This policy flip-flop, mixed with poor government communication and sustained attacks by politicians that prey on affordability concerns, isn’t advancing Canada’s economic or environmental objectives. Never mind the generous rebate cheques distributed by the federal government, leaving most families better off, or the drag on national prosperity from the wilder weather and extreme storms that heat-trapping pollution brings. This ongoing debate is a dangerous distraction from the hard task of building effective, efficient climate policy.

But the carbon tax is not the whole carbon-pricing story in the country. Behind the scenes, industrial carbon pricing through large-emitter trading systems (LETS), including output-based pricing or cap-and-trading systems, is propelling Canada’s clean energy transition. A new report by the Canadian Climate Institute shows that this industrial price on carbon will be roughly three times more effective at cutting emissions between now and 2030 than the carbon tax – contributing a whopping 53 to 90 megatonnes of reductions towards the 2030 target.  And even in Alberta, industrial carbon pricing is alive and well – and bringing down emissions.

Since 2007, successive provincial governments in Alberta have updated their industrial carbon-pricing program targeting large emitters, including producers of oil and gas, chemicals and cement. And the basic design of Alberta’s system has been adopted across the country. Currently, 42% of national emissions are covered by federal, provincial and territorial LETS, with tradable emissions credits valued at $2.4 billion and rising with the national carbon price. By comparison, the federal fuel charge covers 34% of national emissions.

Despite the rhetoric against carbon pricing, governments of all political stripes have become comfortable making big polluters pay. But why? The answer is simple: LETS are good at reducing emissions, good for business and good for competitiveness. To remain effective, however, adjustments will need to be made.

Let’s look closer at what LETS have going for them.

LETS protect competitiveness by lowering costs

To keep balance-sheet costs manageable, the carbon price is applied to only a fraction of industrial emissions, with typically 75% to 90% of emissions unpriced. The incentive to reduce emissions, however, remains unchanged since every emission reduced is still valued at the full carbon price. With the carbon price rising to $170 by 2030, every tonne reduced is worth $170, while the compliance cost that firms face in that year ranges between $17 and $43 per tonne of emissions (assuming unpriced emissions are still 75% to 90%). This means that a chemical plant with 100,000 tonnes of emissions would see carbon costs somewhere between $1.7 and $4.25 million instead of $17 million if all emissions were priced.

As competitiveness risks change, regulators can change the quantity of unpriced emissions. They do this through revaluating the level of the performance standard, which sets the level of unpriced emissions, typically expressed as emissions per unit of production (i.e., allowable emissions per tonne of steel produced). Should competitiveness pressures worsen, the level of unpriced emissions can be increased, and vice versa. To assess competitiveness pressures, Alberta has a series of profit and sales tests that determine whether the financial impact of compliance on a facility is significant. These tests compare the costs of carbon pricing to firm profit or sales. If a threshold is exceeded, the quantity of unpriced emissions is increased, thereby lowering costs.

This scalability to changing competitiveness – or even technology conditions should abatement become easier due to innovation – makes LETS a flexible policy option.

LETS provide a revenue stream for low-carbon projects

Companies are able to sell credits when they reduce emissions and outperform their performance standard. And with carbon prices rising, emission credits will gain value. As this happens, firms can decide whether to sell credits at a profit or bank them to potentially apply them against rising future carbon-pricing costs. This profit motivation becomes particularly strong when assessing whether to invest in emissions-reduction technology, such as carbon capture, utilization and storage.

LETS protect against border carbon tariffs

LETS also help smooth protectionist waters as countries implement carbon border tariffs. With LETS in place, the risk that other countries will impose carbon tariffs on Canadian exports lowers. The protectionist winds are blowing hard out of Europe, where the European Union will apply a carbon price on imports from specific industries, including cement and steel. Various carbon protectionist tariffs are also being contemplated in the United States that would first assess the emission intensity of key products, including aluminum, cement, oil, fertilizer, iron and steel. The Unites States then would seek to apply a border carbon charge or tariff on carbon-intensive imports, increasing the market price in the United States for Canadian products.

