Federal mechanisms for carbon coordination

Federal carbon coordination
Climate and Energy

As part of our ongoing blog series, we are exploring some of the difficult questions around designing a coordinated provincial-federal carbon pricing strategy. As the Prime Minister and the Premiers head into meetings next week in Vancouver, it looks like one role of the federal government could be to establish some kind of minimum level of policy stringency. Let’s take a look at what this might mean and how this could play out.

A federal “backstop” to encourage coordinated policy

I attended a great conference last week on Canadian climate policy, and mechanisms for coordination were on the agenda. Ecofiscal’s own Paul Boothe pointed out that the federal government could set a “backstop” for carbon policy. In other words, the federal government could implement a minimum level of policy stringency across the country. But it could also exempt provinces from the federal policy—as long as “equivalent” provincial policy meets or exceeds the federal backstop. (Stay tuned for more details from Paul on Canada’s history using such policy approaches).

In particular, the federal government could set a minimum carbon price ($15 per tonne has been floated). This would create incentives for provinces to implement policies that converge to a common, pan-Canadian carbon price, which we’ve argued is economically sensible for several reasons. In practical terms, this approach would also have to consider the percentage of provincial GHG emissions covered by the pricing policy. As a result, we’re probably actually talking about establishing a minimum level of coverage, in addition to a minimum carbon price.

Price vs. quantity: defining provincial effort

Using a federal carbon price as a backstop bypasses a tricky and polarizing conversation about splitting up the emissions pie. Instead, it puts the focus on what a carbon price can do best: driving low-cost emissions reductions across Canada. And recent analysis suggests that sharing provincial effort in a cost-effective way doesn’t necessarily imply big compromises on provincial fairness.

Still, there is an alternative approach that could be used. You could imagine defining quantities (i.e., provincial emissions levels) for each province to achieve by a certain date. As long as each province has policies that realistically are designed to achieve its defined share, it would be exempt from federal policy. Provinces with cap-and-trade systems might prefer this approach, partly because it could better account for purchasing emissions reductions from outside the province (for example, from California, via linked carbon markets). Such a quantity-based approach could also account for provinces’ use of non-pricing policies, such as regulations or performance standards. It also, however, begs the question about how to assign the quantities to each province, thus inviting contentious debates about how much each province should contribute toward the national emissions-reduction target. And there are different ways to divvy up Canadian emissions, with different implications for fairness and overall costs.

Federal carbon coordination: devils and details

Lots of questions remain. In particular, a carbon price of $15 per tonne is unlikely to drive emissions reductions consistent with Canada’s existing 2030 target. But the price of carbon in Quebec—and soon, in Ontario and perhaps Manitoba as well—is set by the joint market with California. What does this linkage mean for a backstop carbon price? How might interactions between provincial cap-and-trade systems and other federal policies lead to complications? We’ll return to these questions in the next two blogs.

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

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