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Parallel Paths – 1.0 Introduction

Uncertainty about U.S. commitment and direction on climate change affects the scope and scale of long-term policy direction and commitment here in Canada.

Competitiveness concerns loom large in Canadian climate approaches due to the integrated nature of our energy, investment, and trading relationship with those of our largest economic partner, the United States. A shift to harmonization and alignment of Canadian climate policies with those of the United States, from greenhouse gas emission-reduction targets to vehicle fuel-emissions standards, has been the result.

But what does this really mean for Canada’s own longer-term climate policy? What are the environmental and economic implications of harmonized or aligned Canadian policies with those of the United States? What does delay and uncertainty in U.S. climate policies imply for our own policy choices? What options need Canada consider if the U.S. doesn’t move?

There are economic risks from independent Canadian action, but there are also risks to inaction. So, how can we best implement climate policy in Canada to achieve our environmental goals at least economic cost in the short term, while preparing Canada’s economy for a clean energy and low-carbon economic future? In short, is there a made-in- Canada, transitional path forward, and what might it look like?

This report examines these questions. It is the third report of the National Round Table on the Environment and the Economy’s (NRTEE or Round Table) Climate Prosperity series exploring the economic risks and opportunities for Canada resulting from a changing climate and from the global transition to a low-carbon economy. In this report, the NRTEE explores the risks and opportunities for Canada of designing and implementing climate policy in light of possible U.S. climate policy. The report seeks to identify a policy option for Canada to minimize risks — both environmental and economic — while seizing the opportunities to set Canada on a path toward long-term climate prosperity. It considers how this transitional option can be usefully integrated into existing Canadian climate policy directions and ambitions if the U.S. does not move, but also considers how best to position Canada if the U.S. does ultimately move forward.

On January 30, 2010, the Government of Canada committed in its submission under the Copenhagen Accord to targets that align exactly with the U.S. — 17 % reduction of GHG emissions below 2005 levels by 2020. This was a change in targets from the government’s Turning the Corner plan. Federal Environment Minister Jim Prentice stated in February 2010:

“We have adjusted our previous target to ensure that it matches exactly with those just inscribed by the United States and we have consistently said from the outset that we must harmonize our climate change strategy with that of our greatest trading partner because of the degree of economic integration between our two countries.”¹

But Canada could implement a strategy of climate policy harmonization in more than one way, with potentially very different implications for economic and environmental outcomes. While Canada has matched U.S. targets and taken some steps in response, the government’s overall policy plan to achieve these targets is incomplete, pending greater U.S. certainty and clarity. Meanwhile, we have already seen alignment of vehicle fuel emissions standards for cars and trucks with the U.S. This step is a strong indication of alignment, not just on targets and timing, but also on instruments and actions. Yet Canada has also indicated a willingness to differentiate its policy from the U.S. where appropriate; in June 2010, it announced regulations to phase out coal-fired electricity plants in Canada starting in 2015.

Nevertheless, this distinction between targets and policy is important since the new targets are apparently conditional on the U.S. also implementing policy to achieve its targets. Overall, it seems, Canada will not establish or implement its core climate policy until U.S. direction is clear. But significant uncertainty exists as to both the timing and substance of U.S. climate policy and what this will ultimately mean for Canada. The House of Representatives passed the American Clean Energy and Security Act (known as Waxman-Markey) in June 2009. More than a year later, the Senate considered a range of options, including most recently, the American Power Act of May 2010 (known as Kerry-Lieberman), but finally chose not to bring a climate bill to the floor in 2010.

Behind the basic economic story are the differences between two key aspects of any country’s climate policy: GHG emissions growth and energy mix. Here, Canada and the United States are different. Our emissions are growing faster than those in the U.S., principally due to projected oil sands production and export growth. This means achieving emissionreduction targets relative to 2005 in Canada and curbing emissions growth is potentially a larger task than in the U.S. Further, our energy mix contains more hydro and is less reliant on coal- and gas-fired generation at the national level than in the United States. This means the U.S. could achieve large emission reductions by replacing its coal-fired electricity plants with less carbon-intensive alternatives, while Canada requires a broader range of measures across multiple sectors to reduce emissions. Both are significant challenges with significant costs, but these differences suggest that two countries could take different paths toward achieving emission reductions.