Let’s get the details right

There are two big risks that need to be addressed to ensure that LETS can continue to contribute emission reductions in line with Canada’s climate targets. First, recent analysis by the Canadian Climate Institute indicates future LETS market prices don’t always hold at the national carbon price, notably in Alberta, due to an oversupply of credits.  Credit oversupply can happen for a variety of reasons, including when firms are granted more credits than needed for compliance; technology investments, spurred by subsidies, generate large volumes of credits; and overlapping policies double count reductions. The institute’s analysis shows that addressing credit oversupply and some policy overlap, notably between LETS and the oil and gas emissions cap, can cut another 15 megatonnes of national emissions by 2030 from industrial processes. This 15 megatonnes equals more than a third of the reductions needed to close Canada’s 2030 emissions gap.

This policy fix is straightforward. Regulators need to routinely monitor and update greenhouse gas performance standards to make them stricter. The movement toward government insuring against uncertain future carbon prices, as in the case of carbon contracts for differences and credit offtake agreements, can also help maintain investment certainty.

Second, market transactions and trading prices are opaque and apart from Quebec’s cap-and-trade system, there is no foresight on the current or future value of emission credits in the LETS markets. This adds uncertainty for investors but also limits the ability for regulators to predict market imbalances and take corrective action. Canadian LETS markets are currently worth about $2.4 billion, but this value rises rapidly with the carbon price and stricter performance standards, growing to $6 to $7 billion by 2030. It’s astounding that market oversight and trading systems are not yet in place to track how these markets function and whether the market price holds.

It is no wonder that LETS are the policy tool of choice across Canada and across the political spectrum. These systems incentivize emission reductions, minimize competitiveness risks, and calm the threat of border tariffs on Canada’s exports.

LETS get the job done.

Dave Sawyer is principal economist with the Canadian Climate Institute and operates EnviroEconomics.

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Canada’s new 2030 Emissions Reduction Plan (ERP) is a comprehensive, ambitious and transparent policy roadmap for achieving Canada’s climate goals. It uses credible modelling to demonstrate a path to 2030 targets. It’s a big step forward. 

It’s also not enough. 

Modelling is critical for planning, but it doesn’t reduce real-world emissions, nor does it attain targets. Ultimately, Canada’s success will depend on how – and how quickly – the government puts those policies in place. 

Fortunately, the 2030 ERP is a decent roadmap. According to our independent analysis, the plan will drive emission reductions across all sectors and all major sources of emissions in the economy. 

Unfortunately, Canada has less than nine years to design and implement most of the policies contained in the ERP. Based on our assessment, a full 100 megatonnes of emission reductions – 43% of the needed reductions – are projected to come from policies that have been announced but that still need to be developed and implemented. As Canadian climate policy wonks know all too well, the process of regulatory consultation and design takes time.

The federal government should use the ticking clock to focus its attention on what matters most: the policies that, if designed well, will deliver the lion’s share of reductions required. Here are the five policies that, according to our analysis and modelling, will deliver about two-thirds of the reductions needed to meet Canada’s 2030 emissions targets. 

1. Continued adjustments to the federal carbon price. The government needs to keep ratcheting up the stringency of its carbon-pricing system to deliver more reductions. 
2. Establish an emissions cap for the oil and gas sector. The plan will look to reduce the emissions of the sector to 42% below 2019 levels by 2030, taking into account policy interactions with carbon pricing, methane regulations, et cetera. The cap is low, and it will be a technological and financing puzzle to achieve the aspirations in the ERP. 
3. Design a Clean Electricity Standard. This will aim to make electricity net-zero by 2035 and is a critical step to decarbonizing the rest of the economy. 
4. Finalize the Clean Fuel Standard (this regulation has taken some time to develop) and move to strengthen its stringency well before 2030. 
5. Deploy land-use emission  reduction projects as fast as possible. The ERP relies heavily on nature-based solutions. Canada must move quickly to plant trees, change land-use practices and scale-up workable solutions. 

