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ENVIRONMENTAL POLICY

CANADAS CAP & TRADE SYSTEM

TABLE OF CONTENTS
I. INTRODUCTION..................................................3
II. THESIS STATEMENT............................................3
III. RATIONALE AND SUPPORTING EVIDENCE.............4
IV. DISCUSSION OF NORMATIVE APPROACH...............5
V. DISCUSSION OF POSITIVE APPROACH....................6
VI. ECONOMIC ANALYSIS........................................9
VII. IMPACT ON CANADAIN BUSINESSES..................12
VIII. CONCLUSION AND RECOMMENDATIONS...........14
REFERENCES.......................................................16

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I. INTRODUCTION
For this next session of parliament; as Minister for Environment, my cabinet proposes
developing an environmental policy and legislation on a national cap and trade system which
involves a great deal of research, consultation, analysis and time depending on the
complexity of the issues and the impact it has on the ministrys stakeholders.
The federal government should assume more of its constitutional jurisdiction over the
environment and create a more integrated federal-provincial framework to deal with
environmental issues in an increasingly globalized world. Because the environment is such a
broad and diffuse issue area, many actors are involved in the policy process with varying
interests. Industry and the private sector provide employment and seek to maximize profits,
while environmental NGOs privilege environmental protection over economic growth
(Cederwall & Grebovic, 2011).
However, even with provincial opposition there are prospects for implementation.
Legally, it is possible for two regimes with overlapping rules to function, albeit with less
efficiency than one integrated system. Whether the two levels of government choose to
cooperate or simply create two overlapping and potentially redundant bureaucracies will
have large implications for the transaction costs and resources that go into meeting
Canadas GHG targets (Allan & Baylis, 2006).
After substantive economic analysis, a recommendation from my cabinet has been
identified in preparation for the next session of parliament, along with implementation, cost
options, and timelines - to introduce a Canadian cap and trade emissions system, spurring
reengagement with individual provinces to come on board and combat climate change.

II. THESIS STATEMENT


Canada is currently facing some major environmental concerns like global climate
change which is creating a harmful environmental as well as political impact for Canada;
therefore the federal government must focus on finding actionable and concrete solutions in
properly designing a cap and trade system to control carbon emissions country-wide.

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III. RATIONALE AND SUPPORTING EVIDENCE


Canada has a choice: show real leadership with a cap and trade system that puts an
adequate price on emissions and distributes carbon value fairly and rationally. Time is short
and we need to get it right now, not be forced back to the drawing board later. Simplicity is a
key feature of a strong, fair cap and trade system. Auctioning 100 percent of allowances and
avoiding or minimizing offsets, intensity targets and the technology fund mechanism will
increase the strength and clarity of the carbon price signal, speed the systems
implementation and help ensure that it serves the public interest, not narrow private
interests (Bramley, 2009).
The need to balance the environment and the economy is dangerously misleading:
the projected human, ecological and financial costs of climate change far outweigh the costs
of curbing it. The world desperately needs leaders on climate change, and Canada is well
equipped to be one. History will surely judge us harshly if we fail. Canada's wide cap and
trade system puts a mandatory cap on some portion of national emissions, and allows firms
to buy and sell rights to emit within the cap. (The rights to emit may be called allowances,
permits or credits.) This has the effect of putting a price on emissions because firms
have to buy extra emission rights if they want to emit more. The market price of emission
rights is commonly referred to as the carbon price (Bramley, 2009).
The carbon price will become a factor in all decisions affecting emissions taken by
firms and households. The higher the price, the stronger the incentive to switch from highemission options to low-emission options. The fundamental question that should be asked of
any cap and trade system: is the carbon price likely to be high enough to adequately reduce
Canadas emissions? It may seem odd to ask what the carbon price will be, rather than
simply what level the emissions cap will be set at (Bramley, 2009).
However, cap and trade systems commonly include mechanisms that allow real, new
reductions in domestic emissions to be replaced by reductions whose reality is dubious,
reductions that already happened or may only happen in the future, or foreign reductions.
The expected carbon price is therefore a surer measure of effectiveness than the level of the
cap, particularly when we are concerned about cutting Canadas own emissions (Bramley,
2009).

