Can Canada afford to break with the U.S. on climate change policy? - Macleans.ca
 

Can Canada afford to break with the U.S. on climate change policy?

An interview with economist Chris Ragan on how to avoid hurting Canadian industry while still tackling climate change


 
Canada's Environment Minister Catherine McKenna takes part in a news conference during the First Ministersí meeting in Ottawa, Ontario, Canada, December 9, 2016. REUTERS/Chris Wattie - RTSVGP4

Canada’s Environment Minister Catherine McKenna (REUTERS/Chris Wattie)

Speaking after a key meeting of G7 environment ministers in Italy, Environment Minister Catherine McKenna declared again today that the federal government will not let U.S. President Donald Trump alter Canada’s course on climate-change policy.

“Let’s be clear, the U.S. is bigger than one administration,” McKenna told reporters in a telephone news conference. “And we’re going to be moving forward, as is the rest of the world, with the states, cities and businesses in the United States that are committed to climate action and committed to the Paris agreement.”

Canadians who view Trump’s exit from the 2015 Paris climate accord as just one more bad move in his bizarre presidency will no doubt applaud. Still, is it really possible for Ottawa, along with the provinces, to forge ahead with imposing a national price on carbon emissions, without putting Canadian companies at a punishing disadvantage compared to their U.S. competitors?

I recently spoke about this growing concern with McGill University economics professor Chris Ragan, who also chairs Canada’s Ecofiscal Commission, a group of economists who are trying to promote solutions to environmental challenges that make economic sense.

Q: If someone says, “We’re in trouble, Trump isn’t going ahead with Paris, we’re going to be at this terrible competitive disadvantage,” how would you answer that?

A: There’s a couple of ways. Competitiveness is a really important issue and it was a really important issue last Nov. 7 [the day before Trump was elected president]. The United States was nowhere near a nation-wide carbon price. And on Nov. 8, they were nowhere near a nation-wide carbon price.

So competitiveness was always going to be an issue for any Canadian jurisdiction that was going to put on a carbon price. How are you going to deal with your cement firms, your steel firms, your fertilizer manufacturers, because you’re going to raise their costs and nobody’s going to raise the costs of the [U.S.] rivals against which they compete? But, to me, that was that was an issue pre-Trump and it’s an issue post-Trump.

Q: Even if Trump didn’t change the fundamental problem, it’s still a big problem, isn’t it?

A: It’s funny to me that people say, “It’s crazy for Canada to do this policy unless the U.S. is doing it too.” Well, hold on. We’ve got a completely different health care system that is funded largely from taxes, and that doesn’t seem to be a competitive disadvantage for Canada. It’s actually a very good policy that some people would argue is a competitive advantage for some Canadian firms. We have a different public pension system that’s fully funded, unlike the train wreck that is U.S. social security, and that doesn’t create a competitive disadvantage.

Q: So you’re arguing that climate change is another policy area where Canada can go its own way.

A: We can design our policy to reduce greenhouse gas emissions, we can have carbon prices that are differently designed in different provinces. We do have to think about the competitiveness issue. But the current policies in place are thinking about this; they’re taking it seriously. Alberta has a system of output-based allocations; Ontario and Quebec have a system of giving back some fraction of the permits for free to the emissions-intensive sector. This is all about dealing with the competitiveness issue.

Q: How will the Alberta system work?

A: The Alberta system will be in place, I believe, by the beginning of 2018. But basically what it says is if you are a large final emitter—an oil sands producer, or a cement producer, or a steel producer—you will face a carbon price. But you will also get a credit based on your output—not your output of emissions, but your output of steel.

So you pay the carbon price, and therefore have an incentive to reduce your emissions. But we’re going to give you a credit, which is a function of your output. Think of this as a cash rebate that goes straight to the firm’s bottom line.

It says, “Oh, you were worried about your profitability falling because of this carbon price. Well, we’re going to make you pay the carbon price, but we’re going to give you this credit back, so your profitability isn’t going to be hurt so much.” Depending on how you compute this, maybe your profitability won’t be hurt at all.

Q: So you’d still have an incentive to cut your emissions, because there’s a price put on them. But at the end of the day, if it turns out you can’t do that and remain competitive, you’re getting a little kickback to help your bottom line. Is that how it works?

A: That’s right. And you have an incentive to reduce emissions because that’s where the price is. So if you could maintain your output unchanged, but reduce your emissions, you would save the carbon tax. If you could maintain your emissions constant, but increase your final output, you’d get more of a credit. It’s a carbon price combined with an output subsidy.

Q: What about companies in Ontario and Quebec, where there’s a cap-and-trade system?

A: Those firms are facing a carbon price, but they’re being given free permits. A free permit has cash value equal to the carbon price. So in a world of a carbon price of $17 per tonne, if I give you a free permit, it’s like giving you $17, because you could turn around and sell it in the market for $17. But I’m going to give you those permits for free based on your output.

Q: And that doesn’t undermine the purpose of the carbon price to begin with?

