Canada’s Climate Policy: The Challenges of National Consensus
- Khalil Zahr
- May 2, 2018
- 10 min read
It is ironic that the battle over oil and gas pipelines reached epic proportions in the same year in which the Canada Carbon Pricing Backstop System (CPBS), went into effect. (the CPBS was adopted by the Federal Government in 2016). After all, one of the main goals of CPBS is to harmonize the provincial climate policies.
This harmonization is considered essential if Canada is to meet her Nationally Determined Commitments (NDC) to the Paris Accord on Climate Change. Canada’s climate change commitment is to reduce the emission level of Global Heating Gases (GHG), (such as CO2, Methane and others), in 2030, to 30% below 2005 emission level. The CPBS lays the foundation for a market based national consensus on achieving this target, a consensus considered necessary given the inter-generational dimension of the climate change mitigation and adaptation process. A successful outcome of this process will require a stable policy environment, with minimal uncertainties over the long-term.
Another important advantage of market-based instruments in dealing with global warming is that these instruments, unlike regulations, are relatively immune to political expediency and less influenced by partisan politics. As time passes, they become interwoven with the economic, financial, and social fabric of the state, and consequently become difficult to reverse.
The market-based instruments, whether in the form of a carbon tax or an emission trading system (ETS), function by putting a price on CO2 emissions. This in turn raises the relative costs of fossil fuels (coal, crude oil, natural gas, others) in proportion to their carbon content. This rise in cost will reduce their consumption and increase the competitiveness of alternative green energy sources such as renewable energy (hydro, solar, wind, others) as well as nuclear energy. These dynamics -if the market design is right- are expected to reduce GHG emissions.
An Aggressive Carbon Pricing Stance
The CPBS ensures that carbon pricing applies throughout Canada in 2018, with increasing stringency over time to reduce emissions. Canadian provinces and territories can choose to either implement a carbon tax system with a minimum rate of 10 CAD per ton of carbon dioxide equivalent in 2018, increasing to 50 CAD per ton by 2022—or an equivalently scaled emissions trading system (where the market determined price of an emission permit for a ton of carbon is comparable to the tax level). According to an IMF Study, this policy puts Canada among the most aggressive emission pricing countries. ETS prices elsewhere are around 15 USD per ton or less, while carbon taxes are typically around 25 USD per ton or less. Finland, Norway, Sweden, and Switzerland impose substantially higher carbon taxes, but rates apply to a minor portion of GHGs.
The 50 CAD per ton carbon price reduces CO2 emissions by an estimated 16–23 percent below business as usual levels (no carbon pricing) in 2022 and raises provincial revenues by 0.5–2.5 percent of GDP, according to the IMF study. On the flipside - relief measures provided to large industrial facilities notwithstanding- the policy would raise production costs significantly for all Canadian exporters. More importantly, the study concludes:
"In short, the net costs of the price floor, and the administrative and monitoring issues seem manageable, and pricing provides a valuable source of revenue. The challenge is that, on the one hand the 50 CAD per ton price of CO2 appears to fall well short of what would eventually be needed to fulfill Canada’s NDC, but on the other hand, puts Canada well out in front of other countries ...Likely more important is that uncertainty over long-range emissions prices may deter research into, and deployment of, emissions-saving technologies”.
No National Consensus Yet
The CPBS-intended to reflect Canada’s strong commitment to environmental protection in general and to the effort to stop global warming in particular- has apparently failed to build a national consensus on climate policy strong enough to pacify opposition to the fossil energy industry. This opposition does not only come from special interest groups, environmental action groups, or communities opposed to hosting fossil energy infrastructure, but also from provincial governments such as that of British Columbia, who is actively opposing the construction of new oil and gas pipelines in their territories. This opposition, if successful, will deny the only national outlet for oil and gas exports to the lucrative and vital Far Eastern markets, and may ultimately threaten the industry’s viability.
