What does carbon pricing mean for business competitiveness?

Competitiveness and leakage are important issues that can be addressed through careful policy design

• Competitiveness pressures for Canadian firms arise when carbon prices in Canada are significantly higher than carbon prices faced by those firms’ competitors in other jurisdictions.
• If unaddressed, these pressures can result in “leakage”—production or investment (as well as GHG emissions) shifting to other jurisdictions.
• Temporary, targeted, and transparent support to vulnerable sectors can address this problem while maintaining the effectiveness of carbon pricing.

Competitiveness pressures from carbon pricing affect a small part of the economy

• Canada’s Ecofiscal Commission estimates that at a carbon price of $30/tonne, around 5% of the Canadian economy is exposed to competitiveness pressures from carbon pricing. At $60/tonne, around 7% is exposed.
• Only sectors that are both emissions-intensive and trade-exposed (EITE) face competitiveness pressures.
  • Emissions-intensive sectors have larger carbon costs as a share of the sector’s GDP
  • Trade-exposed sectors sell their products in international markets and have competitors from countries that have lower or no effective carbon prices.
  • EITE sectors in Canada include cement, lime and fertilizer manufacturing, refining, and oil and gas production.
• Provincial economies are very different from one another, so carbon competitiveness pressures differ across provinces; for example, in Alberta and Saskatchewan, around 18% of the economy is exposed, while in Ontario and Quebec it is 1 – 2%.

Business competitiveness is affected by several other factors

• Many factors—for example: corporate tax rates, wage rates, various regulations, exchange rates, prices for commodities and materials, exchange ranges—affect overall business competitiveness.
• Carbon pricing is one factor amongst many and, almost always, far from the largest factor.

Smart policy design can address competitiveness concerns

• “Output-based pricing” or “output-based allocations” (OBAs) (see here for an explainer) can be an effective policy to address competitiveness issues in EITE sectors.
  • Under OBAs, firms pay the full carbon price only on emissions that exceed a given benchmark, paying nothing on the rest.
  • Output-based pricing maintains incentives to reduce GHG emissions by improving performance, but protects competitiveness by removing incentives to shift production or investment (and the corresponding emissions) to other jurisdictions.
• OBAs are widely used in Canada—Alberta, Ontario, Quebec and the proposed federal carbon pricing system all apply OBAs to protect against competitiveness impacts and leakage.
• Other policies can also help address competitiveness concerns, most notably border carbon adjustments.

 

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