Focusing on these five planks cuts against the comprehensive ambition of the ERP, which aggregates an astounding number of policies that previously were scattered across a number of federal documents. The sheer number of those policies will drive emission reductions across all sectors and all major sources of emissions in the economy – but it’s double-edged. 

Overlapping policies can interact and sometimes impair performance. That risk, and the overall urgency of bending Canada’s emissions curve, are all the more reason to focus immediately on the big five that can get us most of the way there. If we get these policies right, the rest can fall into place more easily.

So welcome to the decade of climate governance. Canada has a plan. It’s a good one. It’s not perfect, but it doesn’t need to be. Because even though time is short, this is still more a marathon than a sprint. The 2030 ERP is a first step, not a final one. The priority now must be delivery, starting with hammering out the five policies that will get us most of the way there. 

For governments, industry, expert advisors, and climate policy pundits alike, that’s where we now need to turn our attention. 

The post Five ways the federal government can hit Canada’s 2030 emissions milestone appeared first on Corporate Knights.

Now, with a Trump presidency appearing bent on reversing American climate effort, the carbon competitiveness doom and gloom seems a little more plausible and a lot more threatening.

But to date in Canada, widespread political panic has not set in. Instead, provinces and territories continue designing and implementing credible policy while a new federally led pan-Canadian framework will help coordinate the policy patchwork and guide long-term ambition.

So how did Canadian politicians, for the most part, become comfortable with imposing carbon costs on our large export engines? How has Canada managed to forge ahead on climate policy while other countries lag? The answer can be found in smart policy design oriented to reduce the impact on industry of increasing climate ambition. To some extent, Canadian politicians know they have already Trump-proofed their climate policy. How so?

First, successive prime ministers have used national targets to address competitiveness issues. Prime ministers Jean Chretien, in the case of the Kyoto Protocol, and Stephen Harper, in Copenhagen, reasoned that targets aligned with the United States would minimize the cost exposure on industry. In principle, target alignment made sense. But a closer look at the relative costs of emission reductions in Canada and the United States found that for the same target, Canada’s costs were much higher. This was primarily due to the low cost of decarbonizing coal-based electricity in the U.S. versus Canada’s largely decarbonized electricity system and high costs of reducing emissions in the oil sands. For the same targets, Canada’s carbon prices to reduce emissions are higher, thereby imposing higher costs on industry.

This realization of higher Canadian carbon costs explains why the Harper government set Canada’s 2030 GHG target, or our Nationally Determined Contribution, less strict than the United States. It also explains why the Trudeau government adopted the target as its own, eschewing calls for more ambition aligned with the United States.

Second, governments have limited the cost exposure of carbon targets. Industry is rarely shy about sharing its views on the impact of high carbon costs, taking every opportunity to message that carbon costs equate to job losses. Adding to this insight is analysis and modelling that consistently reveals the high costs of politically ambitious GHG targets. Take the Harper government’s request to the now defunct National Round Table on the Environment and the Economy to cost out a 65 per cent reduction in GHGs. The $200 per tonne sticker shock landed with a thud in an era when few countries were pricing carbon.

To design around the cost uncertainty associated with ambitious emission targets, governments have put in place design features that effectively cap the cost exposure. Alberta’s large industrial emitter program, for example, now has a carbon price ceiling of $20 per tonne for industry, climbing to $30 next year. Alberta’s Climate Leadership Plan, which puts in place a comprehensive policy package, does not contain a GHG target, taking off the table the cost uncertainties associated with target attainment.

Ontario and Quebec’s cap and trade programs, through linked carbon trade with California, effectively contain costs by accessing a larger pool of lower cost reductions. Analysis that supported the design of Ontario’s cap and trade program, for example, found that linked allowance trade reduced the cost of Ontario achieving its climate targets alone from $157 per tonne of carbon dioxide to just $20 per tonne with linked carbon trade.

