Home / Parallel Paths – 2.2 Framing Issues: Competitiveness and Policy Delay

Parallel Paths – 2.2 Framing Issues: Competitiveness and Policy Delay

To set the stage for our detailed analysis in the next chapter, we examine two principal issues : competitiveness and policy delay.

These issues highlight tension between environmental and economic outcomes of climate policy. Competitiveness represents an economic risk of moving forward with Canadian climate policy. Policy delay represents the environmental and economic risks of failing to do so.

COMPETITIVENESS

Competitiveness is a key economic issue in the context of Canadian and U.S. climate policy given the extensive trade integration between the two countries. Competitiveness issues arise when Canadian firms or economic sectors are comparatively disadvantaged by higher carbon costs than those borne by their competitors in the U.S. Canadian competitiveness is impacted by a range of external factors beyond its own climate policy choices, including the trade exposure and emissions intensity of Canadian sectors, differences in the Canadian emissions profile compared to the U.S., and differences in our respective energy economy profiles. Competitiveness has been cited as a major reason for Canada to implement policy only in parallel with its trading partners, and in particular the U.S.

The U.S. Waxman-Markey bill established a set of criteria to define which U.S. sectors are vulnerable to competitiveness pressures from firms that do not face comparable climate policy. First, a sector must qualify as either energy or emissions-intensive. Second, a sector must qualify as trade-exposed. (Together they are energy or emissions-intensive and trade-exposed, or EITE.) Third, these criteria are applied to manufacturing sectors, excluding the extractive sectors.

Based on the first two criteria, about 60 % of Canadian industrial emissions are energy or emissions-intensive and trade-exposed (EITE) under the definition in Waxman-Markey.⁴ These sectors account for about 10 % of Canada’s GDP.⁵ A number of sectors meet the two criteria :

• Oil and gas extraction (about 3 % of GDP)
• Mining (about 1 % of GDP)
• Some pulp and paper sub-sectors such as pulp, paper and paperboard mills (less than 2 % of GDP)
• Some chemical manufacturing sub-sectors (less than 1 % of GDP)
• Cement and other non-metal mineral manufacturing (less than 1 % of GDP)
• Some iron and steel manufacturing sub-sectors (less than 2 % of GDP). Appendix

Appendix 7.4 illustrates how these sectors meet the EITE criteria for vulnerability to competitiveness. Under Waxman-Markey, only manufacturing sectors are eligible for EITE-related provisions, which means that oil and gas extraction and mining are not considered vulnerable under the bill. The remaining sectors listed similarly qualify as EITE in the U.S.

POLICY DELAY

The issue for Canada, however, is not only an economic one — Canada’s environmental goals are also at stake.

A market-based policy that puts a price on carbon is essential to achieving Canada’s emissions reduction targets. Policies already implemented or proposed by the Government of Canada such as regulations for vehicles and for existing coal-fired electricity are important steps, but are insufficient on their own to drive down emissions from all parts of the economy. While the announced vehicle efficiency standards for cars and light trucks and the phase-out of coal-fired electricity do achieve significant reductions, they are unlikely to achieve the government’s 2020 targets on their own. Figure 6 shows the estimated emission reductions gap between expected emissions levels in 2020 and the 2020 government target.⁶ This analysis, provided by Environment Canada, suggests that GHG emissions will continue to climb, and by 2020, the total gap between emissions and the 2020 target would be approximately 178 Mt. To achieve the 2020 target, additional policy steps will be required.

Policy delay also increases economic costs. If the delay is sufficiently long, costs must rise more sharply in a shorter time frame to achieve the targeted reductions. In its report, Getting to 2050: Canada’s Transition to a Low-Emission Future, the NRTEE showed that delaying the implementation of policy that puts a price on carbon emissions increases the costs and reduces the political viability of achieving stated GHG emissions reduction targets within the time frames set. The NRTEE built on these findings in its follow-up report, Achieving 2050: A Carbon Pricing Policy for Canada, which showed that in order to achieve GHG targets at least economic cost, the federal government should establish a clear price signal over the long term using a national, economy-wide cap-and-trade system. In the absence of certain long-term climate policy, the high annual investment in new capital, combined with an average time horizon of 10–15 years between conception and completion of new electricity-generating installations, will result in investment in lower-cost, higher-emitting technologies. Because much of this high-emissions capital has a long lifespan, it will not be replaced for many years and is therefore “locked-in.” When climate policy is ultimately implemented, this lock-in will result in a decreased capacity to switch to low-emitting technologies and consequently higher carbon-policy costs to achieve emission reductions. It will be more expensive to change to low-carbon-emitting technologies and require government regulations, directives, and possibly subsidies to do so.

Updated economic modelling conducted by the NRTEE for this report highlights the risks of delaying Canadian climate policy. Figure 7 shows the required carbon prices and costs for three scenarios that each achieve the government’s target of a 17 % reduction of GHG emissions below 2005 levels in 2020. Costs reflect an estimate of the added expense for emitters of their abatement choices in response to the price signal. Scenario 1 (Start Now) assumes climate policy is implemented in 2010, scenario 2 (Start 2015) assumes policy is implemented in 2015, and scenario 3 (Start 2020) assumes policy is implemented in 2020.⁷ Each scenario is able to achieve the 2020 target because of the assumption that, with the policy implementation date announced significantly in advance, businesses plan and make the appropriate investments needed to hit targets. To make the assessment comparable, the cumulative amount of emission reductions is constant across the scenarios to 2030. While both the Start Now and Start 2015 scenarios begin with a $30/tonne carbon price, the total costs from the Start 2015 scenario are 6 % higher than the Start Now scenario, given that the price must rise higher over a shorter period of time to achieve the 2020 target and the same level of cumulative reductions to 2030. If policy is not implemented until 2020, achieving the same level of cumulative emission reductions requires an even higher carbon price, and imposes 10 % higher costs than the Start Now scenario. The total added costs of delaying 10 years relative to starting now are approximately $5 billion.⁸

[4] While the electricity generation sector is emission and energy intensive, it is not trade-exposed under this definition.
[5] Sawyer, D. (2010).
[6] Based on analysis provided by Environment Canada.
[7] Unlike the main analysis in this report, this modelling was performed using a reduced-form version of the CIMS model, a technologically explicit, behaviourally realistic bottom-up model. The CIMS model is useful for exploring responses of the economy over time to a carbon price trajectory, but provides only an estimate of macroeconomics and total costs (which we explore in detail in this report using the GEEM model, a computable general equilibrium model, as described in Appendix 7.3). The price trajectories were constrained to achieve both the government’s 2020 target and equivalent cumulative reductions to 2030.
[8] Total costs are discounted to the present at a 10% discount rate.