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IV. DISCUSSION OF NORMATIVE APPROACH


From a normative approach, the cap and trade system defines the fundamental market
failure to be addressed, namely that if carbon emissions are left unregulated can lead to epic
proportions of global warming and especially the failure to eliminate greenhouse gas
emissions will devastate future generations whose prospects grow dimmer with each passing
day.
Carbon emissions are currently a negative externality because the costs of the damage
caused by these emissions are not figured into the price of polluting. Allowances must be
distributed in some way to the various entities in order to establish the number of credits on
the market and to determine the starting point from which carbon emission reductions will
occur (Kitze, 2011).
Cap and trade is a tested and proven system for reducing pollution. But for maximum
effectiveness, efficiency, and fairness for consumers, it requires five basic characteristics
(Durning, Fahey, Place, & Williams-Derry, 2009 ):
1.) Comprehensive in scope - Excluding any major sector would make the cap vastly
less effective and put an undue burden on the sources that are included.
2.) Point of regulation is mainly upstream - The system operates where fossil fuels
enter the economy, meaning that less than one-tenth of one percent of businesses
has any direct interaction with the system.
3.) Permits are allocated by auction - To prevent unfair windfall profits for big energy
companies at the expense of consumers, pollution permits should be sold at public
auctions, not given away for free. Proceeds can be invested in communities and
families. Auctioning prevents windfall profits for energy companies, allows the
proceeds of the auctions to serve the public interest, and prevents market
manipulation and gaming.
4.) Its use of offsets is limited, well-regulated, and shrinks over time - To reduce the
costs of meeting the cap and to encourage emissions reductions outside of the cap,
polluters may pay non-regulated emitters to cut their greenhouse gases, perhaps by
capturing methane gas from feedlots or by saving forests from logging. Strict
oversight is necessary to ensure these reductions are meaningful in reaching our
goals.
5.) Uses the auction revenues to protect families - Revenue from permits should go,
first and foremost, to ease the transition to a new energy economy. Revenues can
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also be invested in community benefits like job training, energy efficiency, and
renewable energy production, putting the nation at a competitive advantage in the
growing clean-energy economy.

V. DISCUSSION OF POSITIVE APPROACH


From a positive approach, the cap and trade system introduced by policy-makers will
explain why this government seeks to understand how current policies have come about and
in doing so will try to predict future directions in environmental policies. The policies chosen
are in effect to reduce the harmful effects of excessive amounts of greenhouse gas (GHG)
emissions into the environment.
Even experts agree that a policy that puts a price on emissions broadly across the
economy must be at the heart of any governments GHG reduction plan; this carbon
pricing policy of cap and trade system if introduced is one of the most effective policy that
will cover at least 80% of Canadas emissions and minimizes loopholes, giveaways, and
special treatment (The Pembina Institute, 2011).
There are major differences between the ways that markets allocate resources using
prices which reflect trade-offs based on the knowledge and preferences of millions of
individuals versus government which allocates resources using some form of command and
control based on the more limited knowledge and preferences of a few voters, elected
officials, or appointed bureaucrats (Bogard, 2011).
Governments must intervene to correct market failures and maximize social welfare; it
all begins with a simple question: How are collective decisions made? The answer, of course,
is that the decisions are made by policy-makers voters, bureaucrats (lobby groups) and
ultimately by your elected representatives, the politicians (Lemieux, 2004).
Let us start by looking at a brief analysis of the forces that control government policy;
this analysis is based on incentive effects. (Brander, 2006). Incentives facing policy-makers
are created by two major external forces: Voters and lobbying by special interest groups;
both of these external forces affect the self-interest of politicians (Brander, 2006).It is
obvious that voting influences public policy. All citizens of modern democracies would argue
very forcefully that voting should influence public policy, and that voting is the operational
foundation of democracy (Brander, 2006).

