How to make international, national, and subnational climate policy work.
The road to Paris and the 2015 United Nations Framework Convention on Climate Change Conference of the Parties (COP) seems to be increasingly crowded. That road starts with the provinces. Ontario is working out the details of its cap-and-trade partnership with Quebec, new recommendations are imminent from British Columbia’s expert advisory panels, and Alberta announced an ambitious new program, which includes a carbon tax. The road then passes through Ottawa as well. The new government has embraced the Paris process, with the Minister of Environment, the Foreign Minister, and the Prime Minister all participating. And in Paris, at the end of the road, hopes are high for progress on international climate policy.
But amid all the ramp-up to the COP, let’s also look ahead to the road back from Paris. Because no matter the outcome, much of the hard policy work remains to be done.
There’s no question that a global deal on greenhouse gas emissions would send a powerful message about international cooperation and collective action on a hugely important issue. But even in the best-case scenario, there will be some uncertainty and uneven progress toward international action. Not all countries have the same levels of commitments. And they won’t deliver on them in the same way or with the same policy tools. In other words, a nice clean global price on carbon just isn’t in the cards, at least in the short term.
The fundamentals of a Canadian policy on carbon will remain the same, no matter what happens internationally. Moving forward on broad, economy-wide carbon pricing across Canada will be key to achieving emissions reductions at the lowest cost. Moving now makes sense. Starting sooner, rather than later would mean we could ramp up the price of carbon gradually and predictably, giving emitters time to adapt and develop new, low-carbon technologies and practices.
At the same time, the Canadian policy must take uneven international policy transitions into account. Fortunately, smart policy design can manage this transition. Two issues in particular stand out: for the federal government, coordination, and for provincial governments, competitiveness.
The path toward a harmonized climate price within Canada will not be a straight line. The provinces are taking different approaches to climate policy. BC’s carbon tax sets the price of carbon at $30 per tonne. In Quebec’s system, carbon permits trade at around half of that price. In several provinces, the price of carbon remains at zero. The Ecofiscal Commission has argued that getting started on carbon pricing is more important than having a perfectly uniform, harmonized price — but over time, as carbon prices rise, coordination of provincial policies will be needed.
The federal government has already signalled its plan to cooperate with the provinces. The Prime Minister has invited the premiers to Paris, and he plans to meet with the provinces within 90 days of the COP to develop a pan-Canadian strategy.
What might such a strategy look like? Various mechanisms for carbon pricing coordination are possible. They might include, for example:
- The federal government could supersede existing provincial policies with a federal policy. This approach seems unlikely. Province-specific policies ensure revenue isn’t transferred between regions—a political nonstarter. They also allow provinces to customize policy to reflect their own contexts and priorities.
- Provinces could harmonize their policies, from the bottom up. Ontario and Quebec, for example, will harmonize their carbon prices by linking their systems. Still, bringing all the provinces onside could require federal involvement.
- The federal government could establish a minimum level of stringency, such that if the provinces met the standard through their own policy, they’d be exempt from federal policy. The most logical metric for equivalency would be a common price of carbon, which would ensure cost-effective emissions reductions overall.
In the meantime, uneven policy—across Canada and internationally—means that some industries could be exposed to competitiveness pressures. As a result, production and investment might shift toward jurisdictions with lower carbon prices. This leakage could undermine the economic and environmental performance of Canadian policy — provincial or national.
Yet competitiveness concerns need not obstruct forward movement on carbon pricing. As illustrated in the figure below, only a narrow subset of provincial economies are likely to face competitiveness pressures. The Ecofiscal Commission’s analysis finds that under an economy-wide $30/tonne carbon price, only 5 percent of the economy would be exposed, though some provincial economies would be more exposed than others.
Competitiveness issues, to the extent they exist, can be addressed through policy design. Using carbon revenue to provide targeted, transparent, and temporary support to certain sectors could ameliorate competitiveness concerns without undermining incentives for these sectors to improve their emissions performance.
Policy momentum toward Paris would be welcome. A deal could galvanize and accelerate action across the globe. At the same time, Paris isn’t the be all and end all of climate policy. Canadian governments—provincial and federal—can set us on a path toward smart carbon policy that makes sense at home now. We need not wait for the rest of the world to either lead or to catch up. We have everything to gain by moving forward and, as our research suggests, ever fewer reasons to delay.