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FINDING SUSTAINABLE PATHWAYS

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Home / Parallel Paths – 0.0 Summary

Parallel Paths – 0.0 Summary

A central question in Canadian climate policy remains, “What of the United States?”

Uncertainty about American climate policy colours and shapes Canada’s own policy choices and direction. By necessity, our integrated economies require serious consideration of harmonizing Canadian climate policy with that of the United States. But different energy economies and greenhouse gas emission profiles in the two countries create different economic and environmental implications for Canada as we pursue a harmonized policy approach.

Understanding what these implications mean for Canada and how we implement our own climate policy is critical for Canada’s own prosperity. Thinking strategically about how best to harmonize Canadian climate policy with that of the U.S. allows us to design a system that manages competitive risks, achieves real emission reductions, and drives the development of new clean energy and low-carbon technology. Challenges arise if the U.S. doesn’t move. What options exist for Canada? What steps can we take to achieve our own national environmental and economic goals given the integrated nature of our trading, investment and energy economies?

With this report, the National Round Table on the Environment and the Economy (NRTEE) has undertaken the most comprehensive analysis yet published on the economic risks and opportunities for Canada of climate policy in the context of the Canada-United States relationship. This is one of seven reports on the economic risks and opportunities of climate change to Canada we call Climate Prosperity. We have undertaken this research to inform future policy choices by governments and offer innovative ideas on how Canadian interests can best be served as we secure our future in a climate-changing world. Climate policy has both environmental and economic implications at its core; this report integrates both considerations in order to understand better how Canada can choose a path toward real emission reductions while ensuring a prosperous economy.

The NRTEE’s original research and analysis in this report explores the economic and environmental implications for Canada of leading, lagging, and harmonizing with the U.S. on climate policy. Our analysis leads us to the following conclusions :

  • HARMONIZING on carbon targets and harmonizing on carbon price have different consequences. Canada’s distinctive emissions profile and energy-economy structure mean that matching our GHG targets with those of the U.S. leads to higher carbon prices here. Alternatively, while matching carbon prices with those in the U.S. would reduce competitiveness concerns, fewer emission reductions would actually occur due to projected higher emissions growth in Canada than in the U.S. As a result, Canada would not meet its stated 2020 target.
  • COMPETITIVENESS issues matter, but they matter most for about 10 % of Canada’s economy that is considered emissions-intensive and trade-exposed, including sectors such as oil and gas extraction, and cement manufacturing. Knowing this allows us to take mitigating actions that reduce the impact on those sectors and regions of the country through targeted policy measures.
  • TRADE MEASURES in U.S. legislative proposals and low-carbon fuel standards do pose an economic risk for key Canadian sectors but these risks can likely be managed if Canada adopts equally stringent climate policy as the United States. Acting remains the best preventative measure.
  • COSTS IMPOSED by Canada’s own climate policies and resulting emission reductions have the most impact on Canadian industry. It is not just costs from U.S. policy actions or from differences between Canadian and U.S. policies that matter. This means some costs will be present regardless of when Canada implements its full suite of climate policy actions.

While no approach is risk-free for Canada, smart policy choices represent an opportunity for Canada to manage these risks. Our analysis led us to consider an innovative policy option that would allow Canada to take the appropriate initiative in the face of uncertain U.S. climate policy and to position us to move forward, building on regulatory steps already underway even if the U.S. does not. This Transitional Policy Option would implement an economy-wide cap-and-trade system in Canada ahead of the U.S., but would limit the Canadian carbon price so that it would never become too out of step with the U.S. Our proposed approach would walk a middle line between harmonizing with the U.S. on carbon price and on emission-reduction targets, balancing competitiveness and environmental concerns. It would drive the development and deployment of low-carbon technologies and achieve real emission reductions. At the same time, it would limit competitiveness risks for Canada, ensuring continued strong economic growth in all sectors and regions, and would reduce the risks from U.S. trade measures.

The NRTEE therefore recommends that the government of Canada consider the merits of a transitional, made-in-Canada strategy for harmonization :

1)

  • IN THE SHORT TERM, Canada could implement a Transitional Policy Option, with the following elements :
  • CONTINGENT CARBON PRICING — to establish a price collar that limits the Canadian carbon price to be no more than $30 / tonne CO2e higher than the price in the U.S.;
  • NATIONAL CAP-AND-TRADE SYSTEM — with auctioning of permits and revenue recycling to cap emissions and address regional and sectoral concerns;
  • LIMITED INTERNATIONAL PERMITS AND DOMESTIC OFFSETS — to keep domestic carbon prices lower for Canadian firms, thus maintaining competitiveness and further harmonizing with U.S. policy direction; and
  • TECHNOLOGY FUND — to keep domestic carbon prices lower for Canadian firms, align carbon prices close to those in the U.S., and stimulate investment in needed emission reductions technologies.

2)

  • IN THE LONGER TERM, if the U.S. eventually implements its own cap-and-trade system and when it is willing to link with a Canadian system, an integrated North American carbon market could be established. The resulting common carbon price between Canada and the U.S. would level the competitive playing field for Canadian industries. Because of our own earlier action, we would be ready for this eventuality.

This phased approach would ensure we are ready and prepared to harmonize effectively and advantageously if the U.S. is ready to move. As we start on this path, we can adjust our own efforts as needed depending upon U.S. actions. In this way, we get ahead of the curve, but carefully so, ensuring economic impacts on Canada are manageable and sustained environmental progress toward achieving our 2020 target occurs.

In this report, we have developed a path toward achieving eventual climate policy harmonization with the United States. Canada needs to strategically plan for harmonization. Canada needs to ensure that we use this time and opportunity to prepare for low-carbon economic success by investing in and developing new environmental technologies.