A: What it does is it says, “We want you to reduce emissions, not by getting smaller, but by getting cleaner.” What we don’t want is to reduce emissions in Canada, or Ontario, let’s say, because we closed down the steel sector, and just start importing steel from Pennsylvania. That’s crazy. Globally it would do nothing to emissions. What you’re trying to do to reduce emissions in Canada because we start producing things differently, not because we produce less stuff.

Q: It takes some thinking to grasp how it will work.

A: This two-part policy is confusing. People think, “What are we doing, making them pay money on one side and giving the money on the other?” But we’re giving them money and taking their money in completely different ways. There’s two incentives that firms are facing. One incentive is to reduce emissions, the other incentive is to maintain or increase production.

This interview has been edited for clarity and condensed.


 

Can Canada afford to break with the U.S. on climate change policy?

  1. Can Canada afford to break with the U.S. on climate change policy?

    No, Canada clearly can not.

  2. Yes.

    • “So you pay the carbon price, and therefore have an incentive to reduce your emissions. But we’re going to give you a credit, which is a function of your output. Think of this as a cash rebate that goes straight to the firm’s bottom line.

      It says, “Oh, you were worried about your profitability falling because of this carbon price. Well, we’re going to make you pay the carbon price, but we’re going to give you this credit back, so your profitability isn’t going to be hurt so much.” Depending on how you compute this, maybe your profitability won’t be hurt at all.”

      Wow, that’s some smooth double talk. Let me ask this. If profitability isn’t going to be hurt at all…where’s the incentive? Let’s recap. Carbon pricing was put in place to give firms an incentive for cleaning up their act with regards to pollution. But if you are giving them credits to offset that…that is just giving them a license for ‘business as usual.’

      McKenna then claims that this doesn’t undermine the purpose of carbon pricing. “This two-part policy is confusing. People think, “What are we doing, making them pay money on one side and giving the money on the other?” But we’re giving them money and taking their money in completely different ways”

      But at the end of the day (so as to speak) it still boils down to the fact that firms aren’t really facing an incentive to operate cleaner…and given that a carbon price was felt necessary in order for firms to do so…don’t expect an sharp reduction in emissions any time soon.

  3. Why do the cons keep pushing this meme? Carbon pricing is a small and unimportant aspect of decarbonizing our economy. The path begins with efficiency and conservation along with expansion of non-carbonized energy sources. Germany stands out as one of Donald Trump’s targets for being overly competitive; if that’s true, how does a country with a massive program greening its economy do that or even how did they reverse the trend of rising energy cost. For Canada, it should be easy: being competitive in the USA market doesn’t imply being equally profligate – quite the opposite. For the majority of industries, energy is a cost, consequently simply becoming more energy efficient increases competitiveness. Canada averages 5.3 toe/capita which is even worse than the USA’s 4.2 and exceeds Germany’s 2.5 while it should be noted that the USA has reduced its per capita energy consumption by 10% in the last decade. Instead of asking how carbon pricing might affect our competitiveness we should be asking how we can expect to compete with anybody with the highest energy intensity in the G20. There is obviously no technical reason why Canada can’t reduce its energy intensity to less than that of the USA; in any case, if current trends persist, based on energy intensity, Canada will become increasingly less competitive with US industry as well as the rest of the G20. A compelling reason to rejig our energy use is economic advantage.

    • First of all most of Germany’s success came through amalgamating East Germany and shutting down non viable, energy inefficient plants and factories that could only operate in a Communist regime. Second, Germany is now building coal burning electricity generators to replace nuclear plants they’re closing and they are using coal since it’s the cheapest form of fuel in Europe. Coal also generates the highest CO2 emissions among the various fossil fuels. Third, Germany has ceased their green energy plan because they were being damaged economically. Fourth the U.S had reduced green house gas emissions by 10% due in no way to government actions but because while the oil industry was using fracking to free tight crude oil, they produced a glut of natural gas and drove the price to a level where natural gas was cheaper to burn than coal. And finally, the major source of CO2 comes from transportation and Canadians and the goods that serve them travel over twice the distance per capita then in the U.S.
      The plants and factories in Canada today are just as energy efficient as their counterparts in the U.S. and they got that way when energy costs were twice what they are today. No one has to force industry to conserve energy if the economics support it and they sure did when crude oil was over $90/bbl.
      Finally if you want to see how well Ontario’s Green Energy plan is doing go to page 15 in the link below.
      CO2 emissions will increase dramatically because of it!!
      http://c.ymcdn.com/sites/www.ospe.on.ca/resource/resmgr/DOC_advocacy/2015_Presentation_Elec_Dilem.pdf

  4. A carbon tax is supposed to incent a change in human behavior to reduce fossil fuel consumption. A carbon tax of $30/tonne equates to less than 7 cents per litre fir gasoline. Gasoline prices before the collapse in crude oil prices were 40 cents per litre higher than they are now, equivalent to a carbon tax of $180/tonne. There was a lot of moaning and groaning back then but behavior hardly changed at all and large cars and SUV’s still dominate our highways. And transportation is the major source of green house gas emissions. So the proposed carbon tax by Trudeau, even when it hits its max in a few years, will do nothing to change driving behavior just provide him more money to fritter away.