nova Scotia system with little environmental integrity.

Nova Scotia’s Case

Nova Scotia is an interesting case. It has already reduced emissions significantly – partly due to the decline of industries such as pulp and paper and partly because of progressive climate policies like electricity emission caps, a best practice energy efficiency program, and aggressive renewable energy targets. It will reduce emissions even more after it links up with Newfoundland’s hydroelectric system.

The cap and trade program will be an illustration of if the province intends to just stall, or if it will increase its momentum towards a low-carbon transition. The province now has the technical and organizational capabilities to reduce emissions even further. Will the province use its leadership in environmental protection to reinvigorate its economy, which is the vision supported by all three parties in the legislature. Or will short-term political calculations lead to the province stalling and seeing other jurisdictions shoot past it in exploiting the environmental and economic benefits of low-carbon transitions?