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So the first major external influences on policy-makers are voters. In our democracies,
voters do not decide most issues directly (Lemieux, 2004). In some instances, they vote for
representatives who reach decisions in parliamentary assemblies or committees (Lemieux,
2004). In other instances, they elect representatives who hire bureaucrats to make decisions
(Lemieux, 2004). The complexity of the system and the incentives of its policy-makers do not
necessarily make collective choices more representatives of the citizens preferences
(Lemieux, 2004).
Ultimately, citizens of this country will elect their representatives that best represent
their set of morals and social values. There are good reasons for this. In the first place, it
would be impractical, if not impossible, to have citizens vote directly on most policies
(Brander, 2006). Second, representatives can make use of expert opinion and presumably
make better decisions as a result, especially on technical matters (Brander, 2006). Lastly,
most citizens would be incapable of making an informed judgement without taking enormous
amounts of time and effort (Brander, 2006). Instead, we elect representatives whom we trust
to make good decisions on our behalf in accordance with general objectives that we elect
them to pursue (Brander, 2006).
The second major external influence on policy-makers is lobbying by special-interest
groups. While the influence of voting on policy is obvious and relatively uncontroversial, the
influence of interest groups is both subtle and a cause of concern (Brander, 2006). It is worth
distinguishing between two types of special interest groups: those concerned primarily with
their own economic self-interest, and those trying to promote particular moral or social
values; we will refer to these as economic interest groups and social interest groups
(Brander, 2006).
Sometimes a single interest group will undertake both kinds of activities, i.e. the
Western Climate Initiative (WCI) is one such group that is a non-profit corporation that
provides administrative and technical services to support the implementation of state and
provincial greenhouse gas emissions trading programs (Western Climate Initiative, 2007).
Basically, the WCI is a collaboration of independent jurisdictions working together to identify,
evaluate, and implement emissions trading policies to tackle climate change at a regional
level. (Western Climate Initiative, 2007).
The WCI began in February 2007 when the Governors of Arizona, California, New
Mexico, Oregon, and Washington signed an agreement directing their respective states to
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develop a regional target for reducing greenhouse gas emissions, participate in a multi-state
registry to track and manage greenhouse gas emissions in the region, and develop a marketbased program to reach the target (Western Climate Initiative, 2007).
During 2007 and 2008, the Premiers of British Columbia, Manitoba, Ontario, and
Quebec, and the Governors of Montana and Utah joined the original five states in committing
to tackle climate change at a regional level. All 11 jurisdictions collaborated in the
development of the Design for the WCI Regional Program, which was released in July 2010,
lays the groundwork for a regional cap and trade program and other strategies to meet their
regional goals.(Western Climate Initiative, 2007).
So far, we have considered the two major external sources of pressure on policymakers: voters and special-interest group lobbying; these external pressures are important
because they affect the self-interest of politicians (Brander, 2006). Obviously, politicians will
be sensitive to voting pressures, and they will be sensitive to special-interest group lobbying
(Brander, 2006). In addition, however, policy-makers are subject to direct self-interest
(Brander, 2006). Decisions they make affect their own welfare directly, leading to conflicts of
interest, and at the very least, policy-makers can be expected to take advantage of the
perquisites of their position (Brander, 2006).
A combination of the above three forces ultimately shape every governments actions;
especially for the policy-making discussion on the environment for the government to
introduce a national cap and trade system. In practice, policy-makers will not rely on single
external forces, but on combinations of effective environmental policies. The decision of how
to combine cap and trade with other policy instruments or alternatives rests on economic
efficiency, effectiveness, and fairness to that particular industry being affected by the cap
and trade system.

VI. ECONOMIC ANALYSIS


Many approaches are most commonly discussed as the foundation for a broad program
to reduce greenhouse gas (GHG) emissions, especially emissions on a cap and trade system.
This main approach has its staunch supporters and detractors. Because of the potential costsavings it provides, many economists and policy analysts recognize the strength of using a
market-based policy, such as cap and trade system, as the central element of a domestic
climate policy (Washington State Department of Ecology, 2008).