Third, federal governments have harmonized regulatory effort with the United States. Vehicle efficiency standards are now the same in Canada as they are in the U.S., recognizing the cross-border trade in automotive parts and vehicles. The latest attempt at regulatory alignment is on methane emissions for the oil and gas sector, with former President Barack Obama and Prime Minister Justin Trudeau (along with Mexico) agreeing to reduce this significant source of emissions. These policies are now at risk under a Trump administration.

Finally, governments are pricing only a portion of the emissions of our large and trade-exposed emitters such as cement, oil sands, and iron and steel. This approach, now applied in Alberta, Ontario and Quebec, starts with an economy-wide carbon price consistent across all emitters including households, but then provides the large trade-exposed industries with emission rebates. The carbon price sends a signal to manage carbon and make technology investments while the rebating lowers the overall cost impact. The rebating can be designed to work equally well under a cap and trade program or a carbon tax.

To understand how rebating works, think about the carbon price adder on the gasoline bought in a carbon pricing jurisdiction near you. The carbon price raises the price of fuel, which impacts behaviour to either drive less or get a more fuel-efficient vehicle. Governments then separately rebate households to offset the fuel cost impact. Taken together, the carbon price realigns price signals to use less fossil fuel while the rebate mutes the cost impact on household income. Alberta issues rebate cheques directly to households, alongside output-based subsidies for large industrial emitters, while in Ontario and Quebec, subsidies are available for low-emitting technology.

In B.C., the greenhouse sector is the only exempted industry and the province’s revenue neutral formula, as it applies to trade exposed industries, only rebates back a fraction of the cost in lower corporate income tax. As the only Canadian jurisdiction without a rigorous policy for trade exposed industries, it has been criticized as opening B.C. companies up to greater trade exposure in regards to the United States and other jurisdictions.

The impact on industry of carbon pricing paired with rebating is to significantly reduce costs. In Ontario, analysis supporting the cap and trade program found that the average cost impact on the large trade-exposed emitters in 2020, with a $20 carbon price, was a reduction in profits of approximately 1.5 per cent or equal to 0.12 per cent of sales. Some firms were better off, being able to outperform the requirements of the program and so increase profit through trading emission units.

While carbon policy costs are real, and every penny matters to shareholders, analysis suggests that carbon pricing paired with large emitter rebating can significantly reduce the competitiveness threat.

Which then highlights an important competitiveness dichotomy: while the competitiveness issue typically focuses on competitiveness lost, there is also the opportunity of competitiveness won. Competing in a carbon constrained world, as other countries increase their demand for low carbon goods, is the new prize. Canada is well suited to compete, with our carbon policies driving innovation and learning-by-doing. With America backing away from climate policy, Canadian innovators will be better placed to compete in the U.S. marketplace.

Governments intuitively know that competitiveness is an issue that must be addressed by carbon policy. For years, the sticker shock of carbon targets impeded action. But slowly, and in time, governments became more comfortable with imposing costs on Canada’s large export engines.  As the risk was better defined, and design choice identified that could minimize the impact, governments started to move.

Now with the imposition of a federal carbon price floor nationally, we can expect a more equal burden of costs across provincial emitters. Still, the next competitiveness challenge will be to better govern the patchwork of federal and provincial policies so that the long-term carbon costs can be minimized.

This is the next big challenge for the Canadian federation. Not “price carbon now,” but rather improve policy cohesion, better align regulatory burdens and routinely take stock to identify competitiveness risks as they manifest.

Ed note: A previous version of this article included British Columbia alongside Alberta, Ontario and Quebec as jurisdictions pricing only a portion of the emissions from their large and trade-exposed emitters such as cement, oil sands, and iron and steel. British Columbia is, in fact, the only Canadian jurisdiction without a rigorous policy for trade exposed industries.

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