On October 10th 2016, Prime Minister Justin Trudeau announced that by 2018 there will be federally mandated floor price on carbon. This price will apply to all provinces and territories that have not instituted, or met the floor price by the 2018 deadline. Environment Minister Catherine McKenna made it clear that this measure is intended to serve as a “back-stop” for climate laggards. The proposed policy includes a carbon price of $10 per tonne starting in 2018, increasing $10 per year until it reaches 50$ by 2022.
Initially, the proposed policy would not affect the majority of the Canadians who reside in one of Canada’s four most populous provinces. This is because these provinces have a mandatory carbon pricing regime (or soon will) covering 30 out of 36 million Canadians. Ontario and Quebec have chosen a cap and trade system while their western most cousins, Alberta and British-Colombia, have opted to go with a carbon tax instead. However, these provinces will only remain unaffected as long as their provincial schemes keep- or out-pace the national floor price.
Instead of this backstop, the Federal Government could expound the potential benefits of a single national price. A single, national scheme would ease the hurdles to resource investment by reducing the layers of regulatory complexity. However, the provinces have already beaten the Feds to the punch by implementing their own climate policies. The strength of leaving it to the provinces is that each can craft its own policy, tailored to its unique energy system. Where this approach falls short is that it generates ten distinct regulatory regimes. For a firm examining prospective investment opportunities, this means it would have to comply with each province’s idiosyncratic climate regimes in order to transact its business.
A recent paper by Mark Jaccard at the Simon Fraser University raises the limitation of a pure carbon tax approach, and even questions why this policy solution has set in as orthodoxy among politicians, activists, and even academics across the globe. Dr. Jaccard draws attention to Canada’s repeated failure to achieve outlandish emissions targets, the dramatic carbon price escalation needed for Canada to achieve its 2030 Paris pledge, and the unfavorable political calculus around implementing a national carbon price.This is the same academic who on two separate occasions has called for a moratorium on new oil sands development.
In the report, Jaccard models a number of regulatory scenarios. One scenario simulates the effects on Canada under a single, national carbon pricing scheme, while another simply applies existing provincial and federal schemes with modest increases in the price leading up to 2030. Those existing schemes include Alberta, B.C, Ontario, and Quebec complimented by a Federal price (of $15 per tonne) applied only to provinces and territories which lack an explicit carbon price.
The first set of discouraging results were brought to light by modelling schemes already in place for Alberta, British-Colombia, Ontario, Quebec, and with the addition of the $15 federal carbon price. In this scenario, the researchers federal price remains at $15 from 2017-2020, then progressively increases to 25$ by 2030. The scenario’s federal price only applies to provinces that fall short of meeting the nationally set floor price. Through their analysis, the researchers found this plan would fall far short of meeting Canada’s COP21 commitments. This would still be the outcome, in spite of the fact that the model included generous subsidies for “clean” energy development, and overly optimistic figures for public transit usership.
Second, for Canada to meet its COP21 targets under a single, national carbon price, it would take a price of approximately $200 per tonne of CO2 by 2030. As is noted in the paper, this absolutely outrageous carbon price’s would find no political support among the wider public.Under this emission pricing scenario (single national tax), the cost to oil sands producers is pegged at $50 per barrel by 2030. Compare this against the Energy Information Agency’s (EIA) forecast price of US$97 per a barrel by 2030 (taken from EIA’s 2016 annual outlook report). This additional cost would severely cut into producers’ margins, thus challenging the viability of any new oil sands projects. The modelling also does not account for pipeline access issues, which force producers to take deep discounts on their bitumen. The greater consideration for policy makers contemplating either approach would be the associated political risks.
The political wrangling needed to secure provincial buy-in is perhaps the most daunting challenge to either scenario. Few politicians I know of would have the staying power to survive the fallout resulting from either a $200 carbon price, or even unilateral application of a modest $15 price. Of all the members of Confederation, Saskatchewan has been the most vociferous in its denunciations of the Liberal Government’s proposal. The war of words culminated with Premier Brad Wall raising the specter of a fight over the federal transfer payment system. This heated rhetoric should provide plenty of reason for the Trudeau Government to re-consider its position.
There are three obvious options available to the Federal Government. First, the Feds can leave climate change policy to the provinces, instead focusing its efforts on promoting the adoption of robust schemes, albeit without Federal direction to achieve national harmonization. Second, the Federal Government could adopt a flexible policy approach. This approach would aim to reduce emissions, while attempting to find opportunities to harmonize the disparate regimes. Or, it simply could refrain from the promotion of, or providing assistance on, climate change policy development.
Considering the fact that the Liberals’ made environmental issues a centerpiece of their electoral campaign, it’s hard to envisage them backing off their climate change agenda. This makes the third option of withdrawing support for a climate strategy unlikely. Alternatively as the second option states, the Liberals could promote climate change as a national issue to be solved by the Premiers. Taking this tack would mean that the Federal Government could provide assistance to the provinces with funding, or technical assistance on climate policy development. This strategy would, however, likely yield a fractured regulatory system that erects new administrative barriers to inter-provincial resource investment; and it would create disunity in the effort to meet the COP21 targets.
Minister McKenna’s best possible option as a policy maker then is to build national consensus around a flexible, integrated climate scheme (assuming the Liberals are unflaggingly married to meeting their climate change targets). A flexible scheme will need to count the implicit, as well as explicit, carbon prices created by provincially derived solutions. The implicit price differs from an explicit price in that it is an “estimate of the carbon price that would have been needed to achieve the same level of emission reduction as one or a package of these alternative policies. This is sometimes referred to as the ‘implicit carbon price’ of non-price policies, as opposed to the ‘explicit carbon price’ of a tax or tradable allowance price.” For example, subsidies for the carbon capture and storage system at Saskatchewan’s Boundary Dam, which equates to an implicit price of $60-$80 per tonne of CO2, could count toward Saskatchewan’s share of the national emissions target. By permitting a variety of measures through this flexible inclusion, it should make it easier to get buy-in from provincial stakeholders.
Moreover, the authors of the paper note that some of the largest decreases in greenhouse emissions have come from provincial regulatory interventions, not from carbon pricing policy. The starkest example of this is “BC’s zero-emission electricity requirement caused the cancellation of two coal-fired power plants and prevented a large gas-fired plant, reducing likely annual emissions by 10-15 Mt, three times the expected effect of its $30 carbon tax.” This does not mean a carbon tax is off the table, it simply means that to rely solely on a tax would be naïve. The more effective solution would be a combination of regulatory and pricing policies. However, the solution I am propose differs from those arrived at by Jaccard’s and his associates.
Averting failure will require three main ingredients. First, the Federal Government has to realize the Paris Climate targets are so overly ambitious, that they border on fantasy. The Feds should revise 2030 emissions targets to a more responsible figure. Second, policy makers need to craft an approach that takes stock of provincial solutions, and takes all reasonable efforts to harmonize the disparate regimes. And finally, it will take the political maneuvering of brilliant tactician to reach a national agreement on combating man-made climate change. At this stage it appears any future climate agreement will depend most on the political acumen of our Dear Leader.
NOTE: The Federal Government’s October 3rd announcement came after the paper was authored, and so the modelling does not perfectly reflect the Government’s proposed policy. The paper still provides a useful frame of reference for what is needed to achieve the Paris 2030 emissions targets.
Correction: The previous version of this entry stated a tax of $265 per tonne, it was actually $200 per tonne.
Read more insightful analysis from Maxwell Harrison here