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.

 

3 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.

  2. Jennifer Kirby

    In the Ecofiscal report: “The Way Forward”, the lack of clarity on the responsibilities of the provinces vs the federal government is noted. Saskatchewan and Alberta’s opposition party want Canada’s Supreme Court to rule on this issue to provide clarity on the responsibility of emissions.

    According to Statistics Canada, Alberta has lost 50 billion in GDP in the last two years. Economists at the Calgary Chamber of Commerce attribute this loss in GDP to investment leaving Alberta and increasing taxes: Climate taxes, income taxes and business taxes. According to the Government of Alberta, the foreign investment leaving Alberta’s oil and gas industry was 30 billion less than the foreign investment in Alberta in 2014. According to the Financial Post, there were $130 billion in cancelled projects in Alberta’s oil and gas industry in the past two years which is consistent with the upward emissions profiles generated in 2015 in the “The Way Forward.” Some of the loss in GDP is due to the low price of oil, but not ALL of it. Some is due to the implementation of the new tax structure and carbon pricing. Alberta’s carbon tax has resulted in foreign companies fleeing the Province of Alberta. These companies are polluting elsewhere in the world. Total, France’s oil production company just finished a project in Russia and Statoil, Norway’s production company just committed to a project in Brazil. The goal is to reduce global emissions, not to transfer wealth to other nations or the dictatorships middle east. The US has no intention of implementing carbon pricing. Which oil producing nations do the Ecofiscal commission expect to adopt carbon pricing? Will the transfer of wealth increase the strength of the dictorships? What about impact in the reduction in transfer payments to other provinces in Canada as a result of the loss in GDP in Canada’s oil and gas industry?

    A carbon tax is dependent upon good substitutes being available for existing fossil fuel products in the economy, for which renewables are not good substitutes. One can drive a car for 8 hours a day, but electric cars need to be plugged in for a half hour every 350 km. Electric cars are double the price of gasoline cars. Economic studies by the fraser institute indicate people are not interested in electric cars. In Canada, people only purchase electric cars if a subsidy is available. With the subsidy, very few Canadians have invested in electric vehicles.

    I do not understand the desire to include natural gas in the pricing since it is a part of the transition away from coal and oil. We spent the past twenty years installing natural gas infrastructure in an attempt to reduce the impacts from burning coal and oil. The Ecofiscal Commission is not engaging scientists and engineers in its policy development. In my opinion economists do not have all of the know how or the answers.

    Workers in Alberta and Saskatchewan are another challenge, from the moment one starts investing in education to work in the oil and gas sector, it becomes difficult to transition out of the oil and gas industry to another industry. In Alberta, there are 200,000 workers that have been unemployed for more than three years, most of these workers are highly skilled oil and gas workers. This transition for Alberta and Saskatchewan is not the rosy picture of no economic hardship predicted by Ecofiscal economists from central Canada and BC.

    As noted in the Ecofiscal report “The Way Forward” Alberta and Saskatchewan take in significant revenue from the oil and gas sector in the form of royalties. Economic pricing policy described by the Ecofiscal commission works better in the other 8 provinces other than Alberta and Saskatchewan. The other 8 provinces do not have extreme revenues resulting from pricing carbon. People and corporations need to pay the tax first, before receiving any money back in return. Albertan’s did not vote on carbon pricing and the opposition in Alberta intend to make carbon pricing an election issue. Policy for Alberta’s opposition will be developed by grassroots Albertans.

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