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The argument, in this case, is over what type of economic incentive is most preferred.
However, those policy analysts who are wary of the flexibility provided by economic
incentives prefer a more normative approach, which can provide the greatest certainty over
emissions and/or technologies in particular industry sectors (Washington State Department
of Ecology, 2008).
A cap and trade system, for example, will work best when (1) there is a known overall
goal (an emissions target) and (2) there exist significant cost differences among the
regulated community, so that it is important to provide an incentive for reducing emissions
while at the same time providing flexibility to the regulated community in how muchand by
what meansemissions are reduced (Washington State Department of Ecology, 2008).
Is there an economic incentive to cap and trade? It provides an incentive to industries
with flexibility over how much, and by what means, to reduce emissions (Washington State
Department of Ecology, 2008). It operates by placing a price on carbon-emitting activities,
and by using the market to transmit that price up-and-down the production-sales chain
(Washington State Department of Ecology, 2008).
The cap and trade system places a uniform price per ton of CO2 (or other GHG, if
included) (Washington State Department of Ecology, 2008). By placing the same price per
ton throughout the economy, these market-based systems (theoretically) result in efficient,
low-cost emissions reductions (Washington State Department of Ecology, 2008). This lowcost property results from the flexibility emitters have over how much they reduce emissions
and what technologies they choose to use; because the aggregate number of allowances is
fixed, however, overall environmental goals are met (Washington State Department of
Ecology, 2008).
Each emitter chooses to reduce emissions to the point where the cost of emitting
another unitthe price of an allowance that must be purchasedequals the cost of adopting
a lower-emitting technology or reducing output in order to reduce emissions further
(Washington State Department of Ecology, 2008).
After substantive economic analysis, a recommendation from my cabinet has been
identified in preparation for the next session of parliament, along with implementation, cost
options, and timelines - to introduce a Canadian cap and trade emissions system, spurring
reengagement with individual provinces to come on board and combat climate change.

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1.) Implementation - Environment Canada and Foreign Affairs and International Trade
Canada (DFAIT) are the key implementation centres. Environment Canada will manage the
cap and trade system and lead Canada in domestic and international climate change
negotiations, requiring greater personnel and resources. The cap and trade emissions system
should use the National Roundtable on the Environment and the Economys comprehensive
planning reports as a design framework to achieve measurable GHG reductions while
ensuring economic growth (Cederwall & Grebovic, 2011).
2.) Cost Options - Cap and trade will reduce Canadas GHG emissions, portray a
positive image to the world, and provide Canada with a renewed voice in global climate
negotiations, but some financial costs at least in the short-term will be incurred. These costs
will be minimal in relation to Canadas GDP. DFAIT will advance Canadas international efforts
by providing operational support in negotiations, leading in international dispute resolution
where necessary, and communicating Canadian policies to foreign governments and
interlocutors abroad (Cederwall & Grebovic, 2011).
A cap and trade system is less politically onerous to achieve than a carbon tax given
widespread lingering opposition from our own federal government and from oil producing
provinces, may continue to oppose the policy. The system should be open to future
harmonization if the U.S. develops an effective cap and trade plan, but Canada must act now
if it is to meet its climate change targets (Cederwall & Grebovic, 2011).
Regional Canada-U.S. cross-border groupings between Canadian provinces and U.S.
states, most notably the WCI and the Conference of New England Governors and Canadian
Premiers, can work in conjunction with a national cap and trade approach by continuing to
advance cooperation, best practices, and policy innovation. Cap and trade, as a marketbased approach, is more economically-beneficial than command-and-control government
regulations for individual industries that do not put a price on carbon and allow emissions
trades (Cederwall & Grebovic, 2011).
3.) Timeline - Introduction of cap and trade system legislation by June of 2012 and
implementation one year later, with escalating carbon prices being phased in gradually to
allow industries to adapt (Cederwall & Grebovic, 2011).
It appears likely that from an economic analysis, at some point in the next coming
years; federal environment policy legislation must be passed that creates a national GHG cap
and trade system. Layering federal GHG legislation on top of existing provincial trading
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programs, such as the WCI, and other regional-level policies and measures may have a
variety of implications for Canada as an early mover on cutting down its carbon emissions.
The architecture of the cap and trade system that my office is proposing for Parliament
to implement in 2012 would be fully compatible with WCI, thus facilitating future linking if
appropriate. The WCI recommendations provide the flexibility for Canada to demonstrate
best practice in the form of broad-as-practical coverage, 100% auctioning and avoidance of
offsets (or tight limits on their use). By implementing a simple and highly effective system
with these characteristics in 2012, Canada would set the standard by which other systems
proposed in North America including those of other WCI jurisdictions would be
measured. This would place Canada in a strong position to advocate for greater stringency
and environmental integrity in those systems (Bramley, 2009).

