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FINDING SUSTAINABLE PATHWAYS

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Home / Climate / Achieving 2050: A Carbon Pricing Policy for Canada / Achieving 2050 Advisory Report: Chapter 2: Carbon Pricing Policy – Goals and Objectives

Achieving 2050 Advisory Report: Chapter 2: Carbon Pricing Policy – Goals and Objectives

Chapter Two

Carbon Pricing Policy — Goals and Objectives

The NRTEE’s carbon pricing policy has two main goals:

  • To be cost-effective. We seek to attain the Government of Canada’s medium- and long-term emission reduction targets at least cost. The objective then becomes balancing environmental effectiveness with economic efficiency to calibrate the quantity of emission reductions with abatement costs over time as we strive to make emission reductions affordable.
     
  • To minimize adverse impacts. We seek to minimize or otherwise moderate adverse impacts on regions, sectors, and consumers. The objective then becomes designing a carbon pricing policy to address and avoid, where possible, adverse distributional outcomes of pricing carbon across our economy.

The pursuit of these two goals are reflected throughout this document. In Chapter 3 we discuss the essential requirements to balance these goals, followed by the detailed carbon pricing policy presented in Chapter 4 that is designed to satisfy both the above goals and address the potential adverse impacts that could flow from the implementation of the policy, discussed in Chapter 5.

2.1 Goal One: Achieve the Government of Canada's GHG Emissions Reduction Targets at Least Cost

In this advisory note we are interested in identifying preferred policy design options, not in assessing alternative emission reduction targets. This focus on design allows the NRTEE to step away from the discussion of “which target” and more helpfully address questions of policy design to move us forward. We can then make an informed contribution as to how the federal government can best achieve the targets it has set.

Our carbon pricing policy focuses on two main drivers:

  • environmental effectiveness, which implies that the policy achieves a given target;[4] and
  • economic efficiency, which means the policy should deliver those reductions at least cost.

In other words, the carbon pricing policy must integrate both environmental and economic considerations to achieve our desired environmental objectives at the least economic costs. This observation has important implications for the policy the NRTEE is recommending. It implies that whatever policy is implemented, it will have to incorporate design elements that enable cost to be stable within a predictable bandwidth, but at the same time allow emissions to be driven down to levels consistent with the stated emission reduction targets.

The NRTEE has adopted the Government of Canada’s medium- and long-term GHG targets of 20% below 2006 levels by 2020 and 65% below 2006 levels by 2050, as announced in Turning the Corner. In our Getting to 2050 report, the NRTEE advised that to achieve these deep emission reductions and minimize overall costs, the policy must put an economy-wide price on carbon. The preferred time path to do so was our fast and deep emission pathway, which required emissions to peak at 570 Mt in 2020 and then drop steadily to 235 Mt in 2050.

Figure 1 provides the time path of reductions based on this forecast of future emissions. We have continued to use this pathway for this report but have updated the business as usual (BAU) forecast using the latest available data from Canada’s GHG inventory.

Figure 1: Fast and Deep - Emissions Reductions Pathway to Government of Canada Targets

 

Implicit in that recommendation of an economy-wide carbon price and the reduction pathway to the targets, and carried forward in this current advice, is the principle of cost-effectiveness, defined as:

  • Minimize the dollar value of the additional abatement costs per tonne of CO2e reduced or the carbon price.

There are two parts to this indicator: the first is an emission reduction and the second is the cost of abatement. While an emission reduction is straightforward and defined as the quantity of carbon emissions reduced at a point in time, the cost of abatement needs elaboration. We define the abatement cost as the incremental change in annual capital, operating, and energy costs that can be attributed to the carbon pricing policy relative to a world without a policy implemented. [5] This means that the success of the carbon pricing policy is verifiable if the targets are attained and the simple ratio of total abatement costs divided by total emissions reduced is minimized. Similarly, the mix of alternative design options that make up the carbon pricing policy is assessed based on our first goal of cost-effectiveness. This also implies that the carbon pricing policy we assemble can be scaled to alternative emission reduction targets, that is, the policy should deliver cost-effective reductions regardless of the target. This is an important early conclusion that allows us the confidence to recommend moving now on such a policy despite uncertainties surrounding future climate issues.

We also refer to metrics such as GDP or consumer welfare,[6] particularly in the context of our assessment of macroeconomic and competitiveness impacts. However, we use the required price of carbon to achieve emissions reductions as our primary metric of cost. Indeed, the carbon price is the major driver of macroeconomic and other impacts, and if the policy is cost-effective and achieves the reduction targets then it generally minimizes other impacts such as GDP losses.

2.2 Goal Two: Address Adverse Impacts on the Economy and Society

Our primary policy design focus is on seeking cost-effective emissions reductions. Any carbon pricing policy will have some unavoidable adverse impacts on the economy and society generally, but on certain segments more particularly. Our secondary challenge has then been to consider how we can address some of these impacts where they are of particular concern, while preserving our broad-based focus on achieving the deep emission reductions. The current economic downturn does not exacerbate these impacts as they occur over the medium and longer term—in fact, the need for timely action on emissions reductions remains undiminished. Policy design must nevertheless address adverse impacts of the policy in terms of how it performs against the following evaluation criteria:

  • Distributional Impacts—the preferred policy would distribute the costs and financial benefits equitably (as best as possible) among energy producers, households, other industry, and government. The burden of compliance costs can be expected to fall not only on those undertaking abatement efforts, but also on consumers. Closely allied are disproportionate impacts on certain trade-exposed sectors. Ultimately the question is, what are the design options that minimize income effects on disproportionately impacted groups?
     
  • Acceptability—the preferred carbon pricing policy should be broadly acceptable to the public, governments, industry, and other stakeholders. A broadly based level of acceptability will enhance the ability of governments to proceed with the carbon pricing policy and maintain its durability of application over the long-term vision that climate mitigation requires. These concerns specifically involve short-run income impacts on emitters related to stranded assets [7] and increased costs. Thus, competitiveness and affordability impacts feed into this criterion.
     
  • Governance and administration—the government’s ability to implement a significant new policy such as this, which will affect all provinces and territories, virtually all sectors of the economy, and most households in some fashion or another over time, will be tested. This is particularly acute given the current fragmented nature of climate policies across jurisdictions that will require harmonization, and the diffuse and overlapping responsibility across government departments charged with aspects of climate policy that will require integration. The need for transparent processes and institutions to manage the implementation of the carbon pricing policy over the long term is vital.

     

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4 Ideally, the policy would seek to maximize environmental benefits while minimizing costs, however, by using the environmental targets already set by the government, we are able to focus on minimizing costs to meet those targets.

5 We recognize that the cost-effectiveness indicator is not relevant for setting emission reduction targets. Instead, the preferred target setting approach would be to minimize total abatement costs while maximizing cumulative emission reductions between now and 2050.

6 A measure of consumer satisfaction related to consumption and leisure time, but not including benefits related to stabilizing climate or reducing CO2 emissions

7 A stranded asset is an asset whose market value is less than its book value because it has become obsolete before the completion of its depreciation schedule.