Is Canada’s carbon-pricing policy striking the right balance?

pricing emissions
Climate and Energy

by Chris Ragan, Peter Robinson and Steve Williams

Debates about Canadian climate policy attract people from different perspectives and life experiences – including the three authors of this column. What views could we possibly share regarding sensible climate policy?

Heading up an environmental organization, Peter Robinson understandably emphasizes the urgent need to act decisively to reduce greenhouse-gas emissions. As an economist, Christopher Ragan has a professional habit of advocating the lowest-cost way to achieve any policy objective. And Steve Williams, as a leader of a large Canadian oil-producing company, naturally sees the need to protect the competitiveness of domestic business against rivals from jurisdictions with weaker climate policies.

Given these separate perspectives, one might wonder about our responses to the working paper released Thursday by the federal government, laying out many details of the Pan-Canadian Framework on Clean Growth and Climate Change.

It is well-known that the federal government favours each province and territory implementing a broad-based carbon price within its own jurisdiction. This is crucial, as research and experience show that a well-designed carbon price is the best way to shrink emissions while allowing the economy to grow.

The real news from the release is how Ottawa plans to deal with the competitiveness issue if and when the federal “backstop” takes effect – in those situations where the province or territory decides against introducing its own carbon-pricing policy.

Research by the Ecofiscal Commission shows that competitiveness is a legitimate concern for about 5 per cent of Canada’s economy; in Alberta and Saskatchewan, however, roughly 18 per cent of the economy is exposed to this risk. Dealing with business competitiveness is complicated, but effective solutions exist, and a specific one is included in the federal plan.

The central idea is referred to as “output-based pricing,” and when you examine the details there are really two distinct parts to the policy. The first part is that no large industrial emitter of greenhouse gases (GHGs) will be exempted from the policy. They will all face a carbon price, starting at $10 per tonne in 2018 and increasing gradually thereafter.

The second part is that those same large GHG emitters will receive credits – as in other jurisdictions, such as California – based on their level of industrial output. The emitting company will receive credits for each extra tonne of steel or cement or aluminum (or whatever) it produces. And the company will receive a more generous allotment of credits if its emissions-intensity is lower than that of its industrial peers.

The proposed combination of carbon price and output-based credit is an excellent way to reduce GHG emissions and address the business competitiveness problem at the same time, and this kind of policy will be needed until foreign jurisdictions catch up to our carbon-pricing policies.

This piece was originally published by the Globe and Mail on May 18, 2017.

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