The Ground Rules for Effective OBAs: Principles for Addressing Carbon-Pricing Competitiveness Concerns through the Use of Output-Based Allocations

27 Pages Posted: 6 Jul 2017 Last revised: 10 Dec 2017

See all articles by Sarah Dobson

Sarah Dobson

University of Calgary - The School of Public Policy

G. Kent Fellows

University of Calgary - The School of Public Policy

Trevor Tombe

University of Calgary

Jennifer Winter

University of Calgary - The School of Public Policy; University of Calgary - Dept of Economics

Date Written: June 29, 2017

Abstract

The federal government’s decision to impose a minimum national price on carbon emissions has the potential to make certain businesses in the country less competitive. Specifically, there are emissions-intensive and trade-exposed industries across Canada that compete against producers from other jurisdictions where governments do not put a price on carbon.

For these industries, the obligation to pay a carbon price creates a competitive disadvantage. Specifically, these businesses will face higher costs and may encounter a loss of market share to international competitors from jurisdictions that lack the same emission-control measures. That not only hurts Canadian businesses, it could also negate any emissions reductions that carbon pricing in Canada achieves on a global scale.

The federal government has opted to protect such emissions-intensive, trade- exposed businesses using subsidies called output-based allocations (OBAs). This is the same system that Alberta is introducing through its forthcoming Carbon Competiveness Regulation. It also shares certain similarities with cap-and-trade programs, such as those in Ontario and Quebec, which provide free allocations of emissions permits to certain firms.

OBAs are a desirable complementary policy to a carbon price as they maintain the incentive for producers to invest in production methods and facilities that are less emissions intensive. So while producers are still, nevertheless, subsidized to offset the tax burden of the carbon price, they will, under an OBA system, see greater benefits the more they work to reduce their emissions intensity. Still, to function most effectively and most efficiently, an OBA policy should follow certain key principles.

The most critical principle in the design of an OBA policy is ensuring that OBAs are allocated to facilities independent of their individual emission levels, and allocated equally (on a per unit basis) to facilities producing the same product. One of the major flaws with Alberta’s current Specified Gas Emitters Regulation (SGER) is that it does not follow this principle. Rather, subsidies under SGER are allocated based on a facility’s historical emissions intensity. As a result, more generous subsidies are given to those facilities that are “dirtier” (that is, those with higher emissions intensities) than to “cleaner” facilities with lower emission intensities.

Secondly, it is important for a well-designed OBA policy to have transparent costs. Including a clear accounting of OBAs in government finance reports will ensure the public is fully aware of the revenues being directed to the subsidies.

Thirdly, OBAs for different facilities are best allocated using a classification system based on the product being produced, and not using more conventional industry-classification codes. Commonly used conventional industry classifications—for example, conventional oil and natural gas extraction—group together facilities that produce distinct products and compete in different markets. Consequently, this classification will not recognize the various levels of emissions intensity and trade exposure within an industry. This will result in some facilities receiving more OBAs than they should and others receiving less than they should.

Keywords: OBA, carbon pricing, output-based allocations, Specified Gas Emitters Regulation (SGER), Carbon Competiveness Regulation, emissions

Suggested Citation

Dobson, Sarah and Fellows, G. Kent and Tombe, Trevor and Winter, Jennifer, The Ground Rules for Effective OBAs: Principles for Addressing Carbon-Pricing Competitiveness Concerns through the Use of Output-Based Allocations (June 29, 2017). SPP Research Paper No. Volume 10:17 June 2017. Available at SSRN: https://ssrn.com/abstract=2997181

Sarah Dobson (Contact Author)

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada

G. Kent Fellows

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada

Trevor Tombe

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

Jennifer Winter

University of Calgary - The School of Public Policy ( email )

Calgary, Alberta
Canada

HOME PAGE: http://www.policyschool.ca

University of Calgary - Dept of Economics ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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