Carbon pricing deserves an honest debate

Climate and Energy

Yesterday, the Fraser Institute released an analysis of the impacts of the federal carbon price. Specifically, it examines the effects on business competitiveness. Carbon pricing is new to most Canadians, and we should have a full, honest discussion about this policy, backed by sound evidence and data. Unfortunately, the Fraser Institute’s analysis contains some serious flaws. In assessing the impacts of Canada’s carbon price, it obscures more than it clarifies.

First, some quick background: the federal carbon pricing system came into effect earlier this year. That system includes an “output-based pricing system” (OBPS) for large facilities that produce a lot of greenhouse gas emissions. An OBPS is a way to reduce greenhouse gas emissions by improving industry’s performance, not by shifting production and emissions to other jurisdictions. Put simply, it helps businesses get cleaner instead of smaller.

Yet this analysis from the Fraser Institute ignores the fact that Canada’s system is using an OBPS precisely to address competitiveness concerns. It does not consider the support that the system provides to vulnerable industries. Its modelling assumes that the full carbon price—which will rise to $50 per tonne by 2022—applies to large industrial emitters, despite the fact this is not how the policy is actually designed. As a result, it vastly overstates the likely competitiveness impacts of the policy.

The Fraser Institute notes throughout the report that emissions-intensive, trade-exposed industries will face competitiveness challenges in line with their modeling. This word choice is misleading. It ignores the special treatment that large emitters will receive under the OBPS in order to mitigate these challenges.

The report overstates competitiveness concerns in a number of different ways. It uses very simple methodologies that severely limit what it can tell us about the impacts of carbon pricing. The modelling approach does not capture the dynamic behavioural changes we would expect from businesses and people in response to the carbon price. Again, as a result, the modelling significantly overestimates the economic costs of the OBPS.

When the report eventually acknowledges the OBPS in a short, qualitative discussion, it seems to misunderstand how the system is supposed to work. It criticizes deliberate design choices as bugs, rather than features. Moreover, the analysis also seems to assume that competitiveness can only be protected when a sector faces zero net costs. This is not the case. The design of the OBPS reflects the unique competitiveness pressures each sector faces, and accommodates those differences. It both protects sectoral competitiveness and drives their emissions intensity down. This ensures that businesses can grow and thrive while positioning themselves to compete in a cleaner economy.

Output-based pricing offers the best of both worlds. It allows Canada to put a price on carbon in vulnerable industrial sectors while other jurisdictions catch up on climate policy, and allows us to do so without undermining our economic prosperity. The OBPS is a complex system. The Fraser Institute’s analysis acts as if it simply doesn’t exist.

1 comment

  1. Doug Sanden

    I found the study entertaining: What would happen in a world in which industry didn’t get the memo about climate change and what to do about it, and was surprised / caught flat-footed by a sudden $50/tonne carbon levy, and they could only think to eat costs and hold market share as an immediate response? The authors note the limitations of their study on p.3 and in the summary on p.20: the effects they found would be short term until industry adapted with technology, innovation, production methods and industry restructuring.
    Meanwhile back in the real world there’s plenty of evidence industry got the memo and isn’t waiting for the price signal: investors price emissions of public companies at $100/tonne (1), oilsands announced emissions plans to net zero (2), and ag chemical industry consolidated (3).
    – investors price emissions of publicly traded firms at USD $80/ton

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