federal government and 3 carbon coordination options | Ecofiscal

The Federal Government and the Three Carbon Coordination Options

Federal Government and the Three Carbon Coordination Options
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. Previous blogs have explored the fundamental objectives and challenges of carbon coordination, the country’s GHG emission gap and the overall benefits of coordinating carbon pricing policies. As the benefits of coordinating carbon pricing policies in Canada grow clearer, this blog explores what role the federal government could play.

As the federal and provincial governments are getting ready to meet in less than a month to discuss a national climate plan, multiple issues remain unresolved. Amongst those issues: how should the federal government consider national carbon pricing given the patchwork of provincial policies that currently exists? Indeed, B.C. has a carbon tax, Quebec, Ontario and Manitoba have cap-and-trade systems and Alberta has a hybrid policy. Other provinces such as Saskatchewan, the Atlantic provinces and the territories do not currently have carbon pricing policies.

A useful analogy to use when thinking of the role of the federal government and national carbon pricing policy involves the three porridge bowls in the Goldilocks and the Three Bears fairy tale (I’m not joking). If you recall your childhood, the first bowl was too cold, the second too hot and third just right. While not presupposing which of the “carbon pricing coordination bowls” the federal government will prefer, there are three broad options: (1) a bottom-up approach with no interference; (2) an aggressive top-down approach; or (3) a middle ground approach. Let’s explore some of the advantages and disadvantages of each bowl.

Bottom-up: too cold

A bottom-up approach means essentially that the federal government would play no role in coordinating carbon pricing policies. It would leave that process to provinces to negotiate. This is pretty much the picture for the past decade in federal carbon pricing policy. The main advantage of this approach is that it recognizes the important jurisdictional power of provinces over environmental matters. The important disadvantage however is that relying on voluntary provincial initiatives is likely not enough to meet current national targets. Furthermore, as some individual provincial policies become more stringent, while other provinces lag behind, this approach is likely to be increasingly costly for the nation. This is Goldilocks’ cold bowl of carbon policy.

Top-down: too hot

A top-down approach is the opposite of the bottom-up. It would essentially mean aggressive federal action, which would supersede existing provincial policies and force the implementation of the same carbon pricing policy in lagging provinces and territories. Its advantage is that a single, unified carbon price is the most cost-effective way to achieve the national target. It could also, however, create political turmoil by not respecting the progress that some provinces have achieved and by being potentially unfair for the unprepared provinces and territories. If federal action also means that the federal government keeps the carbon-pricing revenue, then even more political issues are raised. This is Goldilocks’ hot bowl of carbon policy.

Federal Government and the Three Carbon Coordination Options
St. Nicholas by Mary Mapes Dodge – 1873 (page 759)

Carbon coordination done just right

The last option is a middle ground between the first and second option. The federal government could set some kind of backstop, or minimum threshold, for carbon pricing policy. If provincial policy exceeds the threshold, they’d be exempt from federal policy. If not, the federal government would step in. It would gradually bring the lagging provinces into play while respecting the existing initiatives implemented by provinces. By levelling the playing field, it would increase cost-effectiveness compared to the first option. However, the stringency of the backstop policy is key to whether this approach will be adequate for the country to meet its national target. If it is done very carefully, this could be the policy bowl that Goldilocks finds just right.

Given the momentum of provincial policies, the need for a gradual catch-up of the remaining provinces and the history of the role of the federal government in tax coordination, the third bowl is likely the most “Canadian” choice. Of the three options, it is however the least well-defined. What shape could the backstop policy take? What level of stringency would it define? How would equivalencies between the different provincial policies be defined? These are all critical issues to address. These are precisely the topics we will cover in the next blogs. Bon appétit!

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

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