“Canada is back, my good friends,” Prime Minister Justin Trudeau declared in Paris at the United Nations conference on climate change. “And we are here to help.” Donning the mantle of national leader in the fight against global warming and loudly promoting the concept of pricing carbon earned Canada’s new leader widespread acclaim on the world stage. He should be careful with his boasts, however. In placing himself at the head of Canada’s carbon pricing parade, Trudeau was in fact promoting a national emissions reduction target left to him by his predecessor, taking credit for the independent actions of other levels of government, and making commitments he is powerless to deliver himself or force upon others. There will be plenty of economic and political upheaval across the country as this parade gathers speed. But barring a dramatic invasion of provincial jurisdiction, Trudeau will be irrelevant to the entire process, however hard he waves his baton.
Canada is a highly-decentralized country with plenty of scope for provincial innovation on policies of national importance. Whether you consider this to be evidence of a messy “patchwork quilt” (as advocates of national social programs complain) or an elegant “national tapestry,” (according to fans of provincial autonomy) all the action on carbon pricing in Canada to date has occurred at the provincial level.
In 2008 British Columbia established a carbon tax broadly applied to all forms of fossil fuel consumption. This year the tax will bring in $1.3 billion. All money earned is returned to taxpayers through various tax reductions in what is known as “revenue recycling”. The tax started off at $10 per tonne of carbon dioxide emissions and has been capped at $30/tonne since 2013.
An alternative to taxing carbon directly is a cap-and-trade system. This sets a maximum amount of carbon emissions provincially and sells permits up to this amount to industrial and commercial emitters. These permits can then be traded, establishing a market price on carbon emissions. In 2014 Quebec linked to California through the Western Climate Change Initiative and began cross-border trading in carbon emission permits. The current price is approximately $15/tonne. Ontario and Manitoba have recently announced their intention to join this program as well.
Alberta, which in 2007 became the first province to levy a carbon tax on large emitters, this fall adopted a hybrid system with an economy-wide carbon price starting at $20/tonne in 2017 and rising to $30/tonne the following year. While the Alberta scheme allocates emissions rights and allows for some trading within the province, most emitters will likely pay the set carbon levy, causing it to operate like a tax. It is thus distinct from the other two systems.
Eventually all provinces can be expected to establish their own system: either some sort of tax that involves a government-mandated price on carbon, or cap-and-trade, which sets emissions targets and allows the price to be determined through the market. Regardless, it is a process occurring independent of any action or direction on the part of Ottawa.
This is as it should be, according to Canada’s Ecofiscal Commission. “The provinces are all very different in energy use, economic structure and emissions profiles and so it makes sense for the provinces to take charge,” says Chris Ragan, chair of the blue-chip carbon pricing advocacy group that includes former Prime Minister Paul Martin, former Reform Party leader Preston Manning and numerous other luminaries from Canadian economics and politics. “The number one thing the federal government can do right now is not get involved in carbon pricing,” Ragan argues. He’s looking forward to a “national tapestry of provincial policies” on climate change.
Trudeau’s Medicare prescription for climate change
Prime Minister Trudeau seems content to follow this advice. In a speech to the Calgary Petroleum Club last February, he explicitly referenced Canada’s decentralized health care system as his model for carbon pricing. His election platform also promised to let the provinces take the lead. So aside from his enthusiastic cheerleading, Trudeau is actually following the same hands-off policy of his predecessor. B.C.’s carbon tax and Quebec’s cap-and-trade system both sprang into existence on former Prime Minister Stephen Harper’s watch. And Canada’s official submission to the Paris conference − a commitment to lower national emissions to 30 percent below 2005 levels by 2030 delivered with such flair by Trudeau, is another gift from the Harper era. Whatever “pan-Canadian framework” on climate change is established at a much-anticipated federal-provincial meeting expected this coming March, it will inevitably consist of pre-existing provincial initiatives developed without input from the federal government.
