Canada’s Climate Plan announcement last month revealed the federal government plans to increase the carbon tax annually up to a new proposed $170 per tonne by 2030 to exceed Canada’s promise to cut emissions by 30 percent below 2005 levels.
“There is no vaccine against a polluted planet,” the P.M. said at a press conference.
One could make a similar statement about carbon leakage- that there is no vaccine that can effectively combat the negative effects of carbon leakage on the global environment.
It seems the current administration is unaware of the important consequences of carbon taxes.
The mechanism of Carbon Leakage
Carbon leakage occurs when attempts at carbon emissions reduction by one country with a strict climate policy, like Canada, result in an increase in greenhouse gas emissions in a second country. The Fraser Institute colourfully described carbon leakage as “The Whack-a-Mole Effect” in a 2019 article, after the classic midway game. The author Kenneth P. Green describes the specifics of carbon leakage that apply to Canada as follows:
”The issue of carbon leakage, which happens when emission-intensive and trade-exposed industries—facing costly climate policies (GHG regulations or carbon taxes)—relocate to jurisdictions with less-stringent environmental policies. Carbon leakage has the potential to further undermine the utility of Canada’s carbon tax given that the United States, our major trading partner, doesn’t have a comparable carbon-pricing plan.”
While Canadians await the Supreme Court’s decision on the constitutionality of the federal carbon tax, it seems worth investigating carbon leakage and asking why it is not being investigated by the current administration.
Interestingly enough, Climate Change Minister Jonathan Wilkinson is quoted as saying Canada must “look at industrial emissions and how we can actually help our Canadian companies to be competitive in a low-carbon world.” while underestimating the negative impact of the Carbon tax and Clean Fuel Standard on the competitiveness of Canadian industries and the negative environmental effect on the world that those policies are intended to protect.
Not unknown to Environmentalists but few Canadian papers on the subject
Michael Binnion, CEO of Questerre Energy, a Tax Accountant by training and current Executive Director of the Modern Miracle Network has deep insights into what seems to be the most underestimated consequences of the current UN approach to global GHG emissions reduction. He has written several papers on the subject of carbon leakage. In an interview with the BOE Report, he stated,
“Carbon Leakage is not unknown to environmentalists, but surprisingly there are few Canadian research papers on the impacts of Carbon leakage on global emissions. Rather than reducing global emissions, the approaches recommended by the EU often mean they just export their emissions to other countries. Academics, CAPP, and Oil and Gas majors should be supporting research into the negative effects of the current policies which produce carbon leakage – a direct result of the Paris Accord emphasis on production-based accounting for emissions.”
Binnion sees carbon leakage as the consequence of a production-based accounting approach to CO2 emissions – the approach taken by the EU for both the Kyoto and Paris Accords. Production-based accounting estimates the greenhouse gas emissions from all the oil, coal, and gas produced in a country from extraction through to refining, as well as other energy-intensive industrial production, etc. Binnion points out that production-based accounting of CO2 emissions has disadvantages. For example, it excludes emissions stemming from international air and sea transportation. Since those emissions do not take place within a specific territory its attribution to specific countries is difficult.
The risk is energy-intensive industries in countries with strict emission controls, regulations or taxes might move to territories with fewer restrictions and lower energy costs, and little or no environmental controls. The goods produced in the less restrictive countries would then be exported to the more restrictive countries. International specialization can encourage some countries to outsource the production of carbon-intensive goods to other countries with lower production costs but higher emissions. Carbon leakages can then result in a net increase of global CO2 emissions.
The Double Dividend
In the age of global outsourcing, if we let other countries produce everything for us then we have no emissions from production. Michael Binnion notes that,
“We also have fewer jobs, the government will have less tax revenue and the country will have low GDP. If you take this whole concept of carbon leakage to its logical conclusion – if you take the Kyoto and Paris accounting systems to their “illogical conclusions” then you can have zero emissions if you just have zero production. But Canadians still pay money – pay carbon taxes, pay for costs resulting from the Canadian fuel standard to reduce local emissions but the result is an increase in global emissions. However, if we reverse carbon leakage by producing more of the stuff that we can in an environmentally more responsible manner than the rest of the planet, then you know that’s really where you’re going to get a double dividend – more Canadian jobs and less global emissions”
The Green Paradox
Binnion says under the Paris Accord accounting system, the producer ends up paying for consumer decisions. Canada is a country that exports high energy goods- often the result of extractive industries or agriculture, or manufacturing. Canada is highly regulated with many environmental protections. For example, Canada is one of the most environmentally conscious producers of aluminum globally. It is one of the most efficient producers of high energy goods but Canada gets penalized for even low-emissions production under production-based accounting rules.
