Abatement

Efforts to reduce greenhouse gas emissions are known as carbon abatement.

Allocation

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.

Border adjustments

An approach to addressing competitiveness issues through either 1) requiring imported goods to pay for their un-priced emissions costs, and/ or 2) relieving exports of their expected emissions costs. The goal of these approaches is to level the playing field for Canadian firms in either the domestic or international market so as to not place Canadian firms at a competitiveness disadvantage.

Cap-and-trade system

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 (providing quantity certainty) by choosing the number of permits to issue, but the price of permits will be set by the market, and is thus uncertain.

Carbon tax

A carbon tax is a policy instrument that sets a per-unit charge on emissions. Typically the system involves a tax on fuels that emit carbon dioxide when burned and on other greenhouse gas emissions. A schedule for future tax rates would be established, sending a long-range price signal to the economy. The tax thus provides price certainty but leaves the annual level of emissions reductions uncertain.

Competitiveness

Competitiveness issues are possible adverse implications of emissions pricing that result if Canada implements an emissions pricing policy but its trading partners do not. Canadian firms thus have additional costs due to emissions that place them at a disadvantage relative to international competitors.

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 impacts

A criterion evaluating the extent to which a policy design will result in disproportionate impacts on different regions, sectors, or households; the criterion assesses issues of equity.

Downstream

Carbon fuels typically change hands between producers, processors and refiners, distributors, and final consumers who burn them. The final consumer, where fuels are combusted, is known as downstream in the fuel chain. See also UPSTREAM and POINT OF REGULATION

Economic efficiency

A criterion evaluating 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.

Electrification

The shift of the energy system toward an increased use of electricity-using technology instead of fossil-fuel combusting technology. This shift on the demand side is enabled by a growth in electricity generation on the supply side to provide the required electricity.

Environmental effectiveness

A criterion evaluating the extent to which a policy design accomplishes its objective in reducing carbon emissions and lowering atmospheric concentrations of greenhouse gas emissions.

Fuel-switching

One kind of action that could reduce emissions. For example, in response to a carbon pricing policy, a firm could shift from coal-burning technology to natural gas burning or electrical technology.

Leakage

The relocation of greenhouse-gas-emitting firms 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

Linkages between emissions pricing systems (usually cap-and-trade systems) are explicit recognition of emissions reductions in one jurisdiction by another jurisdiction. 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 other’s credits as valid reductions.

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. For example, Company A wants to reduce its emission to 500 tonnes a year. It invests in energy efficiency technologies, and reduces its emissions to 600 tonnes a year, but finds that further reductions would be very expensive. Instead of reducing another 100 tonnes itself, Company A pays for emissions reductions in India, where there are more low-cost emission-reduction opportunities.

Point of regulation

Carbon emissions arise predominantly from the burning of fossil fuels. Carbon-based fuels like oil pass from the oil well to the refinery, to the distributor, and finally to the consumer. Carbon pricing can be applied anywhere along this fuel chain, and the point at which it is applied is the point of regulation. The point of regulation is usually described as UPSTREAM or DOWNSTREAM.

Price ceiling

In a carbon-trading system, the prices of emissions permits are determined by the market. If there are not enough permits, prices will rise, creating a strong incentive to invest in emissions reductions. However, if prices rise too fast and too high, the system may produce unnecessary and damaging shocks to the economy. A price ceiling, or safety valve, sets a maximum possible price. When prices reach the price ceiling, the carbon trading system exhibits similar features to price-setting approaches.

Price floor

Minimum price for CO₂e permits. No permit below this price would be sold in the market or by the regulator.

Revenue recycling

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, providing support for competitiveness issues, funding support for technological deployment and research and development, or addressing adverse distributional effects.

Upstream

Carbon fuels typically change hands between producers, processors and refiners, distributors, and final consumers who burn them. The producer, where fuels first enter the economy, is known as upstream in the fuel chain.