How this provincial patchwork/tapestry will affect the Canadian economy remains uncertain. Current carbon prices don’t appear to pose a major threat. “At $15 to $30 per tonne, there will be more or less no impact on the economy,” says Nicholas Rivers, Canada Research Chair in Climate and Energy Policy at the University of Ottawa, who has done extensive economic modeling on various carbon pricing scenarios. Ragan concurs, arguing that strict revenue recycling can ensure consumers and businesses are left no worse off by having to pay to burn carbon. Even Ross McKitrick, CBE Chair in Sustainable Commerce at University of Guelph and one of the world’s most cogent critics of current climate change science and policy, agrees today’s carbon prices present little risk to economic activity. B.C.’s carbon tax has raised gas prices by 7 cents a litre, he notes, but the economy has survived much bigger price shocks in the past.
Of greater concern for McKitrick is the thick layer of regulation that currently constrains economic activity in the name lowering greenhouse gas emissions. It is the cause of blocked or delayed pipelines, forced coal power plant closures, hard emission caps and much else that harms investment, jobs, economic growth, and government revenues. Then there’s the economic damage inflicted by government funded or mandated energy efficiency programs, most of which are massive money losers. A U.S. program to encourage low income households to insulate their homes, for example, boasts a -10 percent rate of return and costs taxpayers about $500/tonne of carbon emissions saved. McKitrick’s research suggests bio-fuel initiatives, such as blending ethanol in gasoline, cost at least $400/tonne. To ensure a modest carbon price really has a benign impact on growth, he says it will be necessary to “repeal all these other inefficient command and control regulations.”
But just as low carbon prices alone may have little or no impact on economic growth, they will likely have little or no impact on carbon emissions. “You need to distinguish between modest carbon prices from the sort of things we will need to do to reach ambitious targets on emissions,” says Rivers. Along with Trudeau’s recycled pledge to cut emissions by 30 percent within 15 years, the Paris agreement also commits signatory nations to limiting the overall growth in global temperatures to no more than 2ºC. “To do these things, we’re going to need carbon prices that are a lot higher than $30 a tonne,” Rivers observes. Meeting these goals will inevitably require carbon prices in the triple digits.
The International Energy Agency pegs the world carbon price necessary to hit a 2ºC maximum at $135/tonne by 2030 in current dollars. Rivers’ calculations show even a $100/tonne carbon tax could cost the Canadian economy up to one percent of GDP. “Some sectors will become economically unviable” at this price point, he notes. “There will be significant structural change.” Industries facing an existential crisis include coal, cement, petroleum refining, heavy chemicals and certain aspects of agriculture. It’s possible Canadian oil and gas extraction could survive, he allows, although this depends on world prices.
The Paris Climate Agreement, with the unconditional support of Canada’s Environment minister Catherine McKenna, set a substantially more aggressive 1.5ºC global temperature target as its ultimate goal. For that, a carbon price closer to $300/tonne would likely be necessary. Such a scenario is uncharted territory with entirely unpredictable (though obviously terrifying) consequences. “We have no experience with a tax anywhere near that size,” says Rivers.
McKitrick has a pretty good idea what would happen. “Given that it’s unlikely China, India or even the U.S. will ever adopt a carbon price of $100/tonne or more, the resulting capital flight out of the Canadian economy would be devastating,” he says. “Our entire tax base would flee.”
In signing the Paris agreement, Trudeau has committed Canada to a plan that requires aggressive de-carbonization of the national economy. To do this will require carbon prices many, many times higher than those currently in existence or planned at the provincial level – prices that will shutter key components of the Canadian economy and cause considerable economic hardship, particularly in oil-producing provinces such as Alberta and Saskatchewan. Proponents of the threat posed by global warming argue this sort of dislocation is necessary to turn back the tide of carbon emissions and shift the economy onto a new energy track. No doubt. But how exactly will Ottawa ensure it happens?
