Intensity-based climate change policies in Canada

To reduce greenhouse gas emissions from large industries the Canadian government proposed using a tradable emissions performance standard approach, where the intensity of emissions, rather than the absolute level, is regulated. Unlike a cap and trade system, an emissions performance standard does not guarantee a certain overall level of emission reductions, a fact that has led to significant criticism. However, because of the dynamics of performance standards, they may reduce concerns over reductions in international competitiveness in cases where a country has climate policies that are more aggressive than those of some of its trade partners. Likewise, a performance standard may mesh more efficiently with existing taxes and therefore cause less overall economic impact than an absolute cap and trade system. This paper considers the theoretical arguments for and against such a performance standard system and evaluates it in comparison to a cap and trade system using a dynamic general equilibrium model applied to Canada.