{"id":264745,"date":"2017-02-01T11:30:19","date_gmt":"2017-02-01T16:30:19","guid":{"rendered":"https:\/\/policyoptions.irpp.org\/issues\/canadas-carbon-leak-problem\/"},"modified":"2025-10-07T21:27:07","modified_gmt":"2025-10-08T01:27:07","slug":"canadas-carbon-leak-problem","status":"publish","type":"issues","link":"https:\/\/policyoptions.irpp.org\/fr\/2017\/02\/canadas-carbon-leak-problem\/","title":{"rendered":"Canada\u2019s carbon leak problem"},"content":{"rendered":"

Most people I talk to have never heard of carbon leaks, which is when carbon policy causes emissions to be displaced to another jurisdiction. Yet the recent election in the United States heightens the importance of Canada taking carbon leaks into account, as it is a member of the North American Free Trade Act<\/em>.\u00a0 Carbon leaks could in fact be the most important factor in climate policy success.<\/p>\n

Imagine this scenario: Canada decides to levy carbon pricing aimed at leaving more natural gas in the ground. In the first instance, Canada\u2019s emissions would decrease due to less production of natural gas.\u00a0 Further, imagine the taxes are invested in new groundbreaking energy technologies that successfully replaced the lost energy (with lower carbon emissions) and the economy grow as a result. Then we would have a \u201cdouble dividend\u201d of reduced emissions and economic improvement.<\/p>\n

On the other hand, if the United States under its new president responds by producing more natural gas and Canada simply imports it.\u00a0 In this scenario our production leaks across the border, along with jobs, taxes and economic activity.\u00a0 As a result, America\u2019s emissions increase, meaning Canadian carbon leaks across the border as well.\u00a0 This offsets the environmental benefits of Canada\u2019s climate action.<\/p>\n

What if, due to the nature of the product and the trade relationship, the extra emissions in the United States were actually higher than the reductions in Canada, perhaps because of extra transportation, fracking of less efficient reservoirs, or laxer environmental regulations in the US.\u00a0 Then our policy at home designed to reduce emissions would have the opposite effect. This is our \u201cgreen paradox.\u201d<\/p>\n

I was among the first in Canada to speak out on carbon leaks and the green paradox, although it was only later I learned the terms.<\/p>\n

It stemmed from my work in Quebec after our large natural gas discovery in the Utica Shale.\u00a0 Our natural gas discovery is one of the top \u201cgreen\u201d projects in Canada.\u00a0 \u00a0It has the potential to materially reduce Canadian and global emissions by replacing imports of natural gas, which has higher-emissions.\u00a0 Our project represents the opposite of carbon leaks.<\/p>\n

I was dumbfounded when, five years ago, in meetings with environmentalists in Quebec, I realized they were aware of these facts but still opposed local natural gas production. Their focus was on meeting Kyoto-Protocol-based emissions targets and lobbying for a national climate policy.\u00a0 Taking this approach to its illogical conclusion, it would be better to let foreigners produce everything for us, so we can say we don\u2019t have any emissions (not to mention any jobs).<\/p>\n

When I tried to publicize this obvious problem, generally people wouldn\u2019t believe it was true.\u00a0 This is because Canadian citizens paying money to reduce local emissions, when the result is an increase in overall global emissions, makes no sense. \u00a0Yet Quebec\u2019s Strategic Environmental Review<\/a> took this view by only studying impacts of oil and gas development on Quebec-based emissions. Our federal government does the same when it considers only Canadian-based emissions for local projects such as liquid natural gas plants and pipelines.<\/p>\n

It is the production-based accounting system<\/a> embedded in the Kyoto Accord that creates this problem.\u00a0 It gives consumers a carbon incentive to import goods, because the producer is responsible for the emissions.\u00a0 Or as Dale S. Rothman notes<\/a>, \u201cconsumers in wealthy nations have simply passed the buck to people in other places or other times.\u201d A consumption based accounting system would address carbon leaks using the criteria of justice and economic efficiency, raised in particular by Karl Steininger et al.<\/p>\n

The issue of carbon leaks is central to whether Canadian climate policy will achieve its global goals. \u00a0\u00a0Yet this critical issue is poorly studied in Canada, while carbon pricing hurtles ahead.<\/p>\n

Much of the answer as to whether Canada would reap a \u201cdouble dividend\u201d or suffer with a green paradox, or land somewhere in between, depends on the rate of carbon leaks experienced by industrial sector.\u00a0 For example:<\/p>\n