Canada can price car­bon and win in busi­ness—with­out waiting for the United States to catch up

Canada can price car­bon and win in busi­ness—with­out waiting for the United States to catch up

Alberta Oil - - CONTENTS - By Christo­pher Ra­gan

Last month, Don­ald Trump was inau­gu­rated as the 45th pres­i­dent of the United States. Since he ap­pears to be op­posed to car­bon pric­ing, many won­der whether pric­ing Cana­dian green­house gas emis­sions is still sen­si­ble. Re­search from Canada’s Ecofis­cal Com­mis­sion shows that it is—as long as the poli­cies are well-de­signed.

The im­per­a­tive to re­duce green­house gas emis­sions is clear: re­search from around the world shows that the cost of not act­ing soon to slow the pace of cli­mate change is sim­ply too high. But what kind of ac­tion is needed? The chal­lenge is to re­duce our emis­sions with­out putting at risk eco­nomic pros­per­ity.

When de­sign­ing cli­mate pol­icy, we need to ad­dress two sep­a­rate eco­nomic chal­lenges. First, we need to find poli­cies that re­duce emis­sions in the low­est-cost man­ner pos­si­ble. Sec­ond, we need to en­sure the com­pet­i­tive­ness of our lo­cal busi­nesses. In Al­berta and Saskatchewan, this ob­vi­ously in­cludes the tremen­dous wealth gen­er­ated from the oil and gas in­dus­try.

These two ob­jec­tives are not the same. The quest for the low­est-cost emis­sions re­duc­tions re­flects a con­cern for the en­tire econ­omy; the recog­ni­tion that the fewer re­sources we ex­pend in the act of re­duc­ing emis­sions, the more re­sources we have avail­able for a whole range of other things. The is­sue of busi­ness com­pet­i­tive­ness mat­ters across the econ­omy, too, but it is only the car­bon-in­ten­sive and trade-ex­posed parts of the econ­omy that are sig­nif­i­cantly af­fected by any prov­ince’s cli­mate pol­icy.

Fac­ing these two dis­tinct chal­lenges, we need two sep­a­rate pol­icy in­stru­ments. The first is a broad-based car­bon price, which sends a clear eco­nomic sig­nal to con­sumers and busi­nesses to re­duce their GHG emis­sions. Not only can a car­bon price re­duce emis­sions, but econ­o­mists broadly agree that it is the low­est-cost way of do­ing so. The eco­nomic ben­e­fit of us­ing car­bon pric­ing rather than more in­tru­sive gov­ern­ment reg­u­la­tions to achieve our 2020 emis­sions-re­duc­tion tar­gets is an in­crease of al­most four per­cent in na­tional in­come. That’s on roughly the same mag­ni­tude as the 2008-09 re­ces­sion, but it counts each and every year that the poli­cies are in place. That’s a huge eco­nomic plus for car­bon pric­ing.

Now con­sider the threat to the com­pet­i­tive­ness of Cana­dian busi­nesses cre­ated by a car­bon price. Across the en­tire Cana­dian econ­omy, only about five per­cent of over­all GDP comes from sec­tors that are ex­posed to these pres­sures—but they are not evenly dis­trib­uted across prov­inces. In On­tario and Que­bec, less than two per­cent of the economies are ex­posed; in Al­berta and Saskatchewan, the ex­po­sure is more like 18 per­cent of provin­cial GDP. No mat­ter what prov­ince you con­sider, how­ever, the prob­lems in­side those ex­posed sec­tors are very real, and we need smart pol­icy to ad­dress them.

This is where U.S. pol­icy en­ters the pic­ture. Since the Cana­dian and Amer­i­can economies are so highly in­te­grated, the real “car­bon com­pet­i­tive­ness” is­sue re­lates to the rel­a­tive car­bon prices in the two coun­tries. And if the United States is not about to em­bark on car­bon pric­ing, doesn’t this mean that Canada should aban­don its pric­ing plans?

The an­swer is no. There is also a made-in-Canada so­lu­tion. We don’t need to wait for U.S. pol­icy.

The goal is to keep all of our busi­nesses re­duc­ing their GHG emis­sions, but not by shrink­ing their pro­duc­tion and em­ploy­ment or mov­ing their op­er­a­tions to some other ju­ris­dic­tion. We want them to get cleaner, not smaller.

This brings us to the sec­ond pol­icy in­stru­ment we need. A well-de­signed car­bon-pric­ing pol­icy can pro­vide fi­nan­cial sup­port to the firms most ex­posed to these com­pet­i­tive­ness pres­sures. Free per­mits in a cap-and-trade sys­tem (as in On­tario and Que­bec) or the pro­posed “out­put based al­lo­ca­tions” to firms in Al­berta’s oil patch are both ex­cel­lent ex­am­ples. In each case, the fi­nan­cial sup­port goes straight to firms’ bottom lines, main­tain­ing their prof­itabil­ity and com­pet­i­tive­ness—but only if they re­main eco­nom­i­cally ac­tive in their home prov­ince.

The com­bi­na­tion of these two sep­a­rate pol­icy in­stru­ments of­fers an ef­fec­tive onetwo punch to achieve our ob­jec­tives.

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