The opposition to the pipelines does not seem to be driven by rational concerns about potential oil and gas spills resulting from accidents or pipeline failures along their routes. Statistics on pipeline accidents compiled by the Transportation Safety Board of Canada and the National Energy Board indicate that pipeline incidents- which can be normally expected- have had limited impact on the surrounding environment in the past. These statistics also indicate that many of the existing pipelines are relatively old with some already passed their expected operating life. For example, the Kinder Morgan Canada Ltd.’s Trans Mountain pipeline, whose proposed expansion is the subject of fierce opposition and legal battles, is over 60 years old, well past its expected operating life. Even so, the most recent incident on this pipeline occurred 11 eleven years ago in 2007, released 234 cubic meters of crude oil and was caused by external interference.
New pipelines-utilizing state of the art technologies are expected to improve the safety record of oil and gas transport by reducing the incidence of spills due to state of the art design, and by providing relief to older overloaded pipelines with increasing risk of failure. Not to mention that obstructing the construction of new pipelines will enhance the use of alternative modes of transport such as rail and road, which are of higher risks to public safety and the environment.
Obstructionism is a Lose-Lose Proposition
The real motives for the opposition to energy pipelines and other fossil energy facilities do not seem to be safety concerns or negative local environmental impacts, but rather a pronounced belief that shutting down Canada’s fossil energy industry is the only means of halting global warming and mitigating its effects. These extraordinary measures, however, are not only counterproductive, but believed to be ineffective in bringing about the desired climate outcomes. They also reflect an insufficient appreciation of the climate issue and Canada’s economic and social welfare.
Below are few of the reasons why this is true:
Any action on reducing GHG emissions requires coordination at the global level, not only with respect to the size of national commitments, but also on their timing and scheduling. Given that the impact of GHG emissions on climate warming is independent of the geographic location of their source, shutting down Canada’s fossil energy industry out of concert with similar measures by the rest of the world will have a modest impact on reducing GHG emissions, but will cause great harm to Canada’s economy.
Obstructing pipelines and other fossil energy infrastructure will certainly hurt the industry by increasing its costs due to delays and litigation. Due to the availability of alternative-albeit more expensive- modes of transport however, it will unlikely succeed in shutting it down. Consequently, no appreciable benefits to the environment or the climate can be expected.
Denying the natural gas industry access to the Far East and other regions will reduce the supply of natural gas to these markets, where it is used to substitute for higher carbon content fuels such as coal and wood used in power generation and heating.
The oil and gas industry has been an important driver of growth for Canada’s economy. Such actions will decrease its profitability and increase its exposure to the inherent uncertainties of the international oil and gas market. This will have negative economic consequences at the provincial and national levels.
Protecting the fossil fuels energy industry and leading the fight against global warming is not a zero-sum game. Both objectives can be achieved with the right policies on the provincial, national, and global levels.
Obstructionist measures produce polarization and harden the positions of the antagonists, thus reducing the chances of reaching consensus on an effective, sustainable, and inter-generational climate strategy. Such consensus is believed to be vital if Canada is to meet its commitments to climate change and achieve its economic and social objectives.
Building a National Consensus
The expected negative impact of the CPBS on Canada’s competitiveness, will likely hinder its ability to build a strong and lasting consensus on climate policy. The go-it-alone approach, where GHG emissions are aggressively priced irrespective of what the rest of the world and particularly the US is doing in this regard, is among its main shortcomings. This also seems to ignore the assumption made by the National Energy Board (NEB) in its 2017 energy supply and demand projections to 2040, that aggressive pricing of carbon emissions be undertaken in concert with the rest of the industrial world, in order to minimize the impact on Canada’s competitiveness and reduce carbon leakage (carbon leakage is when carbon emitting industries migrate to jurisdictions with no or lower carbon emission cost). The NEB warned that “implementing a carbon price that is significantly higher than in other countries can impact the competitiveness of some Canadian industries. Carbon pricing policies can be designed to offset this to an extent. Existing carbon pricing plans in various provinces have some measures in place to mitigate carbon leakage. However, carbon prices well above those in other countries could still have competitiveness impacts”.
