The question is not if Canada needs to lower greenhouse gas emissions, but rather when and how. The answer is now—through provincial carbon pricing.
In April 2015, the 12 Canadian economists who make up Canada’s Ecofiscal Commission came together to determine the most cost-effective and practical approach to lowering greenhouse gas emissions in Canada. Our recommendation: Every province across the country should put a price on carbon. Supporting analysis and evidence can be found in our report: The Way Forward (it’s worth the read). What follows here is the behind-the-scenes story of how we came to our conclusion, and why our recommended approach addresses some of the biggest obstacles to progress on one of our country’s most important issues.
You can almost hear it. The loud crack of a middle ground erupting, cutting through the din of Canada’s polarized economy-versus-environment debate on climate change.
What’s brought it to the surface? A broadening agreement among Canadians that “doing nothing” to reduce greenhouse gas emissions is simply not an option, but that “doing something” must not (and need not) undermine our economic prosperity. This is a good thing. It moves us past the question of “if” we need to deal with Canada’s GHG emissions challenge to the more important question of “how.”
This is where The Way Forward begins: with a question that asks how. How can we reduce greenhouse gas emissions in Canada in the most cost-effective and practical way? In a way that positions our economy to thrive in the 21st century? Imagine a dozen leading economists from across the country in a room together wrestling with this question. (Hint: It wasn’t quiet). Economists are about as famous for consensus as we are for our optimism. But in the making of this report, we ultimately found both.
Economists are about as famous for consensus as we are for our optimism. In the making of this report, we ultimately found both
It was not an easy process. Yes, it took months of research, analysis, discussion, and debate. But it took something else, too: a widening of the middle ground from which we started. It was not enough for us to agree that something must be done to lower Canada’s greenhouse gas emissions, and that it must be done in a cost-effective and practical way. That was the easy part. We also needed to agree—and did—that making progress quickly was the number one priority, and that some important details about policy could follow.
Once we adopted the lens of urgency, “the way forward” for pan-Canadian progress on climate change became increasingly clear. Strong provincial carbon pricing policies, applied broadly, and even independently, make good economic sense for every province—and for Canada as a whole. Designing those policies to recognize essential economic differences as well as different provincial priorities is nothing more than practical. We were mindful of a key aspect of Canadian history—that leading national policies in this country often have their roots in provincial action. Perhaps most important, building on the momentum that is already under way in our provinces gets us what we most need: progress.
Around the world, the wave of concern over climate change crested a few years ago—but those who are paying attention can see that the next wave is building. That wave will come and it will be highest when it crests on our shores. Canada needs to be ready for it.
How much is climate change going to cost us in the next few decades? Such predictions are notoriously difficult to estimate with precision. However, the scale of potential damage is clear and telling. Rising sea levels threaten coastal cities. Invasive species, diseases, and droughts pose risks to our food production. Warmer winter temperatures raise costs for our natural resource industries. The increased intensity and frequency of extreme weather events—floods, storms—damage property and infrastructure, and, worse, cost Canadian lives.
All regions and economic sectors in Canada are vulnerable in the face of climate change. We’re already beginning to pay those costs.
Cost of damages resulting from the southern Alberta floods of 2013.
Area of Western Canadian forest devalued by outbreak of mountain pine beetle.
Increased cost of shipping in the Great Lakes – St. Lawrence system from lower water levels.
Extra air transport costs incurred by Diavik Diamond mine in NWT because of the shorter winter season.
Storms that used to occur every 40 years are now occurring every six years. And because of the composition of the Canadian economy and society, we’re ending up with more damaging events.
Delaying policy action will cost us even more. The OECD (Organisation for Economic Co-operation and Development) estimates that every dollar we fail to invest in clean energy now will cost more than four dollars down the road. Studies in both Canada and the United States suggest that the longer it takes to implement climate policies, the more expensive effective action will be.
The flip side is that acting now may actually put Canadians ahead. As other major economies transition toward lower carbon, demand for cleaner technologies will naturally rise. This provides an opportunity for us. With the right policies in place, Canadian businesses could claim a market advantage in areas from sustainable resource development to marine power to energy-efficient buildings.
That’s not where we are today. When it comes to effective climate policy, Canada is not on track. That’s true no matter what definition of “strong enough” you use—whether it’s achieving our own short-run targets or the deeper reductions that will be necessary over the longer term.
