Key climate policy issues are Canada’s vulnerability in energy and trade, the lack of Canadian carbon research, and our comparative advantage in carbon.
The world has always been able to count on Canada to punch above its weight on issues of global concern, including the potential impacts of climate change. However, doing the right things depends on doing things right. If we agree that Canada should do more than its part, we need to think globally. We need a common-sense approach to climate change.
In this endeavour, policy-makers need to address three key issues: Canada’s economic vulnerability surrounding energy and trade, the lack of Canadian research on carbon leakage (when carbon costs in one jurisdiction cause greenhouse gas emitters to move their businesses to a jurisdiction where there are no carbon costs, or where they are lower than in their current location), and Canada’s comparative advantage in carbon.
Economically, Canada is almost twice as vulnerable on energy and more than twice as vulnerable on trade compared with our main trading partner, the US (which does not currently price carbon). Seventy percent of the Canadian economy depends on trade. By comparison, only 30 percent of the US economy is trade-dependent. Additionally, Canada currently uses 14 mega joules (mj) of energy to produce US$1 of GDP, versus only 9.3 mj for the United States.
Our carbon policy choices have been based largely on theory Instead of objective research. The problem? In theory, practice and theory are the same — but in practice, they’re not.
In theory, if you tax something you will get less of it. In practice, investment can easily move, and it does. If investment moves to jurisdictions with less strict environmental policies (which is virtually everywhere), global emissions can easily rise more than Canadian emissions decline.
In addition, due to the inelastic demand for energy, carbon taxes yield only a tiny reduction in emissions. Last September, the Conference Board of Canada found that a $200/tonne carbon tax would only reduce emissions outside of the electricity sector by 12 megatonnes by 2025 — before carbon leakage.
By displacing less efficient energy sources, one large LNG plant could reduce more emissions than a $200/tonne carbon tax on the entire Canadian economy.
There are many examples in manufacturing, processing and resources where Canada is the best in the world environmentally. In these industries we could say Canada enjoys a “comparative advantage in carbon.”
Take the case of Canadian aluminum. It only takes two tonnes of carbon to produce one tonne of Canadian aluminum, versus 11 tonnes of carbon for one tonne of American aluminum. Thus, a carbon tax that shifts aluminum production to the US would actually increase aluminum emissions by 500 percent. This is the problem with a local versus global approach.
Canada can do more to reduce global emissions through common-sense policies. Here are some of the ways.
- Invest in independent, peer-reviewed economic studies on carbon leakage, with public consultation, to establish where Canada has comparative advantages in carbon. This is a prerequisite to good policy.
- Introduce targeted deregulation for carbon-competitive industries to make them more economically competitive. This will allow them to displace more carbon-intense competitors in other jurisdictions.
- Provide low-carbon-intensity income tax credits, along the lines of the manufacturing and processing credit, to incentivize investment in clean tech and a Canadian environmental advantage.
- Where Canada doesn’t have global advantages in carbon, use targeted emissions intensity limits and let the market decide how to best meet them. This is the approach the US Environmental Protection Agency took with fleet mileage limits (likely the world’s most successful emissions reduction program ever).
- Repurpose the federal and provincial fuel excise taxes as a more effective and comprehensive tax on greenhouse gas emissions.
- Aggressively use the provisions in the Paris Agreement for global offsets, allowing Canada to make the maximum contribution to the planet, given the nature of our economy and our well-established comparative advantages environmentally.
Emissions are a global problem, not just a Canadian problem. With a common-sense approach, Canada can achieve a triple dividend of economic growth, decreased energy poverty and fewer global emissions.
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