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Parallel Paths – 6.0 Conclusions and Recommendations

This report proposes a path forward through economic risks and opportunities of Canadian and U.S. climate policy choices.

The federal government has indicated that Canadian climate policy will be harmonized with U.S. climate policy as much as possible given the integrated nature of our two economies. Overall, this is a sensible and realistic approach.

But how we pursue that goal matters just as much. As the U.S. struggles internally with its domestic climate policy, Canada must protect its own interests, both environmentally and economically. This report explores the key risks that Canada must navigate given uncertain American climate policy and potential delays in the U.S. moving forward. Canada faces some economic competitiveness risks in moving too far ahead of the U.S., but also faces both environmental and economic risks by simply waiting. Delay leads to rising carbon emissions each year, and a higher financial and economic cost in ultimately acting to meet our stated GHG emission targets for 2020 or beyond. Neither outcome is desirable or inevitable.

Four key conclusions on Canada-U.S. climate policy harmonization emerge from our research and analysis:

  • 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 emissions 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.

Taking these conclusions into account, the NRTEE offers a path toward achieving the government’s goal of climate policy harmonization with the United States. And, we need to consider our own steps if the U.S. fails to move. Canada needs to strategically plan for harmonization. We need to ensure we use this time and opportunity to prepare for lowcarbon economic success by investing in and developing new environmental technologies.

Regulatory steps taken by the government to reduce emissions on both a harmonized and independent basis with the U.S. provide an important base for more action. They can be complemented and reinforced with a clear carbon price signal as set out by the NRTEE in its Transitional Policy Option.

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

This phased approach would ensure we are ready and prepared to harmonize effectively and advantageously if the U.S. is ready to move. It would start us on the path to prepare Canada’s economy for a low-carbon transition with a modest, initial, but real carbon price signal leading to new investments in clean-energy technologies and to actual GHG emission reductions that would change our current carbon growth path once and for all. And, 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 impacts on Canada are manageable.

This transitional harmonization strategy for Canada would consist of two main steps:

  1. IN THE SHORT TERM, Canada could implement a Transitional Policy 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 large-scale 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. But, because of our own earlier action, we would be ready for this eventuality.

Implementing this phased strategy could have clear benefits for Canada.

FIRST, MAINTAINING COMPETITIVENESS AND ECONOMIC GROWTH: Setting a contingent price on carbon would incent emission reductions here in Canada, but would collar that carbon price at an affordable level to ensure the Canadian price does not get too far ahead of the price in the United States. Given current economic circumstances, the price can be ramped up over time to avoid any immediate economic shock, to ensure continued economic growth in all regions, and to bring about increasing emission reductions over time. Carbon pricing is put into effect through an economy-wide cap-and-trade mechanism building on provincial actions in this area and reinforcing stated federal government intentions.

SECOND, DRIVING CLEAN TECHNOLOGY INVESTMENT: Under the Transitional Policy Option, Canada would invest significantly in technology by creating a new Canadian Low-Carbon Technology Fund worth between $500 million and $2 billion in 2020 depending upon the carbon price set. This fund would be financed through the compliance investments of carbon-polluting firms, but recycled back via investment in new low-carbon technologies such as carbon capture and storage, green energy, and energy-efficiency.

THIRD, ENSURING REGIONAL AND SECTORAL EQUITY: Recycling revenue mostly back to the carbon emitters through reduced corporate taxes and technology investment prevents financial redistribution of carbon wealth across the country. It also ensures that financial flows stay mostly within Canada for our own investment purposes rather than leave to buy international carbon credits offshore.

FOURTH, MANAGING RISKS OF AMERICAN CARBON PROTECTIONISM: The Transitional Policy Option reduces the risk of border carbon adjustments from the U.S. Congress and American government by having Canada lead responsibly and smartly. Canadian carbon prices would be more stringent than in the U.S.

FIFTH, PREPARING CANADA FOR HARMONIZATION: Moving ahead of the U.S. in the short term would allow Canada to develop institutions to manage a cap-and-trade system and to learn from and improve the system over time. An integrated Canada-U.S. carbon market would ensure firms in neither country face competitive disadvantage from carbon prices. It would allow Canada and the U.S. to move together toward achieving deep reductions in the long term. And since the Canadian cap-and-trade system would already be operational, Canadian emissions would have already been reduced, Canadian firms would be familiar with emissions trading, and overall, Canadian industry would be well positioned moving into an integrated market.

SIXTH, ACHIEVING REAL GHG EMISSION REDUCTIONS : Canada’s current upward growth in emissions would be arrested and start to be reduced, putting us firmly on the path to our 2020 target. The clear, economy-wide carbon price would send the signal to firms and households in Canada to invest in low-carbon technologies, which would be developed and deployed in Canada.

No single climate policy option is risk-free; realistically, each entails some costs. But, if Canada desires to achieve its stated environmental goals of GHG emission reductions within a certain period, we will need to consider additional steps now, independent of U.S. actions and policy uncertainty. Minimizing Canadian economic costs and competitiveness risks as we do so is realistic and appropriate for policy makers to consider. The NRTEE’s Transitional Policy Option offers one way of doing so.