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Tax rise won't solve Kyoto woes

Okay, Ottawa, we're waiting for it. Just tell us the truth about greenhouse gases and taxes. It's hard to see how less of the former can be accomplished without more of the latter.

On Feb. 16, the Kyoto Protocol on climate change legally comes into force. Canada has absolutely no hope of meeting its greenhouse gas reduction targets, not now, not next month or in 10 years. That's because Canada was a boy scout when it joined Kyoto in 1997. It agreed to the most aggressive reduction target of any signatory -- 6 per cent below the 1990 emissions level. Thanks to strong economic growth, the love affair with gas-gobbling SUVs, huge expansions of the Alberta oil sands operations, Canada's greenhouse gas compliance gap was 171 million tonnes a year in 2002. Aldyen Donnelly of Vancouver's Greenhouse Emissions Management Consortium says the gap, based on fuel use data, could rise to 220 million tonnes by the time the first Kyoto reporting period ends in 2012.

Forget Rick Mercer's One Tonne Challenge. Every car and every furnace in the country could be turned off for a month a year and the target would still be fantasy. The target becomes all the more unachievable when you consider the government suddenly wants to remove a lot of the Kyoto burden from the "large final emitters" -- the 700 or so big energy-burning companies such as electricity producers and oil refiners. If they cut back less, everyone else -- households, businesses -- will have to cut back more.

Any attempt to reduce the compliance gap will be stupidly expensive. One option is buying so-called Certified Emission Reduction credits from United Nations-approved projects in developing countries. For example, Canada could pay for a Central American country to put a chunk of rain forest aside forever, or pay for a system that captures methane, a particularly nasty greenhouse gas, from landfill sites. Nice idea, especially if you like making work for UN bureaucrats. The problem is that buying enough credits to offset the compliance gap would require shipping billions of dollars out of the country, with zero economic benefit to Canada.

The other option is to slap taxes on the consumption of energy -- electricity, natural gas, gasoline, diesel, heating oil, even barbecue propane if necessary. No one wants to pay higher taxes, but the government could at least argue that Her Majesty's levies would slosh around Canada instead of taking a one-way trip to Costa Rica or Brazil. To make the energy consumption tax more palatable, the government could use the proceeds to finance a payroll tax reduction or build a monster fund to finance the construction of energy-efficient houses (In 2000, Canada's Climate Change Fund, used to retrofit old homes, contained a mere $78-million and has been next to useless.)

The tax idea has been floating around for a few months and has been notoriously hard to pin down. Last week, The Globe and Mail reported the existence of a draft "secret" document, possibly written by a federal bureaucrat for cabinet consumption, that suggested "more consideration of regulation and taxation to drive behavioural change" in meeting Kyoto's targets.

Was this a leak? If it was, you could expect a tax measure to appear in some Kyoto-related proposal before Feb. 16. But the signals from the government departments working on the Kyoto file suggest the document was not a leak, in the sense that cabinet has not yet discussed a Kyoto tax measure and is unlikely to do so next month. Nonetheless, you can bet that some sort of tax-induced behavioural change will have to come under formal consideration. Canada's Kyoto compliance gap is just too large to avoid it.

If Ottawa goes for an energy consumption tax, it will point to the relatively low per-capita energy consumption in Europe, where taxes have made energy prices outrageously high by North American standards (in Britain, gasoline goes for the equivalent of $1 a litre). Doubling gasoline or electricity prices would certainly reduce demand, taking greenhouse gas emissions down with it. But it would also be political suicide and hurt the poor and middle class much more than the rich. A small gasoline tax increase, say a dime a litre, would do almost nothing to reduce demand while painting the government as a blatant tax grabber.

Here's another problem with the energy tax scenario: Energy exports could not be taxed, meaning American buyers of Canadian natural gas and other hydrocarbons would be paying less that Canadians. In this scenario, energy imports would cost less than exports. Guess where the new electricity generation plants would be built?

Energy taxes seem inevitable in Canada's post-Kyoto world. They are also doomed to backfire.

ereguly@globeandmail.ca

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