The Benefits of Coordinating Canadian Carbon Pricing Strategies

Coordinating Canadian Carbon Pricing Strategies - Level playing field
Climate and Energy

As part of our ongoing blog series, we are exploring some of the difficult questions around designing and implementing a coordinated provincial-federal carbon pricing strategy. The first blog explored the core objectives and challenges of such a strategy, while the second blog explored the size of the emissions gap (i.e. the emissions reductions necessary to reach the targets). This blog takes a step back and asks a fundamental question: why is it desirable to coordinate carbon pricing policies in the first place?

Talks of a coordinated federal-provincial carbon pricing strategy may be on the horizon

Carbon pricing is top of mind for environmental policy-makers in Canada. By March of this year—90 days after the Paris COP agreement—federal and provincial governments will meet to discuss how to meet the country’s GHG reduction objectives — and in particular, Canada’s 2030 target. And given that this is the first of such meetings in over a decade, each province will be bringing different GHG reduction strategies to the table—relying on diverse policy instruments with varying levels of scope and stringency.

In some ways, provinces’ abilities to customize their own policy has enabled them to move forward with policy. But at the same time, stitching together a coherent national framework and moving toward pan-Canadian carbon pricing strategy will be a challenge; it must carefully manoeuvre around the nuances of Canadian federalism. So if developing a coordinated carbon pricing strategy is so tricky, why bother with such an approach at all?

The enduring economic and environmental benefits of coordination outweigh the one-time costs of federal-provincial negotiations

There are three key reasons why a coordinated carbon pricing strategy can lead to better economic and environmental outcomes than relying on decentralized regional or provincial policies:

The first clear benefit of a coordinated carbon pricing strategy is greater effectiveness in reducing carbon emissions. The current patchwork of provincial policies is likely insufficiently stringent; more aggressive policies are needed if Canada is to achieve its current national target. A coordinated strategy could, for example, set a minimum level of stringency across Canada. We’ll take a closer look at some of the mechanics of such an approach in a future blog.

Second, a coordinated strategy offers the most cost-effective way to mitigate GHG emissions. Different carbon prices in different provinces (with emissions in some provinces un-priced altogether) could result in inexpensive emissions reductions left unrealized. A uniform carbon price across Canada can ensure that the least costly ways of reducing emissions are adopted first, lowering the total cost to the Canadian economy.

The third benefit of coordination is a level playing field for businesses. A common carbon price can help alleviate competitiveness concerns: in a world with different provincial carbon prices, businesses may have the incentive to move to a lower-cost province. This not only leaves the total amount of GHG emissions unchanged (because emissions are simply moving between jurisdictions), but it also could result in higher economic costs for the provinces with more ambitious policies.

Yes, the process of coordinating policy could be challenging. The federal-provincial meeting in March is more likely to be starting point than the finish line. But coordination is worth the effort, given the clear and enduring benefits for environmental and economic outcomes.

The whole is greater than the sum of its parts

Carbon coordination can help Canada meet its international GHG reduction targets, in an effective and cost-effective way. A coherent, pan-Canadian framework can also level the playing field between provinces, reducing competitiveness concerns, and can reduce administrative redundancies. The path towards carbon coordination could be complex, and is likely to open up some of the challenging dynamics of Canadian federalism. But the end goal is worth it. The benefits of a coordinated carbon pricing strategy are greater than the sum of its parts.

Next in our blog series, we explore the possible role for federal involvement in coordinating a national carbon pricing strategy.

On February 23, we held a live panel discussion about #FedProvCarbon Coordination.
Watch the Panel

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