CD Howe Institute 2004 proposal for emissions trading

Just read over a great commentary from the CD Howe Institute, published in 2004: The Morning After: Optimal Greenhouse Gas Policies for Canada's Kyoto Obligations and Beyond. . Its a commentary, so isn't necessarily the opinion of the Institute itself. Basically its a set of alternative policy proposals for achieving GHG reductions by 2010, supported by modelling. Two of the three authors are researchers from Simon Fraser, one of whom at least (Mark Jaccard) has worked extensively on climate change policy modelling for the feds since Kyoto was signed; the third is Matt Horne from the Pembina Institute.
Their set of policies focuses on what they call market-oriented regulations, basically tools like emissions trading ("emissions cap and tradeable permits" or ECTP as they call it), renewable portfolio standards, and vehicle emissions standards. They also add in some traditional command and control in the form of a carbon sequestration requirement for oil and gas and increased energy efficiency standards.
I'll focus here on what they have to say about emissions trading and carbon taxes.

First, carbon taxes. They reject carbon taxes as a tool because of political unfeasibility, although they point out that revenue neutral tax shifting could be used to make it more attractive.

Secondly, emissions trading. They propose two options, less aggressive and more aggressive. Both options:

• use an absolute cap on emissions (no intensity targets here)
• seem to auction off most permits (not explicitly stated, but implied)
• grandfather (i.e give away) some permits for old coal electricity generation in high emissions provinces, for political acceptability
• provide a price ceiling on emissions permits, beyond which the government will sell unlimited numbers of permits at the ceiling price, using the revenue to buy international permits of some form.

The difference between the options is in the price ceiling for permits - 10$ per tonne in the less aggressive, 50$ per tonne in the more aggressive.

The results of their modelling (based on 2004 implementation): 57.5 Mt of reductions from BAU under the less aggressive model, 86.4 Mt with the more aggressive model. In both cases, industry makes significant use of permits at the price ceiling.

Link to the CD Howe commentary

My comments: I found this a great article for a lot of reasons. It sets up clear policy evaluation criteria, gives an overview of all of the options that could be used, and then explains why certain policy tools were chosen. It clearly explains and summarizes the reductions associated with each policy tool (not always the case in other documents I've seen), and it references every argument on the effectiveness of the tools to academic research.
Re their emissions trading proposal, it seems sound to me. Absolute targets instead of intensity targets, and mostly auctioned permits instead of the permit giveaway planned under the LFE system developed by the feds. I found the grandfathered permits easier to swallow because they were limited to the amount of grandfathering necessary to keep reductions cost burdens relatively equal between provinces, which is a relatively fair political consideration. Their modelling of the results of the different permit ceiling prices was interesting, since it puts the 15$ per tonne guarantee the federal government promised under the LFE scheme into perspective.