The CPBS does not only raise the price of carbon to CAN $50 per ton in 2022, but also promises to increase the price at a real rate of 2% annually over the subsequent years. This, rightfully raises questions about the purpose and scientific basis of carbon pricing. The primary purpose of carbon pricing is to reduce atmospheric GHG emissions. Consequently, it is rational to expect that the price will be anchored to the cost of removing, offsetting, or avoiding these emissions. If so, the cost should be expected to decrease with time as the GHG offset technologies develop and advance (costs of renewable energy, carbon sequestration, and other green technologies have come down drastically over the past years and this is expected to continue). Therefore, the continuous rise in the price of carbon is not warranted if the sole purpose of carbon pricing and resulting revenues to the budget is climate protection.
Even with this aggressive pricing of carbon and other GHGs, it will not be sufficient to bring the emissions down to the NDC levels. For to achieve the NDC levels by solely relying on nationally-based reductions, much higher carbon prices will be required. This however, will likely be highly contentious due to the large negative impact on the economy and on Canada’s competitiveness. The challenge is due to two main factors: The first has to do with Canada being a major fossil energy producer and exporter, whose operations are energy intensive. With that in mind, the relatively low cost of energy attracts energy intensive economic activities, such as primary and heavy industries. The second factor stems from the fact that the energy sector, which is responsible for the great majority of GHG emissions, is considerably green already.
Canada ranks fourth in the world in renewable power generation, and green power generation sources such as hydro, renewables, and nuclear already contribute about 80% of total electricity generation. Consequently, relying on renewables to close the remaining gap will be difficult and too costly.
Reducing the Cost of Compliance with the NDCs
In order for Canada to meet its national climate commitments and limit the resulting consequences to its economy and competitiveness to acceptable levels, it needs to maximize the use of carbon offset credits, which allow the use of low-cost options for reducing emissions, both nationally and internationally. A pan Canadian framework for a carbon offset system is currently being developed by the Canadian Council of Ministers of the Environment. It is expected to lay down the rules to determine which offset credits can be accepted for compliance, including foreign credits.
While facilitating carbon offsets is commendable and reflects an appreciation of the potential contributions that offset mechanisms make toward a sustainable climate policy, it is believed to be insufficient to achieve the desired outcomes. This conclusion is borne out by Canada’s failure to benefit from the international offset mechanisms of the Kyoto Protocol, such as the Clean Development Mechanism (CDM). (“The Clean Development Mechanism allows emission reduction projects in developing countries to earn certified emission reductions (CERs), each equivalent to one ton of CO2. CERs can be traded and sold and used by industrialized countries to offset a part of their emissions under the Protocol”).
According to a year 2000 Report by The Pembina Institute, the Canadian Government did not see itself as an investor in CDM projects, but only a supporter of private sector involvement. This policy, however, was insufficient to offset the high risks of CDM investments. These risks were heightened by the price of carbon credits which has been in decline since 2011 due to lack of demand. Several hundred projects have been initiated but have not been able to continue due to the fall in the price of carbon.
In contrast, Norway, a country that shares many attributes with Canada such as a commitment to the environment, comparable climate, dominance of hydro power in its energy system, and being an energy exporter, adopted a proactive policy that found in the risks of the CDM market and in the price decline of carbon credits an opportunity to accumulate carbon credits at a very low cost. The Norwegian Government established the Norwegian Carbon Procurement Facility (NorCaP) in September 2013, with the Nordic Environment Finance Corporation (NEFCO) as Facility Manager, to procure credits from projects under threat. Some 60 million CERs have been generated under this program in the second commitment period of the Kyoto protocol (2013-2020). These CERs will go into offsetting Norway’s national commitments while supporting the international effort on climate by shoring up the CDM.
A proactive policy on carbon offsets by the Government of Canada is not only needed on the international level, but also domestically. An integrated national market in which carbon offsets can be traded will significantly contribute to the cost-effectiveness of emission reduction. Furthermore, building a pan-Canadian electricity grid can substantially support Canada’s climate agenda while boosting the economy. It will allow for greater efficiencies in the electric power sector by capitalizing on the variability (non-coincidence) of electricity consumption among the provinces and across several time zones. This national grid will become the backbone for trading, not only in energy, but also in carbon credits or CERs. Provinces with hydropower resources and other renewables will be able to export it to provinces lacking such green resources. Such initiative would require the leadership of the Federal Government, the active involvement of all levels of government, as well as private stakeholders.
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