Next up, Canada’s own climate summit
The March meeting with the premiers should prove a fascinating test of Trudeau’s powers of persuasion – or deflection. If he is intent on keeping Canada to its ambitious Paris targets, he’ll need the provinces to agree to do more – much more – on carbon pricing and emissions curtailment. But despite the provinces’ first-mover status, they’ve already demonstrated a keen sense of politically-motivated caution when it comes to protecting vulnerable sectors and avoiding exposing voters to economic pain, even at low carbon prices, all of which suggests a looming clash of visions over climate change.
Consider the inner workings of Quebec’s cap-and-trade system. While it sets a maximum limit to emissions in the province, the province has left plenty of room for its famous preference for picking winners and cultivating corporate champions. A long list of sectors are to be given their emissions permits for free. This giveaway includes politically-sensitive industries such as aluminum, cement, mining, pulp & paper, gypsum and agri-food. California has an equivalent list of protected sectors, including wineries, fruit packing, guided missiles and space vehicles. Ontario will doubtless have its own separate list of sheltered industries once it joins Quebec and California. This banquet of free permits distorts the efficiency arguments for carbon pricing and undermines the proper functioning of the carbon market.
“Cap-and-trade is like a milk marketing board for fossil fuels,” McKitrick snaps. He cites Europe’s emissions trading system as evidence for how a liberal application of free permits by jurisdictions worried about putting their economies at a competitive disadvantage can permanently derail such schemes. The current market price of carbon in Europe is just $12/tonne.
B.C.’s carbon tax, often praised as a textbook example of a “revenue neutral” carbon pricing system, has also been undermined by political meddling and concerns over economic impacts. Initially all tax revenue was to be recycled into personal and corporate tax reductions, thus insulating consumers and businesses from the hardship of higher energy prices. Since Christy Clark became premier, however, carbon tax revenue has been directed to various boutique tax credits for such things as home renovations and children’s fitness programs. Certain segments of agriculture have been given permanent exemptions. And the biggest business tax reductions now go to the film industry, that oft-favoured recipient of unjustified goodies from taxpayers.
In 2013 B.C. halted any further increase in its carbon tax due to the “small negative impact” of the tax on provincial GDP. “Increasing the carbon tax beyond the current $30/tonne would have a stronger negative impact on economic growth,” a provincial assessment states. This demonstrates a “provincial pain threshold” for carbon price that’s far below what will be necessary to fulfill Trudeau’s Parisian pledges, says McKitrick. “B.C. is a very green province and if $30/tonne is as much as they are willing to tolerate, then the idea any government can hit people with a $100/tonne tax and maintain their popularity seems pretty farfetched.”
It bears mentioning that many provinces have discussed emission or carbon price targets that appear every bit as ambitious as what Trudeau signed up for in Paris. The Alberta Climate Leadership Panel chaired by economist Andrew Leach, which provides the template for the Notley government’s new policy, contemplates a $100/tonne carbon levy by 2030. A similar B.C. advisory group says the province needs to increase its carbon tax to $350/tonne by 2050 if the province is to meet its obligations under provincial legislation. And this September, Quebec announced the very aggressive emissions reductions target of a 37.5 percent reduction by 2030 from a 1990 base. Meeting this goal will require a dramatic curtailment in provincial emissions permits, free or otherwise.
As much as the provinces may appear to be lining up behind Trudeau on the climate change file, however, remember these are still early days. Despite the frothy idealism in Paris, the development of carbon pricing policies in Canada has not yet reached full flower. More importantly, there have been no obvious quarrels between provinces or substantial push-back from voters. But this sort of conflict is inevitable over time, says Tracy Snoddon, an economist at Wilfred Laurier University who specializes in federal-provincial relations. “Once we start to see large differences in carbon prices between provinces, they’re going to start acting more like competitors than colleagues,” she says. This competition will be most notable between those provinces that choose a carbon tax and the group involved in the burgeoning cap-and-trade system. If, based on European experience, emissions trading prices are kept low by protectionism, industrial policy giveaways and other forms of political meddling, this could lead to dramatic shifts in regional economic mix. Whoever offers an exemption to the cement industry, for example, can expect to gain at the expense of provinces that don’t. As Alberta’s Leach Report explains: “imposing policies in Alberta that are more stringent than what we have suggested is not tenable until our peer and competitor jurisdictions adopt policies that would have a comparable impact on their industrial sectors.” No province will be so eager to fight climate change that it’ll allow others to benefit at their expense. All politics is local, even when it concerns global warming.
