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Coming to Terms with Canadian Carbon Policy – 2nd Quarter 2017

In November 2016, Canada’s first ministers met to progress Canadian carbon policy. Ideally they would have actually dealt with its current contradictions. What  occurred fell well short of that objective, settling for an incomplete consensus on a  national carbon pricing standard.

The federal government chose not to assert that carbon pricing via carbon taxes would be the country’s pre-eminent policy instrument for dealing with the global climate change risk. Nor did it insist that such  taxes  must be applied transparently and uniformly across the country on all emissions.

Regulating carbon emissions is fundamentally inconsistent with carbon pricing if it is truly to  the pre-eminent carbon policy instrument. Microeconomics should determine how much the carbon tax impacts hydrocarbon consumption, energy infrastructure investment, and the “value” of acquiring foreign carbon off-sets. Consider the reduction of coal in the electric generation fuel mix in Alberta over the past year. The effects of low natural gas prices and carbon taxes have reduced the share of coal that can compete economically in the dispatch order. That process will inexorably work over time if carbon taxes rise to “crowd out” more coal capacity — all without government intervention to accelerate that process by “buying out” existing infrastructure. Specific emission caps on sectors such as oil sands production at some point subordinate the carbon tax to arbitrary regulation, even if that sector can afford the prevailing carbon price. The impact of any particular carbon emission, regardless from what sector, is the same.

The federal government also failed to insist on  the principle that  the stringency of this national tax must be a function of what  carbon prices Canada’s major trading partners impose on themselves, explicitly or implicitly. For example, Canada cannot impose a $50 per tonne carbon price on itself when its major trading partners have not reached even $30 per tonne. Conversely, if those same partners impose carbon prices exceeding $100 per tonne, Canada will be compelled to match that price, regardless of the economic consequences to some parts of its economy. At this point, Canada’s national pricing standard has no such explicit linkage.

Constraining Canadian carbon-price stringency according to its trading partners’ comparable policies is ever more necessary with the advent of the Trump administration.  However it approaches the current  UN process to deal with the risk of climate change, and whatever fundamental changes — sustainable or otherwise — emerge,  the developed world will respond. Canada must adjust the stringency of its carbon tax accordingly, not in some “splendid isolation”.

And perhaps worst of all, the federal government did not clarify that Canada’s current national emission reduction target is only an aspiration, not a binding legal obligation. If carbon pricing is truly the pre-eminent carbon policy instrument for Canada, the emission reductions we achieve can only be those economically consistent with that pricing level. It is ridiculous to impose an emission reduction target that can be only achieved with carbon prices exceeding $200 per tonne, when the world can barely bring itself to exceed $20 per tonne. But that is precisely the contradiction of the current Canadian target, which seeks an absolute reduction of roughly 25 per cent from current levels by 2030.

KXL and TransMountain expansion pipelines have now been approved. Their eventual construction and operation will see Canada, over the medium term, either increase absolute emissions or sustain current levels, coming nowhere near the level of absolute reductions required to meet the country’s target affirmed at Paris.

Moreover, no Canadian government as yet has shown any inclination to directly intervene in the energy consumption choices of Canadians to the extent necessary to meet that target, such as restricting natural-gas use for space heating, constrain fossil fuels for personal transportation, mandating  electric vehicles, or eliminating  all fossil fuels from electric generation, regardless of cost or system stability. Even worse would be a federal policy to  constrain hydrocarbon production for export, regardless of its economic value to the country, and despite demand from the rest of the world, which would certainly find its supply elsewhere.

Finally, the federal government should have established that any national carbon tax regime will be revenue neutral to taxpayers, not incremental their existing tax burden. What would change is who pays tax within Canada, from current taxpayers to carbon emitters. Ideally, taxes that inhibit investment and productivity would receive priority for reduction; in any case, the principle of revenue neutrality would not be violated.

Do Canadian political leaders possess the political will to come to terms with these visceral issues? The Trudeau government appears content to defer resolving them for the remainder of its current mandate. Ratifying  Paris, regardless of the costs to Canada, and without any plan to meet its targets. Creating a national pricing standard, but tolerating  Ontario and Quebec acquiring California “off-sets” at nominal values less than the national pricing standard. An expectation to enforce recent pipeline approvals while claiming implacable commitment to meeting Canadian emissions targets established at Paris regardless of how the Trump administration proceeds and of how those actions affect the entire UN process.

As for Alberta, the province’s current government desperately wants to consolidate its market access gains. It rightly recognizes that Alberta’s own carbon tax and support for the national carbon pricing standard were necessary quid pro quos to ensure that pipeline approvals were actually achieved from the Trudeau government. No criticism of federal carbon policy positions, regardless of how fundamentally inconsistent and unfair some  may be to Alberta. Irrationally, Alberta persists with imposing early coal shutdown and mandating renewable capacity, regardless of the cost to Albertans.. Even worse, its  ] emissions cap on oil sands derived emissions  may compromise the economic contribution of its oil sands production over time.  Why? After all those emissions pay its carbon tax.

Ontario suffers from its past climate-related fiascos, but cynically prefers buying foreign off-sets via its dubious cap and trade participation with California instead of conforming with Alberta and British Columbia on a transparent carbon tax. All with the expectation that the federal government will not intervene to impose a national carbon tax.

Saskatchewan, the de facto the champion of climate denialism as a national carbon policy, resists carbon pricing on any basis. Still, it has no qualms imposing on its own citizens “low carbon” investments representing carbon abatement costs that far exceed the current carbon tax applicable in Alberta. Consider Saskatchewan’s bizarre foray into carbon capture and sequestration as well as various wind and solar initiatives. That province, too, seems to expect that the federal government will simply not intervene.

Little insight or nuance is evident in the federal opposition parties either.

If in power, the NDP would presumably implement the dictates of the Leap Manifesto — a program whose basic tenet of de-carbonization would economically diminish the country. Virtually none of the Canadian environmental movement has criticized this position and many explicitly support it. No cost is  too great for Canadians to bear in the name of carbon  emission reduction.

Conservatives, both federal and provincial, by all indications embrace de facto climate denialism on the same cynical terms as Steven Harper displayed. In other words, Canada’s Conservative parties nominally acknowledge climate risk, but without supporting or implementing any meaningful policy. Disingenuous reduction targets coupled with promises of sectoral regulation and technology development support, but no carbon pricing.

To their credit, Canadian business leaders, and especially the Canadian hydrocarbon production sector, support carbon pricing. But they have not chosen to seriously confront the federal government on its implausible national reduction targets.

Muddling through – implausible promises and  deferring  resolving the fundamental policy contradictions  is seemingly  the default.

Yet over the remainder of 2017, as pipeline proponents try to construct and operate the projects for which they have now received approval, the federal government is expected to enforce their rights.  By doing so, the government will be indicating its understanding of the value of hydrocarbons to the economy, and implicitly that carbon pricing is the only credible and proportionate policy instrument to rationalize that resource. That much we can expect and hope for.