7.2.1 Command and Control Policy Mechanisms

Carbon pricing is often posed as an alternative to so-called ‘command and control’ regulation. Such regulations (such as emissions standards) are generally considered environmentally effective, but not economically efficient if applied broadly. This is because they impose the same broad cost on all affected parties, while the costs of actual emissions abatement vary. Carbon pricing, which allows emitters to balance abatement costs and compliance costs, is thus preferred as the more efficient economy-wide approach to reducing emissions. However, where carbon pricing cannot include all emissions sources, there can be a role for command and control regulations to complement the carbon pricing policy.

Complementary regulations that extend coverage should align with the carbon price. That is, the regulations should be designed to achieve a similar level of abatement effort as if the pricing policy was covering the sector. If regulations are more stringent than the carbon price, or vice versa, the efficiencies of a unified carbon pricing policy are compromised, leading to greater overall costs.

7.2.2 Evaluating Potential Complementary Regulations

Complementary regulations, where they overcome barriers to the success of carbon pricing policy, can improve both the environmental effectiveness and the economic efficiency of carbon pricing. Regulations to extend coverage are a more administratively straightforward option than other approaches, such as offsets. Most of the complementary regulations explored in our research already have precedents in Canada. Regulations on the capture of landfill gas exist in several provinces, as do regulations concerning the handling of upstream emissions in the oil and gas sector. The existing precedents for regulations in these areas suggest that such approaches are politically acceptable.

Economic modelling demonstrates that complementary regulations can extend coverage and improve the effectiveness of carbon pricing policy. In Section 4.1, several emissions sources were identified that would be challenging to include in a carbon pricing policy. Complementary regulations are the most appropriate means for extending coverage of carbon pricing policy to these emissions, unifying the price over emissions. Below, some possible complementary regulations are identified. Given the focus of this project on carbon pricing, the research into these complementary regulations should be regarded as illustrative. Regulations include:

• High upstream oil and gas venting, flaring, and pipeline leaks: Regulations would require the phasing out of venting and flaring (other than for safety reasons), with fines for noncompliance. Similar regulations could be used for pipeline leaks, with perhaps lower stringency given the technical impossibility of completely eliminating pipeline leaks. Modelling for the NRTEE estimated that a program of regulation aligned with fast and deep pricing could cut emissions from these sources source by around 42 Mt CO₂e per year.
• Landfill gas emissions: Most abatement opportunities from the capture of landfill gas cost around $15-$25 / tonne CO₂e. Regulation could require the capture of landfill gas from all landfills (above a minimum size threshold). Modelling for the NRTEE estimated that 25-28 Mt CO₂e per year could be reduced this way.
• Agricultural emissions: Consultants for the NRTEE estimated that reductions of between 8 Mt in 2020 and 13 Mt in 2050 are available from changes to agricultural practices at marginal abatement costs similar to fast and deep carbon prices. Regulations relating to agricultural practises could be established to achieve these reductions, though this may be costly both to implement and enforce. Recommending specific regulations for the agricultural sector is beyond the scope of NRTEE’s carbon pricing analysis.

Similarly, Section 7.1 suggested performance-based standards could be one element of technology policy that could improve overall cost-effectiveness of policy. Two possible complementary technology regulations were identified and modelled, as below. Again, these policies should be considered illustrative. Regulations include:

• Standards to overcome principal-agent failures in the building sector: A widely acknowledged market failure is the disconnect between those who determine the day to day use of energy in building structures, and those who own them. The owners of buildings cannot necessarily recover investments in energy efficiency, as they are reaped by renters or leaseholders who determine the energy load and pay the energy bills. Renters or leaseholders, on the other hand, have no incentive to make significant energy efficiency investments, as they do not usually have secure tenure to their residence. A LEED (Leadership in Energy and Environmental Design) standard or equivalent could be used as a base level for all new commercial buildings, and at least a 50% increase in shell efficiency for all residential buildings compared to current and planned codes.⁸⁸

• Vehicle emission standards in the transportation sector: Transportation contributes a large share to Canada’s emissions, and targets cannot be achieved without the transformation of vehicle technology. However, modelling suggests vehicles are slow to respond to carbon pricing. This inelastic response could be due to information market problems; it is challenging for consumers to determine savings from choosing more efficient vehicles. The complexity of gas prices and fuel efficiencies of different vehicles makes economic vehicle purchasing decisions more challenging. Regulations could involve the national adoption of California’s GHG emissions intensity policy out to 2020, gradually increasing in stringency to a virtually zero GHG intensity policy by 2040. These regulations imply either complete electrification of the transport fleet or switching to an alternative liquid or gas motive fuel; biofuel and hydrogen are two candidates. The policy delivers 11 Mt CO₂e in 2015, gradually increasing to 68 Mt
  CO₂e by 2050.

In the modelling forecasts, these policies enabled the carbon price to be reduced by 30%, from $300 / tonne CO₂e to $210 / tonne CO₂e to reach the same target.⁸⁹ Figure 16, below, illustrates the effect of complementary regulations by sector in meeting the Government of Canada’s GHG targets.

These NRTEE modelling results suggest a clear rationale exists for implementing complementary regulations and targeted technology regulations. They can improve the overall economic efficiency and environmental effectiveness of a broader carbon pricing policy.

7.2.3 Summary and Key Conclusion for Complementary Regulations

Complementary regulations should be developed on the basis of a clear economic rationale. This will typically mean that their use will be limited to areas where regulations extend coverage beyond the scope of the carbon pricing policy or address a market failure. They should also be designed so as to align with the unified carbon price signal.

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