Parallel Paths – 5.1 The Essential Issue for Canada
Canada has committed to harmonizing its climate policy with the U.S. This goal is sensible, but it is not as simple as it sounds.
This report demonstrates the underlying benefits and challenges of harmonizing Canadian climate policy with the United States. Harmonizing offers the prospect of moderating the economic impact overall on Canada of climate policy given the integrated nature of our two economies. The challenges or risks in doing so are that harmonization comes with potential trade-offs between environmental outcomes and economic impacts. Here’s why:
FIRST, competitiveness risks from higher Canadian carbon prices relative to those in the U.S. will have implications for sectors that rely heavily on trade and are emissions intensive. These sectors represent 10% of Canadian GDP.
SECOND, uncertain U.S. climate policy can lead to policy delay here in Canada. There is currently no overall U.S. policy with which Canada can harmonize (vehicle emission standards notwithstanding). But waiting for absolute clarity from the U.S. could mean an undesirable delay in developing and implementing climate policy in Canada. Canada has already moved ahead of the U.S. in signalling that it will regulate emissions from existing coal-fired electricity plants. But carbon pricing policy is required to drive emissions down throughout the Canadian economy and meet emission reduction targets. A later start for carbon pricing policy in Canada has medium- and long-term consequences for Canada in not achieving its stated 2020 emission reduction targets, and will lead to probable higher economic costs in ultimately doing so, as we have demonstrated. It further hinders progress on transitioning to a low-carbon economy necessary for our future competitiveness and success.
FINALLY, given the energy-economy differences between Canada and the U.S., Canada cannot easily harmonize on both carbon prices and emission-reduction targets with the U.S. The same carbon price in Canada as in the U.S. leads to fewer reductions in Canada, while the same target leads to higher carbon prices in Canada relative to the U.S. At the same time, Canadian exports could be exposed to border carbon adjustments if our climate policy is seen as less stringent than U.S. policy; whether this pertains to a lower carbon price or lower targets in Canada is not yet clear.
Uncertainty combined with energy-economy differences with the United States highlights a tension for the scale and scope of Canadian climate policy: Canada will experience some economic impacts from any climate policy, both from competitive disadvantage due to higher carbon prices relative to the U.S, and from the costs of reducing emissions from our economy to meet our own policy goals and GHG targets. The former impacts can be reduced by harmonizing with a U.S. carbon price, but the latter impacts are independent of U.S. policy harmonization and could well increase, the longer Canadian policy is delayed.
© 2013