Issues

Search

FINDING SUSTAINABLE PATHWAYS

OUR PROCESS

Our process helps Canada achieve sustainable development solutions that integrate environmental and economic considerations to ensure the lasting prosperity and well-being of our nation.

RESEARCH

We rigorously research and conduct high quality analysis on issues of sustainable development. Our thinking is original and thought provoking.

CONVENE

We convene opinion leaders and experts from across Canada around our table to share their knowledge and diverse perspectives. We stimulate debate and integrate polarities. We create a context for possibilities to emerge.

ADVISE

We generate ideas and provide realistic solutions to advise governments, Parliament and Canadians. We proceed with resolve and optimism to bring Canada’s economy and environment closer together.

Home / Parallel Paths – 7.1 Glossary of Key Terms

Parallel Paths – 7.1 Glossary of Key Terms

TERMS DEFINITION
ABATEMENT Abatement is actual reduction in greenhouse gas emissions.
ADDITIONALITY When funds are used to pay for technologies or actions that reduce emissions, the resulting emissions reductions are “additional” only if the reductions would not have occurred in the absence of those funds and if the reduction will not be reversed after the payment. Emissions reductions from offsets, for example, are not always additional.
ALLOCATION Allocation refers to the method by which emission permits are distributed in a cap-and-trade system. The emission permits themselves are also sometimes known as “allocations.” Typically, permits can be allocated freely or auctioned by government.
ALIGNMENT In this report, we use alignment to represent an approach to harmonizing Canadian carbon prices with U.S. carbon prices through Canadian policy design choices (such as cost containment).
AUCTION Auctions are one way to distribute permits in a cap-and-trade system; they require firms to bid on all permits required to meet the cap.
BORDER CARBON ADJUSTMENTS (BCAs) Border Carbon Adjustments (BCAs) are an approach to addressing competitiveness issues through: 1) requiring imported goods to pay for un-priced carbon emissions costs; and/or 2) relieving exports of their expected emissions costs. Their aim is to “level the playing field” for firms either in domestic or international markets. In this report, our analysis focuses primarily on U.S. import tariffs, represented in the Waxman-Markey bill as International Allowance Reserves, a form of BCA.
CAP-AND-TRADE Also known as a “tradable allowance system,” a cap-and-trade policy involves setting the annual level of emissions by issuing emission permits (allowances). If individual emitters produce more emissions than they have permits, they can purchase additional permits. Governments can fix the level of emissions by choosing the number of permits to issue, but the price of permits will be set by the market, and is thus uncertain.
COMPETITIVENESS Competitiveness issues are possible adverse implications of emissions pricing that result if Canada implements an emissions pricing policy that is more stringent than those of its trading partners. Canadian firms would thus have additional costs due to emissions that place them at a disadvantage relative to international competitors.
COMPLIANCE Compliance refers to how firms meet the cap set by policy on their emissions. Compliance could be achieved through reducing emissions (or abatement), or through purchasing additional permits on the carbon market, on the international permit market, or from a government safety valve.
CONTINGENT PRICING In this report, a contingent pricing policy is a policy in which the Canadian carbon price is conditional on the U.S. carbon price, but is not aligned identically. This policy uses a safety valve to limit the difference in carbon prices between Canada and the U.S.
COST CONTAINMENT Cost containment refers to policy design mechanisms used to reduce the carbon price in a cap-andtrade system. Examples of cost containment include a safety valve or price ceiling, which sets a maximum carbon price, or increased access to offsets, which can reduce the costs of compliance and reduce the market price of carbon in the trading system.
COVERAGE A carbon pricing policy can be applied to different greenhouse gas emissions, different sectors of the economy, and different emissions sources. This is known as the coverage of the emissions pricing policy.
DISTRIBUTIONAL EFFECTS Distributional effects refer to the extent to which a policy design will result in disproportionate impacts on different regions, sectors, or households; the criterion assesses issues of equity.