VII. IMPACT ON CANADAIN BUSINESSES


What kind of an impact will the cap and trade system have on business? Is it good or
bad for business? In the simplest terms, cap and trade is a market-based solution to an
environmental problem. The government puts a cap on pollution (greenhouse gas emissions
in this case) and allows businesses to figure out the most cost-effective way of keeping their
combined pollution under the cap. However, within this broad framework, many details need
to be worked out, and the costs and benefits to businesses will depend on how the
government tackles these finer points (Horne, 2011).
At the core of a cap and trade system is the pollution permit (often called an
allowance), which is essentially a commodity created by governments in recognition that the
atmosphere cannot be treated as a free dumping ground. Businesses regulated by cap and
trade are required to own one tonnes worth of pollution permits for every tonne of pollution
they produce (Horne, 2011).
If pollution permits are costly, businesses will choose to reduce their pollution so they
need fewer permits. Like a carbon tax, this approach strengthens the economic case for
investing in clean energy (Horne, 2011).
The amount a business needs to spend on pollution permits depends on how much
pollution it produces and three other factors. The first is the amount of pollution allowed
under the cap. If the cap is relatively lax and there are plenty of permits to go around, they
will not be worth much. If the cap is tight, there will be fewer permits available, and those
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permits will end up being worth a lot because they will be in greater demand. The downside
of a lax cap is that it minimizes the environmental benefits (Horne, 2011).
The second factor is the number of offsets allowed. Offsets are projects that reduce
pollution in sectors of the economy not covered by a cap. An offset project costs money, so it
has a value, just like pollution permits. The potential advantage of offsets is that they can be
cheaper for businesses than reducing pollution or buying permits. The downside is that even
the best efforts to verify their legitimacy will accredit some offsets that will not effectively
reduce pollution (Horne, 2011).
The third factor in determining the cost of pollution permits is how governments decide
to allocate them: they can give them away free or auction them. If permits are given away,
the businesses given permits will have lower costs. If permits are auctioned, governments
collect the full value from businesses. In addition to providing governments with revenue,
auctioning simplifies the rules by eliminating any need to decide which businesses get
permits and which do not (Horne, 2011).
Many businesses question what cap and trade will do to their competitive advantage,
or to Canada, for that matter. For businesses providing products and services that help
reduce pollution, like a wind farm for example, cap and trade will create market opportunities
(Horne, 2011).
For businesses that have to buy permits, at least two other aspects of cap and trade
can help maintain or improve competitiveness. First, cap and trade systems typically include
multiple jurisdictions, so they provide a level playing field for all businesses in the system.
Second, governments have flexibility to decide how best to use any auction revenue they
collect, and there are plenty of ways money can be invested to improve the economy (Horne,
2011).
Canadas approach of using carbon tax revenue to reduce other taxes is an example
that should be used towards generating a revenue-neutral system to promote technological
and process innovations that reduce pollution down to or beyond required levels. The bottom
line is that a well-designed cap and trade system can be part of a climate change solution
that is good for the environment and good for the economy (businesses) nation-wide (Horne,
2011).

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VIII. CONCLUSION AND RECOMMENDATIONS


