How will you cope under "cap and trade"?

This week's news that Ontario and Quebec will set up a joint "cap and trade" scheme to control carbon emissions is interesting, although lacking in such important information as details. I would have preferred the "carbon tax" option that BC has chosen, as it would be administratively simpler to run, but businesses here will now have to get ready for it. I foresee that we accountants, but more importantly the engineers, will need to really work in order to ensure that this works the way it is intended to.

Here's why:

• The businesses that will be subject to the scheme will have to self-report the amount of carbon emissions that they generate. Whether this is based on inputs or outputs, it means some rather detailed manufacturing reporting, and that's where the engineers will need to set up the appropriate systems.
• Businesses will be issued permits assigning given carbon allowances for what they are allowed to consume. Depending on the scheme's design, some permits may be given out for free, while others may be issued upon payment of a given price per tonne of carbon emissions involved. It you emit less carbon than you are permitted, you can sell the excess allowances on the open market. If you emit more carbon than you have allowances for, you will be assessed a fine, unless you purchase other businesses' excess allowances. That is where the accountants come in, to keep track of the company's exposure and ensure that everything is being properly reported.
• Over time, the amount of carbon allowances will be proportionately reduced, in order to compel reductions in the generation of emissions.

There are accordingly several risks and opportunities:

•  Who will qualify for free allowances?
• Will the scheme cover all emitters, or will certain exemptions or minimum thresholds apply?
• How efficiently will the open market for excess allowances work?
• As emissions caps are being progressively reduced, will it be cheaper to invest in new equipment in order to meet the targets, or will it be cheaper to pay the fines?
• Would it be worth your while to invest in new equipment now, if the market price for your excess allowances will generate a positive net present value?
• Similar concerns arise about the financial viability of investing in carbon offset projects and other methods of securing credits.

Quebec's scheme is interesting to look at, but Ontario has refused to indicate whether theirs will function the same. Stay tuned in six months' time.