Why Quebec will pay less than the West
Consider it the curious incident of the dog that didn’t bark, f ederal- provincial edition.
In October, Prime Minister Justin Trudeau announced a new national carbon tax: the most significant federal intrusion into provincial jurisdiction in decades. And Quebec, that ever-vigilant guardian of provincial rights — one that’s never encountered an imposition from Ottawa it didn’t denounce as a grave threat to its right to self-determination — had nothing to say. Well, not exactly. Quebec Premier Phillipe Couillard actually called it a “positive” move.
Ottawa plans to invade a policy area that’s long been the exclusive domain of the provinces. With a new tax. And Quebec is OK with this? What in the name of maître chez nous is going on here?
The answer to this mystery reveals the inconsistencies, confusions and looming crisis at the heart of Canada’s national carbon tax plan.
Trudeau plans to impose a $ 10- per- tonne tax on carbon emissions starting in 2018, rising $10 yearly to $50 in 2022, on all provinces not pricing carbon at an equivalent rate. B. C. and Alberta will be exempt if their provincial carbon taxes rise to meet the federal rate. The same goes for provinces operating cap- and- trade systems. Quebec is already a partner with California in a carbontrading system called the Western Climate Initiative ( WCI) that Ontario will join shortly. Nova Scotia plans to operate its own cap- andtrade plan.
Last summer, Couillard said he had no objections to a federal carbon tax “as long as it does not conflict with our carbon market.” He thus expects Ottawa to leave him alone when it comes to putting a price on carbon. But central to the federal plan is the notion that carbon prices must be consistent across the country. Large deviations between federally mandated tax- rate hikes and cap- andtrade permit prices will inevitably lead to serious economic problems — and political mayhem.
Currently the permit price for carbon emissions in Quebec under the WCI is around $16 per tonne, higher than the federal tax’s introductory level. By 2020, however, the minimum national carbon tax will have risen to $ 30 while the floor price for permits in Ontario and Quebec is projected at just $19 per tonne. That gap is expected to grow. By 2022, when the national carbon tax hits $50, the WCI permit price is estimated at below $ 24. People in Alberta and B.C. will thus be taxed twice as much as Ontarians and Quebecers. Differences that large will pose a major threat to constitutional harmony.
What explains this massive price difference? California Scheming.
To smooth over political objections to pricing carbon, California deliberately created a vast oversupply of emis- sions permits in its electricity sector, pushing down prices and leaving the state awash in excess permits until at least 2026. The opportunity to harvest this crop of cheap permits is what’s driving Quebec and Ontario’s participation in the WCI — and why these permit prices will be substantially below Trudeau’s carbon-tax minimums. Without access to California’s low- cost permits, Ontario’s own research shows its permit prices would rise to a stunning $ 157 per tonne in just two years, destroying any argument for cap and trade.
Cap and trade thus offers Quebec and Ontario an enormous competitive advantage over provinces subject to Trudeau’s mandatory carbon tax, namely B.C., Alberta, and perhaps Saskatchewan and Newfoundland. How’s that for a national plan?
According to a f ederal policy backgrounder, provinces with cap- and- trade systems can avoid the minimum national tax if they meet two criteria. In addition to aligning themselves with federal 2030 emissions- reductions goals, cap- and- trade provinces must also have emissions targets for 2022 that “correspond, at a minimum, to the projected emissions reductions resulting from the carbon price that year in price-based systems.”
This sounds like permit prices and taxes must be similar enough that they produce similar results. If so, to maintain the coherence of its national plan, Ottawa will soon have to overrule Quebec’s claims to carbon- price sovereignty and impose a madein- Canada floor price on permits to bring them up to the tax rate. Such a move seems rather improbable; the heavy hand of Ottawa doubling carbon prices in Quebec would be the best thing to happen to the separatist movement since the defeat of Meech Lake.
Then again, the policy offers a loophole big enough for Quebec and Ontario to drive a diesel truck through. Any comparisons between projected emissions reductions can only be made by subjective modelling exercises. In the absence of a clear metric — and given the stakes at play — Quebec and Ontario will have plenty of motivation to defend cap-and-trade’s exceptionality by whatever means necessary, including with ample supplies of well-tortured data. Aggressive self- advocacy of this sort is something of a specialty for Quebec. Recall its bafflegab in debates over equalization: claiming to be a net contributor despite being the largest recipient.
Deliberately or inadvertently, Ottawa has provided Quebec and Ontario with the opportunity to maintain cap- and- trade permit prices significantly below the rate it would impose on unluckier provinces. Given Couillard’s insistence on carbon-price independence and his insouciance about Trudeau’s tax plan, this may be what Quebec expected all along. Why bark when there’s a feast to be had?