Another Trudeau, another NEP?
Further, having staked out their primacy in a brand new policy field, the provinces will be in no mood to take orders from Ottawa, particularly if federal direction affects the provinces unequally − which is inevitable. With different systems in operation across the country, any national plan will require convergence on either price or emissions targets. A collegial response to any federal request in this regard seems highly doubtful. One shudders to imagine the reaction from Quebec City if the prime minister suggested a doubling of their emissions permit prices to match the $30/tonne in effect in Alberta and B.C. The same response can be expected from any attempt to allocate emissions reduction targets across the country on a proportional basis, since this would increase the hardship on oil-producing provinces. On the other hand, why would Ontario accept a per capita emissions target that hits more-populous provinces harder? (Avoiding entrapment in any cross-country initiative is the real reason behind Alberta’s distinctive hybrid approach since it defies easy linkage with other jurisdictions.) Trudeau could try to impose a national standard on price or emissions by fiat, but that would be politically toxic; and uncomfortably reminiscent of his fathers’ reviled National Energy Program.
Those comparisons may soon be invoked in Alberta if Trudeau’s government makes good on its promise to expand the mandate of the National Energy Board to include upstream emissions from oil extraction in its pipeline permitting process. Such a move could make it even harder to get pipelines approved, and would be widely seen as singling out the already struggling Alberta energy sector for federal carbon punishment.
Finally and crucially, says Snoddon, “Ottawa lacks access to the billions of dollars of carbon revenue that will soon be flowing to the provinces.” The Leach Report estimates Alberta’s revenues from a carbon levy at $3 billion in 2018. Quebec expects to make $2.5 billion by 2020 selling permits. This is money that won’t be available to the federal government to bribe recalcitrant provinces into going along with any national plan. With Ottawa’s fiscal situation already deteriorating due to a panoply of Liberal promises in other areas such as infrastructure, traditional cheque-book federalism won’t be an option for the climate change file. On carbon pricing, the fiscal imbalance now heavily favours the provinces. It’s a dramatic reversal from the standard model of Canadian federal-provincial relations (excepting, of course, the Harper era) in which Ottawa is dominant and the provinces take orders.
To fulfill his global pledges Trudeau will ultimately have to rely on the goodwill and co-operative instincts of the premiers. Good luck with that. While the prime minister cites Medicare as his model for a coordinated national climate change policy, health care is a benefit appreciated by all Canadians and creates no major tensions between the provinces, who benefit from massive transfers of federal cash. Carbon pricing, on the other hand, disadvantages all consumers and puts provinces in direct competition with one another for jobs and economic growth. For this reason the appropriate analogy is not Medicare, but rather those many intractable problems that perpetually plague Canadian federalism, such as internal trade, security regulation and harmonized tax policy. If the premiers still can’t agree to allow beer to cross provincial borders – and Quebec fought a rear-guard action against butter-coloured margarine for decades – is it realistic to believe they’ll all join hands and allow Ottawa to set rules on carbon that could wreak economic havoc and/or put their provinces at a competitive disadvantage? The March meeting will tell the tale.
Whatever happens on climate change in Canada, it will occur because the provinces make it happen. And that means they must see it to be in their own self-interest. Ottawa won’t be running this show. The prime minister may think he’s leading the parade, but he should check behind him every once in a while to make sure it’s still there.
Peter Shawn Taylor is editor-at-large of Maclean’s. He lives in Waterloo and is married to Tracy Snoddon.
– THE CANADIAN PRESS/Adrian Wyld
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