Acting now may put Canadians ahead. With the right policies in place, businesses could claim a market advantage
The explicit focus of The Way Forward is provincial carbon pricing. There’s momentum behind both parts of that equation (the provincial element and the carbon-pricing one). First, about carbon pricing:
Increasingly, carbon-pricing policies are becoming widely accepted by economists, governments, and businesses as an essential tool for lowering greenhouse gas emissions. In fact, 39 countries and 23 sub-national jurisdictions already have such policies in place or are actively considering them. Together they account for a quarter of the world’s global GHG emissions. This trend matters. Not only does it give us real evidence about the efficacy of these policies, it also shows where the world is going. Those who do not move forward with their own policies are vulnerable to being subject to the decisions of others. Suffice it to say that talking climate policy in the 21st century means talking carbon pricing.
We must not lose sight of the profound economic risks of doing nothing. The solution can be a fundamentally conservative one that will empower the marketplace to find the most efficient response. We can do this by putting a price on emissions of carbon dioxide.
In Canada, the public discourse surrounding carbon pricing has recently taken an interesting turn. Amidst the old “if” debate and the burgeoning “how” debate, another dimension for discussion has opened up around “where.” In other words, which level of government should lead the direction on carbon-pricing policy? It’s a good question, and one that likely has more than one answer.
Comprehensive, coordinated carbon pricing across the country is the ideal goal. It’s the most cost-effective, business-friendly, and ultimately impactful solution. There’s no doubt that all levels of government, including federal, have some role to play along the way to that destination. What does that journey look like and what exactly are those different roles? There’s no single best answer; there are likely many ways to get from where we are today to where we need to go. Weighing the costs and benefits along these different paths is important—and would make a great future report (don’t worry, we’re already working on it).
But we don’t need to have the perfect path mapped out to make necessary progress now. What’s the fastest and smartest way to get farthest down that road today? Provincial carbon pricing. It makes perfect sense to focus on provincial action as the way to harness existing momentum.
First, provinces not only have the jurisdiction to price carbon, they already have a head start. British Columbia, Quebec, and Alberta have all implemented different approaches to carbon pricing. Ontario will move forward in the next year, and there is a live discussion taking place in Nova Scotia. In August 2014, every provincial premier in the country agreed to work on a Canadian Energy Strategy that prioritizes greenhouse gas reductions, explicitly recognizing the importance of putting a price on carbon.
Canada is a global leader in providing a secure, sustainable, and reliable supply of energy that is delivered with a high standard of environmental and social responsibility, consistent with efforts to reduce greenhouse gas emissions, and contributes to continued economic growth and prosperity for all Canadians.
Second, Canada has a wealth of experience developing innovative national policy at the provincial level. Saskatchewan led the creation of public health care; Alberta and Saskatchewan led the fight against budget deficits. What started as unique provincial priorities, and opportunities for regional experimentation, eventually became entrenched as pan-Canadian economic values.
What started as unique provincial priorities eventually became entrenched as pan-Canadian economic values
Under a centralized approach to carbon pricing, with revenues going back to the federal government, it’s easy to see why some provinces might be concerned with any “top down” approach to carbon pricing.
These provincial differences frame the challenge for Canadian climate policy, but they need not stand in the way of advancing it. Building on the existing momentum behind provincial carbon pricing is the first critical step forward.
Okay, so let’s come back to the “why carbon pricing?” question. Is it the be-all and the end-all of climate policy? No. Other approaches, such as specific kinds of regulations, have a role to play. But carbon pricing should be a fundamental ingredient in any overall climate policy recipe. Here’s why.
By giving businesses and households the incentive to produce fewer emissions and the flexibility to find the best solutions for doing so, pricing carbon reduces emissions at the lowest possible cost. (Regulations don’t usually do this.) At the same time, carbon-pricing policies generate revenue—money that, if “recycled” wisely by governments, can create additional economic benefits. (Regulations don’t do this either.)
We all stand to gain from
What’s immediately clear is that all provinces and the country as a whole stand to benefit more from carbon pricing than from any other type of emissions-reduction policy. Also, there are big, immediate wins from all provinces putting their own independent pricing policies in place.
This doesn’t mean that a coordination of policies is not important; ultimately, this is where we want to be. The key point is, provinces have every reason to start putting smart and practical carbon-pricing policies in place now. We all stand to gain from provincial action.
Everything should be made as simple as possible, but not simpler.
The fundamental advantages of carbon pricing are “Economics 101.” However, when it comes to practical and effective policymaking, the devil—as always—is in the details.
