Saskatchewan remains an outlier on carbon pricing - Canada's Ecofiscal Commission

Saskatchewan remains an outlier on carbon pricing

Climate and Energy Pollution

On Monday, the Saskatchewan government unveiled its Made-in-Saskatchewan Climate Change Strategy. As expected, it does not feature a carbon tax or a cap-and-trade system, but does include a form of carbon pricing. There are many details that remain undefined in the Strategy, but let’s unpack a few key elements.

Missing piece

Since refusing to sign onto the Pan-Canadian Framework last year, Saskatchewan has remained adamant that it would not put a price on carbon. The new strategy highlights the lack of trust in market-based mechanisms, stating that “a simple tax will not result in the innovations required to actually reduce emissions… the conversation about climate change must be broader than carbon pricing.”

A broader conversation is important, but carbon pricing remains the most effective and cost-effective way to reduce emissions. It provides a nudge to businesses and households to reduce their emissions, and allows them to decide where, when and how to do so. In fact, carbon pricing is very good approach to drive low-carbon innovation.

It’s not a tax, but it’s something

While Saskatchewan’s plan sidesteps an economy-wide carbon tax, it does feature carbon pricing. Saskatchewan will apply a “sector-specific output-based performance standard” on facilities that emit more than 25,000 tonnes of CO2e a year. Assuming performance standards increase in stringency over time, they will function like a carbon price.

The mechanism, at least, could look very similar to the output-based pricing systems proposed in Alberta, federally, and more recently, Manitoba. That approach could help protect emissions-intensive and trade-exposed sectors from competitiveness pressures. The figure below shows those sectors in the top right.

If carbon price applies to very few emissions, is it still a price?

But there’s a problem. This performance standard will apply to a very narrow slice of emissions. It will cover the mining, pipeline and manufacturing sectors, but will exempt upstream oil & gas and electricity. In the absence of broader carbon pricing, small emitters—including vehicles, buildings, and small industrial facilities— will see no carbon price.

That approach will not create incentives for reducing emissions in most of Saskatchewan’s economy. And since it is inconsistent with the benchmarks laid out in the Pan-Canadian Framework, it opens the door for the federal government to apply its backstop in Saskatchewan.

Relying on non-pricing policies increases costs

Without broad-based carbon pricing, Saskatchewan will rely heavily on non-pricing policies that will function as substitute policies, which they provide some detail on. Given the prominence of the province’s energy and agricultural sectors, there is likely opportunity to identify and implement cost-effective non-pricing policies, such as methane regulations and adoption of best practices to maximize carbon retention in soil.

However, even a modest carbon price could potentially reduce emissions elsewhere in the economy at lower cost than some of these policies. By relying on particular sectors to drive emissions, Saskatchewan may leave lower-cost options on the table.

Something slightly new: ITMOs

As part of its output-based performance standards, Saskatchewan’s plan will allow firms to trade Internationally Transferred Mitigation Outcomes, or ITMOs – a first in Canada. ITMOs are relatively new international instrument that allow any jurisdiction to transfer a portion of its Nationally Determined Contribution under the Paris Agreement to another country. These transfers can include technology transfers or climate finance, or more traditional market-based instruments like offsets or emissions credit trading.

Emissions reductions outside of Canada still contribute to avoiding climate change. If they can be (legitimately) realized at lower cost than domestic reductions, this approach makes sense, both for Saskatchewan and other provinces.

The details for how ITMOs will work in Saskatchewan need to be hammered out, but certainty worth keeping an eye on.

Moving forward

Saskatchewan’s climate plan emphasizes innovation, resilience, and pragmatism. While there are still plenty of details to be determined, the lack of an economy-wide carbon tax is a missed opportunity across all three objectives. The province’s unique economic makeup doesn’t mean carbon pricing wouldn’t work or fit, just that its design should be careful—made-in-Saskatchewan, as it were. In neglecting to include carbon pricing, a legal battle with the federal government seems likely. If nothing else, Saskatchewan’s latest move is evidence that Canada’s ongoing shuffle towards coordinated, cost-effective climate policy is far from over.

 

2 comments

  1. Carole Lavallée

    These compare and contrast articles on how different Canadian sub nationals are trying to comply with the Fed. Carbon pricing plan were most useful. Now, may I ask if you can have a discussion on the consequences of switching back and forth between various policies and strategies as governments change over the years. Specifically, even though I prefer a carbon fee and 100%dividend, something the Ontario Conservatives are promising in this election campaign, the current Liberals already have a cap and trade policy in place. Is is worthwhile changing?Would we be wasting precious time switching governments to switch to carbon fee and dividend?

    • Brendan Frank
      Brendan Frank

      Hi Carole,
      It’s an excellent question. The costs of transitioning do matter. There are transaction costs and there’s the cost of undermining policy certainty. But it’s also important that we get policy right over long-term. But this is the debate we should be having: How to price carbon instead of whether to price carbon.

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