Therefore, in conclusion, we see from our thesis statement: Canada is currently facing
some major environmental concerns like global climate change which is creating a harmful
environmental as well as political impact for Canada; therefore the federal government must
focus on finding actionable and concrete solutions in properly designing a cap and trade
system to control carbon emissions country-wide.
The rationale and supporting evidence show us that there are multiple alternatives
available to Canada to solve the critical problems that affect environmental affairs. Some
alternatives favour environmental protection, while others privilege economic growth
instead. The key is to move away from a zero-sum framework and find problem solutions
through the nexus of sustainable development. Each alternative presents differential
constraints and expected impacts (Cederwall & Grebovic, 2011).
From a normative approach, the cap and trade system defines the fundamental market
failure to be addressed, namely that if carbon emissions are left unregulated can lead to epic
proportions of global warming and especially the failure to eliminate greenhouse gas
emissions will devastate future generations and sustainability.
From a positive approach, the cap and trade system introduced by policy-makers will
explain why this government seeks to understand how current policies have come about and
in doing so will try to predict future directions in environmental policies. The policies chosen
are in effect to maintain economic prosperity through innovations and sustainable
developments that will then reduce the harmful effects of excessive amounts of greenhouse
gas (GHG) emissions into the environment.
After substantive economic analysis, a recommendation from my cabinet has been
identified in preparation for the next session of parliament, along with implementation, cost
options, and timelines. The architecture of the cap and trade system that my office is
proposing for Parliament to implement in 2012 would be fully compatible with WCI, thus
facilitating future linking if appropriate. This would place Canada in a strong position to
advocate for greater stringency and environmental integrity with those systems. (Bramley,
2009)
Finally, what kind of an impact will the cap and trade system have on business? Is it
good or bad for business? Many businesses question what cap and trade will do to their
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competitive advantage, or to Canada, for that matter. For businesses, providing products and
services that help reduce pollution, cap and trade system for these businesses will create a
thriving market opportunities.
As for some policy recommendations, a cap and trade system can be a cost-effective
means of controlling GHG emissions. However, because of the diversity of emission sources
and the variety of economic agents with some control over emissions, cap and trade cannot
be a universal remedy. Other types of policies and instruments will be needed to reduce
emissions from sources not easily included in the system, to provide incentives for a wide
range of economic agents to take actions that reduce emissions, and to address other
environmental or social goals that may conflict with GHG reductions (Washington State
Department of Ecology, 2008).
A national cap and trade system appears to be closer on the horizon, it will be
important for all provinces to participate in the debate about creating a national cap and
trade system design. Especially, for industries affected by future federal and current
provincial policy programs (including the current WCI mandate and other policy instruments)
are not put in an adverse position in the future when the cap and trade system is
implemented nation-wide.

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Economics: Principles and Applications:
http://economicsprinciplesandapplications.blogspot.com/2011/05/public-choice-theory.html
Bramley, M. (2009, September). Key Questions For A Canadian Cap-And-Trade System.
Retrieved November 20, 2011, from The Pembina Institute: http://www.pembina.org/pub/2015

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Brander, J. A. (2006). Government Policy Toward Business. In J. A. Brander, Government Policy


Toward Business (pp. 82, 5.1). Mississauga, ON: John Wiley & Sons Canada, Ltd.
Cederwall, G., & Grebovic, N. (2011). Environment A Canadian Foreign Policy Review. Ottawa:
Norman Paterson School of International Affairs, Carleton University.
Durning, A., Fahey, A., Place, E. d., & Williams-Derry, C. (2009 , June). Cap and Trade 101: A
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http://www.sightline.org/research/energy/climate-pricing/Primer%20Executive%20Summary%20%20formatted%20for%20print.pdf
Horne, M. (2011, July 01). Demystifying Cap and Trade in Canada. Retrieved November 30,
2011, from BC Business Online: http://www.bcbusinessonline.ca/policies-andissues/environment/demystifying-cap-and-trade-canada
Kitze, R. (2011, May). Cap and Trade v. Cap and Dividend. Northfield, Minnesota, United States.
Lemieux, P. (2004, September). The Public Choice Revolution. Retrieved Novemeber 27, 2011,
from The Cato Institute: http://www.cato.org/pubs/regulation/regv27n3/v27n3-2.pdf
The Pembina Institute. (2011, April 13). Climate Change: Cap-and-Trade / Carbon Tax.
Retrieved November 12, 2011, from The Pembina Institute: http://www.pembina.org/climate/carbonpricing
Washington State Department of Ecology. (2008, September 17). Economic Analysis of a Cap
and trade Program. Retrieved November 30, 2011, from Washington State Department of Ecology:
http://www.ecy.wa.gov/climatechange/2008docs/Combining_Cap_and_Trade_with_Other_Policy.pdf
Western Climate Initiative. (2007, February). About the WCI: History. Retrieved November 29,
2011, from Western Climate Initiative: http://www.westernclimateinitiative.org/history

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