ECONOMIC EFFICIENCY Economic efficiency refers to the extent to which a policy minimizes total costs, including the cost of compliance with the policy as well as transaction costs. Economic efficiency is also increased if a policy addresses other existing economic distortions or market failures.
ENVIRONMENTAL EFFECTIVENESS Environmental effectiveness refers to the extent to which a policy design accomplishes its objective in reducing carbon emissions and lowering atmospheric concentrations of greenhouse gas emissions.
LEAKAGE Leakage refers to the relocation of greenhouse-gas-emitting firms or activities to other jurisdictions to avoid the costs of an emissions pricing policy. In this case, the policy has not reduced the total number of emissions, merely caused their point of origin to change. Since climate change is a global issue and the source of emissions does change their impact, leakage reduces the effectiveness of the policy.
LINKAGE Linkage involves allowing the trade of emissions permits between two or more cap-and-trade systems. For example, a linkage exists between systems A and B, if firms in jurisdiction A can receive credit for emissions permits allocated in jurisdiction B. Linkages can be one or two-way depending on whether both jurisdictions accept the others’ credits as valid for achieving compliance.
LOW-CARBON FUEL STANDARD (LCFS) A low-carbon fuel standard is a regulation that mandates a decreasing carbon content in the total pool of transportation fuels.
MARGINAL ABATEMENT COST Emissions reductions usually involve some cost, often the cost of investing in new technologies or processes. The cost of reducing emissions is known as the abatement cost. The marginal abatement cost is an economic concept, which refers to the cost of one extra unit of reductions (that is, the cost of a marginal increase in abatement).
MARGINAL ABATEMENT COST (MAC) CURVE A marginal abatement cost curve shows the incremental costs of different levels of abatement associated with a range of abatement levels. It can be used to highlight how different carbon prices will drive different levels of abatement.
OFFSETS Offsets are emissions reductions that are “created” outside any regulated system, and sold to regulated emitters. Regulated emitters can use offsets, instead of permits, to comply with the carbon-pricing policy. Because emissions reductions from changes in forestry, agriculture, or landfill gas practices are difficult to include under a cap-and-trade system directly, including these reductions as offsets can allow firms to take advantage of potentially lower cost reductions in these areas, reducing the overall costs of the policy.
OUTPUT-BASED ALLOCATIONS Output-based allocations refer to permits allocated for free, for which the firm allocation is updated based on a current or lagged metric of production such as tonnes of output or value of production. The per-unit allocation is a benchmark based on a sector-wide metric such as an average emissions intensity, a percentage of historical average emissions intensity, or average value added.
PRICE CEILING A price ceiling is a maximum carbon price imposed in a cap-and-trade system. It is a form of costcontainment, and can be implemented using a safety valve mechanism.
PRICE COLLAR In this report, a price collar is the maximum carbon price differential allowed between carbon prices in Canada and the U.S. under a contingent pricing policy.
REFERENCE CASE AND POLICY SCENARIO The business-as-usual — or reference case — scenario is the forecast of emissions in the absence of additional policies. The policy scenario is the forecast of emissions when a given policy or suite of policies is implemented. The difference between the emissions forecasts for the two scenarios equals the emissions reductions expected to be induced by the policies included in the policy scenario.
REVENUE RECYCLING Revenue recycling is an element of policy design determining how government revenue (accrued through either a carbon tax or the auctioning of permits in a cap-and-trade system) will be allocated. Possible approaches to revenue recycling include: reducing existing taxes (for example, corporate or income taxes), providing support for competitiveness issues, funding support for technological deployment and research and development, or addressing adverse distributional effects.
SAFETY VALVE A safety valve is a cap-and-trade design mechanism to set a maximum permit price. By selling additional permits directly at this price, government can limit the magnitude of the market price of carbon.
TECHNOLOGY FUND When govenment revenue from a safety valve is reinvested in low-carbon technology research, development, and deployment, it is known as a technology fund.