The implication of these factors, coupled with U.S. climate policy uncertainty as to scope, scale, and timing of its actions to reduce emissions, is that Canada’s stated commitment to harmonize our policies is not as straightforward as it might seem. It leaves us open to both risks and opportunities. Understanding these implications is essential if Canada is to manage economic risks while positioning itself for deep long-term emission reductions. Central to this discussion of risks and opportunities are three issues:

FIRST, competitiveness clearly matters for a few economic sectors; these sectors account for about 10 % of Canada’s GDP. But our analysis suggests that the policy the U.S. implements and how it differs from Canada’s are less impactful upon industry than the choices we make to reduce emissions within our own economy.

SECOND uncertainty regarding an eventual U.S. approach complicates Canada’s position by potentially delaying some of our own actions with consequent environmental risks. As the NRTEE has shown in Achieving 2050 and Getting to 2050, uncertainty and policy delay will increase the costs of achieving Canadian emission-reduction targets in both the medium and longer term. With only a decade ahead of us before the 2020 deadline, comprehensive action is required if we are to successfully meet our GHG reduction target at least cost and position ourselves for longer-term reductions and a low-carbon transformation in the future.

THIRD Canada and the U.S. have different economies and emissions profiles and as a result, respond differently to policy. Our analysis suggests that to achieve the same emission reduction targets as the U.S., Canada would require policy that imposes a greater carbon price in Canada relative to the U.S. Higher Canadian carbon prices could competitively disadvantage some Canadian industries relative to their American competitors. But if Canada were to instead implement policy that imposed the same carbon price as that in the U.S., it would not achieve its emission reduction targets. Further, the lower level of reductions could expose Canada to carbon-protectionist trade measures imposed by the United States.

This report builds on previous NRTEE work on carbon pricing and cap-and-trade systems. Our approach is to consider existing and stated federal and provincial government policy directions and offer a potential policy path forward in the face of uncertain U.S. climate policy and apparent economic risks. In this way, we can see which national approaches may be most viable to help Canada achieve its environmental goals, at least economic cost.

THE OBJECTIVES FOR THIS REPORT ARE TWO-FOLD:

1) ASSESS the implications of U.S. climate policy choices for Canada and for various Canadian climate policy options.

2) IDENTIFY policy options leading to long-term emission reductions while managing the economic risks for Canada of adverse national, regional, and sector-level impacts from both potential U.S. and domestic policy choices.

The analysis and findings from Achieving 2050² form a foundation for this report and provide some of the architecture for the policy options it examines and recommends. This report digs deeper with a specific focus on the interaction between Canadian and American climate policy choices and what they could mean to Canada’s economy and its ability to meet its GHG emission reduction targets. But the international policy and political landscapes since Copenhagen have shifted and continue to evolve, both here and in the United States. A major challenge for our analysis was therefore to adapt and revise our approach to ensure it was current and relevant. With continually changing U.S. legislative proposals and evolving Canadian targets and policy in response, we designed a research framework to account for both uncertainty from the U.S. and uncertainty about what this might mean for Canada’s own policy choices.

THIS REPORT IS ORGANIzED AS FOLLOWS:

IN CHAPTER 2, we set the stage and provide context for our analysis, highlighting issues of carbon competitiveness and the economic and environmental implications for Canada of delaying the implementation of a cap-and-trade system in Canada. We also describe the economic modelling approach we have taken to assess a range of climate policy scenarios, and we summarize key assumptions.

IN CHAPTER 3, we identify Canada’s choices in the face of uncertain U.S. climate policy, and quantify economic and environmental risks for Canada that could result from these choices. We explore risks if Canada lags behind U.S. action, including possible U.S.-imposed carbon border measures. We also assess the economic risks of implementing policy independent or ahead of the U.S. Finally, we assess the risks of harmonizing with U.S. policy.

IN CHAPTER 4, to address these risks, we analyze the opportunities for Canada to move ahead in an uncertain U.S. climate policy context. We assess different policy tools that can be applied to harmonize Canadian policy with the U.S. but also tools that could allow Canada to responsibly lead.

IN CHAPTER 5, we consider a made-in-Canada transitional policy option designed to reduce economic risks for Canada in the short term and optimize medium- and long-term opportunities to achieve emission reductions. If the U.S. fails to implement climate policy in the interim, this approach could allow Canada to begin the transition toward a low-carbon future while managing risks of competitiveness, trade measures, and any adverse regional and sectoral impacts.

IN CHAPTER 6, we summarize the conclusions and recommendations that emerge from our analysis.

[1] Environment Canada (2010).
[2] Achieving 2050: A Carbon Pricing Policy for Canada (NRTEE, 2009) recommended that Canada implement a unified carbon price across emissions and jurisdictions through a national cap-and-trade system with complementary policies and access to international carbon abatement opportunities.