many pieces of Canada's federal-provincial climate puzzle

Federal and provincial ministers will be meeting early in March to discuss how best to move forward with coherent policies aimed at reducing greenhouse-gas emissions. Despite plenty of enthusiasm from the new federal government and a few provinces, the task ahead is daunting, and hard work will be required to sort through the many complex details. The Ecofiscal Commission will begin to explore some of these federal-provincial coordination issues in a series of blogs taking place over the next several weeks.

Why federal-provincial coordination on carbon?

Three primary objectives for coordination of policy across Canada should be adopted from the outset. First, we should aim to significantly reduce Canada’s greenhouse-gas emissions by 2020 and achieve even deeper reductions by 2050.

Second, we should commit to achieving these reductions with the smallest possible economic cost; that is, our policies should be “cost effective”. By harnessing the power of markets, carbon pricing offers the lowest-cost approach among all the alternatives. So carbon pricing should form the centerpiece of any overall Canadian policy framework.

Third, the federal government should respect the provinces’ right to develop policies in this space. The environment is a shared jurisdiction between the two levels of government, but energy and natural resources—which are clearly connected—lie within the provincial realm. Rekindling any federal-provincial tensions should be avoided.

What are some of the challenges for coordination?

Given these three primary objectives, and the fact that some provinces already have well-designed carbon-pricing policies, the big question is how the federal government can play a constructive role in promoting and piecing together a cost-effective pan-Canadian policy framework. This is a lot tougher than it might sound.

Some of the largest coordination challenges are as follows.

First, any policies should ensure that all carbon-pricing revenue generated within a province remains in that province, to be used in a way determined by the provincial government. So any federal policies that price carbon need to be accompanied by a promise not to send the revenue to Ottawa—and provinces need to be able to believe this promise. This is easier said than done.

Second, carbon prices should ultimately be harmonized across all regions. This is fair to all households, minimizes the risk that businesses will be put at a competitive disadvantage in some regions, and ensures that our emissions reductions will be achieved at least cost. What process best aligns the various provincial carbon prices? Is the possibility of federal action needed to convince recalcitrant provinces to introduce carbon pricing? And if the feds are needed here, how can we avoid creating federal-provincial tensions?

Third, should the federal government layer its own carbon price on top of the existing provincial prices, or should it leave pricing policies entirely to the provinces? If the former, how do we best integrate the two sets of policies and ensure administrative efficiency? If the latter, how do we achieve a common carbon price across Canada if some provinces choose not to introduce their own policies? And to what extent are interactions between various policies problematic?

A fourth challenge is California’s linkage with the cap-and-trade systems in Quebec and Ontario. This linkage effectively means that the path of the carbon price in our two largest provinces is determined more by California than by any shared objective with other Canadian provinces. Will this “California price” restrict the pan-Canadian price? Will it be consistent with our national objectives for emissions reductions? If not, can the links with California be severed and, if so, at what political price for Ontario and Quebec?

Finally, in order to drive the scale of emissions reductions that we need, carbon prices may have to rise considerably over the next few decades. If there is insufficient political appetite for high carbon prices, will our governments instead be driven to introduce less transparent—but more costly—regulatory policies to do some of the heavy lifting? There is a powerful economic argument to avoid such regulations, but economics often loses in a street brawl with politics.

Where do we go from here?

At the Ecofiscal Commission, we don’t yet have solid answers to these many questions. But they are too important not to be examined, discussed, and debated. So, over the next several weeks we’ll dig into the many aspects of the federal-provincial coordination issue in a series of blogs, and we certainly hope that you will respond with some thoughts of your own, in the comments below or on social media using #FedProvCarbon. Stay tuned.

This blog is based on the opinion piece by Chris Ragan in the Globe and Mail Report on Business on January 26, 2015.