Higher carbon prices drive more emissions reductions. But the share of emissions that are actually priced (average carbon cost) also matters. That cost is smaller if permits are given away for free.
A carbon tax guarantees a certain carbon price. A cap-and-trade system guarantees a certain amount of emissions reduction. But these policies are more alike than different. Both instruments—or a hybrid—can work well.
Broader policy is better policy. Options include covering emissions upstream (from the carbon content of fuels), downstream (from the production of emissions), or both. The availability of free permits—if and how many—can narrow policy.
Options include lowering other taxes, investing in infrastructure, technology, or reducing impacts on vulnerable communities or sectors. The choice, or combination of choices, affects how policy shapes the economy.
In designing their own carbon-pricing policies, provincial governments—and their constituents—will have to grapple with many choices. The good news is, three of them already have, offering homegrown examples of what different decisions look like in real life, and some insight into what works, as well as what doesn’t.
Ramped up over a five-year period.
Combines elements of a tax and cap-and-trade system, by setting a standard and giving emitters a number of different ways to meet it including purchasing credits, using offsets, or paying into a Technology Fund.
Linked with California’s market, the emissions cap is scheduled to decrease over time, while the “floor price” for permits will slowly increase.
Emitters pay for all covered emissions.
Emitters only pay for emissions that exceed the set standard.
Some permits are auctioned, others are given away for free.
How much is covered
70% paid for
Households and businesses are taxed based on the carbon content of the fuel they buy.
3% paid for
Covers the largest emitters in the province.
Share paid for is low because emitters are only charged for emissions exceeding the standard.
62% paid for
Free permits bring down the share of emissions paid for.
How $ is recycled
Personal & business tax cuts (Revenue neutral)
Technology Fund for GHG emissions reduction & adaptation
Public transportation, green energy, energy efficiency, and GHG reducing projects
What we know so far
Research shows per capita fuel use declined by 19% compared to the rest of Canada, with no negative impact on the economy.
What we know so far
Data suggests that emissions reductions have been minimal.
What we know so far
It’s too early to measure impacts.
The Way Forward starts with a crack, a fissure in the polarized climate debate that has tied our hands for too long. It starts from the place where, I believe, most Canadians are: the middle ground, between “doing nothing” about unchecked greenhouse gas emissions and “changing everything” in a way that would put our economies and our livelihoods at risk.
Being smart matters. Being practical matters. And most of all, making progress matters. So, how do we move forward? Here’s what 12 of Canada’s leading economists think:
1. All Canadian provinces should put a price on carbon.
Provincial carbon pricing will set every province, and our country as a whole, on a path to increased emissions reductions. We can seize the momentum and opportunity of provincial action while ensuring that the differences between our regions don’t become barriers to the progress we need now.
Different paths to strong carbon-pricing policy can, and do, exist. The key is to make the best design choices possible
Different paths to strong carbon-pricing policy can, and do, exist. Three Canadian provinces have taken three very different approaches. Of those three, Alberta’s policy clearly has the greatest need, and room, for improvement. The key—for existing policies and new ones—is to make the best design choices possible.
2. Plan for policies to ramp up over time.
As the world moves toward decarbonization, it’s not a question of if Canada will advance greenhouse gas-reducing policies, but rather when. By starting now, we can ramp up in a smooth and predictable way, and that’s best for our economies. Delaying action is costly. Provinces should therefore design (or redesign) policies to incentivize lower carbon choices now, with an eye to steadily ramping them up so people and businesses can adjust and plan.
3. Make coverage as broad as practically possible.
It’s not only more effective to apply policy to a larger share of emissions, it also makes reducing emissions cheaper overall. Emissions come from varied sources: fuel combustion, industrial processes, and agriculture; and from different types of emitters: industry, vehicles, and buildings. The more sources and emitters included in the policy, the more cost-effective.
4. Root policies in provincial context, with an eye to moving toward national coordination.
For every province, and the country as a whole, there are still big questions to answer. How do we design policy that protects vulnerable sectors of our economy and vulnerable members of our communities? How can we best use these policies to spark innovation, growth, and a cleaner economy? What does coordination ultimately look like, and how can we prevent unfair redistribution of funds among provinces? These are questions Canada’s Ecofiscal Commission will address soon, based significantly on the discussions we’re having now with Canadians across the country.
Today, asking these questions—and carefully deliberating the answers—is meaningful progress. It means we Canadians are finally seeing the path ahead, and making the most critical decision of all: to move forward.