Cap-and-trade best way for Canada to reduce emissions
Over the last decade, in the absence of federal leadership, Canadian provinces have gone their own way on carbon pricing. Alberta chose a unique carbon-pricing system, British Columbia implemented a carbon tax and Quebec launched a cap-and-trade system which Ontario will soon join. Others are waiting in the wings, either weighing their options or vehemently opposed. As a result, Canada’s environmental standing fell and full economic potential went untapped.
Now that the country has an engaged federal government that is determined to act on climate change, things are likely to take a new direction.
Provinces that aren’t pursuing any form of carbon pricing will likely be asked to do so. The current musing is that the federal government will set a $15 carbon tax to act as a minimum carbon price. But is a national price floor enough, or should the federal government consider other options? The problem is that $15 is not enough to drive the deep emissions reductions needed. Without a hard cap, population and economic growth will drive growth in emissions. Furthermore, it is hard for governments to commit to continually increasing a tax; whereas it is not too difficult to continually tighten the cap in accordance with emissions targets.
Cap-and-trade is the best way for Canada to reduce its greenhouse-gas emissions and still maintain economic growth and competitiveness. Rather than having multiple provincial auctions, the administrative costs of the program would be minimized through coordinated joint auctions across provinces. The system would operate similarity to the Western Climate Initiative’s system, where each province puts up a number of allowances for auction, and all provinces bid on the common pool of allowances. A countrywide carbon price would be determined.
The federal government would set its cap in line with Canada’s commitment to reducing emissions to 80 per cent below 1990 levels by 2050. Auction revenue would be distributed across the provinces, in line with their respective allocation of emissions (determined using1990 levels). This way, each province contributes evenly to achieving Canada’s goal. Doing so will ensure that Canada is able to fulfil its international commitment while ensuring fairness across provinces.
Rather than a patchwork of provincial policies, a Canada-wide system would send a stronger signal to businesses and investors that a low-carbon future is upon us. This will help businesses make better informed investment decisions.
If Canada as a whole puts a hard cap on emissions, the domestic demand for lowcarbon (clean-tech) goods and services will increase. This will help the country develop its clean-tech market, providing space to grow and sell to a domestic market, eventually maturing, exporting and capturing global market share.
With a common carbon price across provinces, interprovincial competitiveness concerns related to asymmetric climate policy are alleviated — firms cannot skirt the carbon price by shifting production across provincial borders. This reduces the carbon leakage that more environmentally progressive provinces would face under asymmetric climate policy.
Another major benefit to a common Canadian market is that, when engaged in allowance trading across provinces, each province benefits. In our most recent paper, we find that Ontario’s economic outcomes are improved when firms are able to import cheaper allowances from low-cost regions, such as California. Under a pan-Canadian system, through allowance trading, high-cost provinces would benefit from lower compliance costs, while firms in low-cost provinces would increase their profits by abating and selling excess allowances.
A Canada-wide cap-and-trade system would achieve the best outcomes for the environment and the economy, while respecting each province’s autonomy. Provinces would be allowed to use auction revenues as they see fit — whether to invest in low-carbon technology, infrastructure, cut other taxes, issue household transfers, etc. Each region also has the autonomy to issue free allowances to at-risk industries in order to minimize the costs on businesses and address competitiveness concerns. This should tame the fears of industry and politicians in Canada’s resource-dependent provinces, like Alberta and Saskatchewan.
To be frank, a $15 price floor does almost nothing to guarantee that the country lives up to its international commitments. A national cap, on the other hand, with obligations spread evenly across provinces, will allow the country to address climate change while providing best outcomes for the economy.
It feels as though Canada may be on the cusp of fulfilling its role in fighting climate change, while still ensuring the economic growth we need. There is a model wherein we can have both federal leadership and provincial control. The prime minister and the premiers can have a thoughtful conversation about carbon pricing and pipelines at the same time. Now is the time to do so together, rather than at odds with one another, and take our place on the global stage as both an economic and environmental leader.