Home / Parallel Paths – 4.0 Assessing Opportunities for Canada-U.S. Climate Policy

Parallel Paths – 4.0 Assessing Opportunities for Canada-U.S. Climate Policy

In the previous chapter, we assessed the risks for Canada under scenarios of lagging, leading, or harmonizing with the United States on climate policy.

We found that no approach for Canada is risk-free. Uncertainty in U.S. policy makes managing these risks even more challenging. Yet adaptive Canadian policy design represents an opportunity to manage these risks.

In this chapter, we assess policy tools that present possible risk management opportunities for Canada. Four tools emerge for Canada to address the key economic and environmental risks identified in the preceding chapter. In particular, these tools address competitiveness concerns through harmonizing carbon prices with the U.S., while responsibly moving forward on reducing emissions. These tools could be applied in the context of uncertain U.S. climate policy to create a feasible made-in-Canada climate policy approach:

1. LINKING EMISSIONS TRADING SYSTEMS³⁸ involves trading carbon permits between Canada and the U.S under an integrated cap-and-trade system to create a North American carbon market. It would result in the convergence of carbon prices between Canada and the U.S. This tool would address competitiveness and market access risks, but increase the risk of delaying Canada’s transition to a low-carbon economy.
2. ALIGNING CARBON PRICES involves using Canadian policy levers to ensure the Canadian carbon price does not go above the U.S. price. Canadian policy levers include access to international permits as well as a safety valve to ensure the Canadian carbon price matches with the U.S. price. This tool would address competitiveness risks, but raises the risk of Canada not achieving its GHG targets.
3. PERMIT ALLOCATION AND REVENUE RECYCLING involves either auctioning permits and recycling the revenue back into the economy or providing permits for free under a national cap-and-trade system. Permit allocation decisions can affect the distributional impacts of competitiveness and of achieving Canadian emission reductions, depending on how permits and revenue are distributed in the economy. This tool could address distributional risks.
4. CONTINGENT CARBON PRICING involves setting an initial carbon price for Canada that is higher than any U.S. price in order to begin to make emission reductions while managing competitiveness concerns. It would position Canada’s policy between harmonizing with the U.S. targets and harmonizing with the U.S. carbon price. The contingent price could be set at a maximum dollar amount relative to the U.S. price so it sends a clear price signal but is not so high that negative economic impacts are generated. It could be adjusted up or down when American carbon price intentions are known or appear in the marketplace. This tool would balance competitiveness and environmental risks.

WE EXPLORE THESE RISK MANAGEMENT TOOLS THROUGH THREE GROUPS OF MODELLING SCENARIOS :

• LINKAGE SCENARIOS that consider first, Canada and the U.S. achieving targets with separate, unlinked cap-and-trade systems, and second, Canada and the U.S. achieving targets with linked cap-and-trade systems;
• CARBON PRICE ALIGNMENT SCENARIOS that consider Canada achieving targets with no offsets, and Canada using a safety valve to limit the Canadian carbon price; and
• PERMIT-ALLOCATION SCENARIOS that consider free output-based allocations based on value-added, free out-based allocations based on emissions intensity, auction with recycling mostly to income tax, and auction with recycling mostly to corporate tax.

[38] See Sawyer, D. and Fischer, C. (2010) for a detailed review of the implications of linking Canada-U.S. cap-and-trade systems.