Leave carbon pricing to the provinces

Climate and Energy

This Full Comment piece by Glen Hodgson originally appeared in the National Post on April 7, 2015.

Carbon pricing is the most efficient way to fight climate change, and the provinces are best placed to apply it — at surprisingly low cost to business.

Today, Canada’s Ecofiscal Commission is releasing a new report arguing that independent provincial carbon pricing is the practical way to move forward on reducing Canada’s greenhouse gas emissions. But is a provincial approach practical for Canadian business? Our research shows that it is

The world is moving inevitably toward a lower-carbon future. Targets have already been set and international agreements signed. In this real world, delaying action on climate policy is a risky proposition. Studies in both Canada and the United States suggest that the longer it takes to implement climate policies, the more expensive effective action will be.

The flip side is that acting now may actually help to put Canadians ahead. With the right carbon pricing policies and practices in place, Canadian businesses could create a market advantage in areas from sustainable resource development to marine power to energy-efficient buildings and vehicles.

Our research confirms that carbon pricing is the most economically effective way to reduce emissions — far superior to the imposition of regulations to achieve a target level of GHG emissions. Carbon pricing allows firms and individuals to take decisions in their own best interests on energy consumption, production and innovation. If firms or individuals want to reduce the price they pay for carbon, they have the opportunity to innovate — to change how they produce and consume. In so doing, they will discover lower carbon products, processes and services that both meet their needs, and can be sold into the wider commercial marketplace.

Many Canadian firms, particularly those making very long-term capital investments, are already ahead of governments on carbon pricing. Firms are building carbon pricing into their decision-making scenarios in anticipation of future carbon pricing policy action. What they now need is a confirmed carbon pricing plan moving forward.

Why is the Ecofiscal Commission proposing action at the provincial level? Part of the response is practical. British Colombia and Quebec already have carbon pricing regimes in place. Alberta has a targeted carbon intensity tax on major emitters in the energy sector, and Ontario is openly debating the merits of different carbon pricing regimes.

Harnessing the momentum of provincial action, adapted and customized to provincial circumstances, makes common sense and offers a way forward now

Beyond practicalities, there are significant barriers to a “one-size-fits-all” Canadian carbon pricing system. Given the diverse economic and energy profiles of Canada’s provinces, and the resulting revenue differences by province from carbon pricing, a single top-down policy would be hard to implement (and sell across the country). Harnessing the momentum of provincial action, adapted and customized to provincial circumstances, makes common sense and offers a way forward now.

At the same time, let’s acknowledge there are perceived business risks associated with a “patchwork” of provincial carbon policies. Some would point to the costs of managing different provincial systems. In a perfect world, businesses would probably prefer the simplicity of a single national carbon policy (or even a single global policy). But Canadian firms have long had to manage and adapt to different provincial systems — corporate and other business taxes, employment training programs, and pension regulations, to name but a few. Provincial carbon pricing will be just another provincial system to manage.

What about the concern that different carbon pricing policies may lead business or investment to shift toward jurisdictions with weak or no carbon policy? In reality, there is little evidence of this race for the bottom. Research in the U.K. suggests its carbon levy has reduced energy consumption by firms, but has had little impact on employment or output. Early evidence on the B.C. carbon tax shows similar results. Businesses choose to operate in a particular location for a wide array of complex reasons. A price on carbon is but one factor to consider; indeed, a well-design and managed carbon pricing regime might even become a competitive advantage over time, as other jurisdictions look to implement carbon pricing.

Let’s focus for a moment on sectors and firms most likely to be affected by a price on carbon, those that are both high carbon-emitters per unit of production, and also trade on the global market. These sectors include cement manufacturing, iron and steel mills, and some chemical manufacturing. Policy design choices can help those sectors in particular. Phasing in carbon pricing policy gradually and on a clearly defined schedule would give firms in these and other sectors time to adjust.

Similarly, targeted transition assistance could be given to sectors, firms and individuals that are most affected by a policy change, to help with adjustment. For example, in February, the province of British Columbia implemented a “transitional incentive” allotting $22 million to the province’s cement industry over a period of three years, specifically earmarked to support adoption of cleaner fuels and other innovations that lower emissions intensity.

The bottom line is that global movement on climate policy is already taking place. Our research confirms that Canadian provinces are the right place to implement carbon pricing, now; and firms considering major long-term capital investments are already building carbon pricing into their decision making. The real risk for Canadian businesses is to keep acting like it’s business as usual. Time to get with the program!

About the Author

Glen Hodgson is chief economist at the Conference Board of Canada and a commissioner of Canada’s Ecofiscal Commission.

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