He makes a good case for consumption-based accounting for CO2 as a better basis for global emissions reduction policies. The National Academy of Sciences of the United States of America’s findings support the adoption of consumption-based accounting for global CO2 emissions as well, stating
“Twenty-Three percent of all CO2 emissions from fossil-fuel burning (globally), were emitted during the production of goods that were ultimately consumed in a different country. Where exported from emerging markets to developed countries, these emissions reinforce the already large global disparity in per-capita emissions and reveal the incompleteness of regional efforts to decarbonize. Consumption-based accounting of CO2 emissions demonstrates the potential for international carbon leakage. Sharing responsibility for emissions among producers and consumers could facilitate international agreement on global climate policy that is now hindered by concerns over the regional and historical inequity of emissions.”
This is the Green paradox- that attempts at reduction of emissions at home actually increase global GHGs as hydrocarbons are produced in poor ESG jurisdictions. Binnion says Canada is especially vulnerable to the Green paradox. He also points out that Canada has a comparative carbon advantage. In an article he authored in the C2C Journal he explains,
“We already have some of the world’s toughest emissions standards and practices in numerous areas of manufacturing, processing, and resource extraction, delivering very high rates of productivity per unit of greenhouse gas emissions. One could say Canada enjoys a “comparative advantage in carbon.” But current policies are also making Canadian firms less competitive than their global competitors. Adopting policies to reverse this trend could lure more production in emission-intensive industries away from inefficient foreign suppliers and into Canada. Doing so would lower overall global emissions while delivering jobs and wealth to this country.”
In short, if Canada produces more, we can reduce global emissions. Binnion thinks we can use smart regulations instead of taxes to achieve this result. He says there are problems with the Clean Fuel Standard which he points out will only increase the cost of fuel disproportionately and calls it the “High Cost” Fuel Standard. He says since it is layered on top of the carbon tax, Canadians will turn to high emission imports, which will be cheaper since they will come from jurisdictions with no carbon pricing and much higher emissions and possibly higher pollution due to lack of controls.
For a real-world example of the perils of turning to high emission/low environmental standards jurisdictions, we only have to look to a 2008-2011 scandal over the environmental practices of Chinese polysilicon suppliers to the manufacturers of photovoltaic panels. Chinese suppliers were able to dramatically reduce the price of photovoltaics from 2008 on and by 2014 nearly half the world’s photovoltaics were being manufactured in China. However, some of those manufacturers were dumping toxic silicon tetrachloride waste from producing cells on farmers’ fields instead of investing in equipment that could reprocess it, rendering those fields useless for growing crops and polluting the air for nearby residents. In 2011 China set standards requiring that companies recycle at least 98.5 percent of their silicon tetrachloride waste yet it remains to be seen how well the rules are enforced, especially since internal reporting during the original incident was suppressed.
Binnion also says the Clean Fuel Standard is an arbitrary standard that is not set relative to global standards,
“The fundamental problem with the “High-Cost fuel standard” (CFS) is that it is layered on top of a bad policy that actually increases global emissions for our export industries. It sets an arbitrary percentage reduction instead of setting it relative to foreign competition.”
How Australia and Norway made the right Carbon Choices
Binnion sees options for Canada to handle Paris Accord directives better saying,
“Look at what Australia did with Kyoto. They realized it was foolish for Australia as an exporter to tax themselves out of the market when they’re actually more environmentally responsible. They recognized it was the opposite of what they were trying to do, so they opted out of the carbon tax. Norway has had a Carbon tax since 1992 but when the European emissions trading system (ETS) came into effect, Norway revised its Oil and Gas fiscal terms. They revised their Energy and Environmental reviews and completely redid their environmental regulations and their oil and gas regulations before agreeing to the EU ETS in Oct 2019 so their Oil and Gas gas companies would stay competitive.”
The $7B to $10B challenge
Michael Binnion characterizes global energy requirements as a “Seven to Ten challenge”. There are currently over seven billion people globally and there will be 10 billion by 2050. He predicts the world will need almost double the amount of energy that is being currently produced. There is a fear that this increase in energy consumption will produce a devastating increase in carbon emissions and pollution. He thinks that in Alberta and Canada, we are in the best position in the world to solve this challenge. Alberta has a history of innovation and he thinks we can double the energy produced and reduce the environmental footprint at the same time and one example of how we can get there is with zero-emissions production of natural gas.
Maureen McCall is an energy professional who writes on issues affecting the energy industry.