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December 23, 2020

The horse is out of the stable. Earlier this month, the federal government announced its plan for meeting Canada’s targets for greenhouse gas emissions under the Paris Agreement, the centrepiece of which is a carbon price of $170 per tonne of greenhouse gas emissions in 2030. Ottawa also announced that it will explore using border carbon adjustments to address “carbon leakage,” and will forgo a Clean Fuel Standard for gaseous fuels.

To those who are suspicious of Ottawa, this plan may feel like a jab at Canada’s beleaguered petroleum industry. And to be sure, the painful adjustments involved should not be downplayed. Based on today’s engineering, a $170-per-tonne carbon price would mean much higher costs for oil sands producers or gas-fired electricity generation. It would mean higher costs for heating homes with natural gas or buying gasoline.

But hard as it may be to swallow for many, this plan is exactly what Canada needs.

Uncertainty around national emissions policy has long loomed as an economic threat to Canada. The plan provides our energy producers and consumers with a clear and credible path for future carbon pricing. It provides a partial remedy for mounting international concerns around Alberta’s oil sands. Global investors now see a credible projection for Canada to meet its Paris targets at this price, and investors and creditors can more confidently estimate the compliance costs facing companies and specific assets.

Technology, meanwhile, has transformed how we move, live and work, and it will continue to do so. What was impossible yesterday can become commonplace tomorrow. And innovation responds to incentives – such as a carbon price.

By announcing the trajectory for carbon pricing, Ottawa has anchored expectations. This helps companies and households make informed decisions about new investments or retrofits. Knowing the future price, companies can build business plans for transformations to reduce emissions. Engineers can propose new designs and calculate the savings these will yield.

The alternative to carbon pricing is regulating emissions from each and every activity. This runs the risk of government picking winners and losers based on political expedience or lobbying. Instead, in this climate plan, the federal government has largely chosen market forces over central planning.

This good feature nevertheless comes with important caveats.

First, the federal government should publish its greenhouse gas projections and energy-use assumptions for each sub-sector and province. A carbon price of $170 per tonne by 2030 roughly aligns with estimates by the Parliamentary Budget Office and EcoFiscal Commission for meeting Canada’s Paris targets. But Ottawa should allow us to peer under the hood and kick the tires on its modelling.

For earlier projections, Environment and Climate Change Canada published detailed data tables. The projections that undergird Ottawa’s strategy should also be an open book, because more information helps markets work better.

Second, Ottawa did the right thing by kiboshing the Clean Fuel Standard (CFS) for gaseous fuels. Natural gas is much less carbon-intensive than liquid fuels, and an economy-wide carbon price is a better way of rationing natural gas use. The framework around carbon pricing also provides greater flexibility to offset impacts on households and trade-exposed industries that use natural gas.

Ottawa also published draft regulations for the CFS for liquids fuels last Friday. The “Liquids CFS” will create a market for reducing emissions, and specified activities (e.g., carbon capture and sequestration, substituting biofuels, or recharging electric vehicles) will generate credits. Fuel suppliers need credits to comply with prescribed reductions in the carbon intensity of a given liquid fuel (e.g., gasoline or diesel), and to work efficiently, the market will need good information. Indeed, the volatility of prices for credits under British Columbia’s Low Carbon Fuel Standard – which ranged from $33/tonne to $324/tonne during 2019 – reflects how large information gaps surround supply and demand in this market. The market for Liquids CFS credits will need much better disclosure.

Third, Ottawa must address carbon leakage. Border carbon adjustments (BCAs) involve imposing tariffs on the embedded emissions in imports and rebating carbon levies to exporters (analogous to GST rebates on exports). In this way, BCAs level the playing field between domestic and foreign producers. Ottawa’s contemplation of BCAs follows statements that the European Union and U.S. president-elect Joe Biden will pursue such measures.

Conceptually, BCAs are permissible under international trade law, but implementing BCAs is complex in practice. For example, for BCAs to comply with WTO rules, Canada would likely need to phase out the current pricing system for large emitters. As well, establishing default carbon intensities for each imported product and origin country will be data-intensive and difficult. Finally, unless Ottawa exclusively collects revenues from pricing carbon, the federal government would face fiscal and administrative challenges for rebating carbon levies to exporters.

But even though it is an imperfect work-in-progress, the federal climate plan crucially and positively clarifies how Canada plans to achieve the Paris emissions targets. Ottawa has now provided a road map for businesses and households, but the real work remains ahead.

Published in the Globe and Mail 

Grant Bishop is associate director, research at the C.D. Howe Institute. He lives in Calgary.