The Climate Change Olympics

I wonder if we could, as a country, find a way to approach climate change with the same dedication we exhibited at the Vancouver Olympics. I am even trying to conjure up a slogan to match “Own the Podium” (“Own the Climate”? “Own the Environment”?), but I am obviously not a marketer. Instead, the decades go by and we pay lip service to our commitment to addressing this grave risk to the planet, but our policy makers tend to resemble a hockey player who is ragging the puck rather than trying to score.

Polls often suggest that many Canadians like the image of their country as a leader in addressing some of the major challenges facing the globe, and this leadership is sorely needed when it comes to climate policy. This lofty self-image might explain Canada’s aggressive commitments in the Kyoto Protocol of 1997, in which we promised to make substantial greenhouse gas emissions reductions by this year, 2010, even though our fossil fuel–intensive economy and rapid population growth, compared to most industrialized countries, would make this task relatively difficult and costly.

Canada made this bold commitment at Kyoto, but never implemented the kind of policies that would achieve it. We talked big, but our performance was pitiful. In researching Hot Air: Meeting Canada’s Climate Change Challenge, my co-author Jeffrey Simpson interviewed senior advisors to the Chrétien government and was told that there had been little real intent to implement policies that would achieve the Kyoto target. Various excuses were given for federal inaction. The Canadian public said it wanted Canada to lead on climate policy, but did not expect to pay more for energy commodities such as electricity, home heating fuel and gasoline. Regional politicians and media pundits argued that a forceful, effective federal policy would be interpreted as a jurisdictional threat to fossil fuel–rich provinces, perhaps causing a constitutional crisis. Industry threatened massive job losses if rising energy costs harmed its international competitiveness.

As a modeller of energy-economy-environment systems, I know—along with all other experts in this field—that in our market economy, the shift to lower emission technologies will only be significant if emissions are no longer free. In other words, emitting greenhouse gases must have a cost and this cost will drive the gradual shift of our economy toward low- and zero-emission technologies, many of which are already commercially available, but which gain little market share because they are more expensive when greenhouse gas–emitting technologies have a free ride. This includes renewable sources of electricity, hybrid and now plug-in hybrid electric vehicles, and heat pumps for ­buildings.

After Canada signed the Kyoto Protocol, my research team was selected by the federally funded National Climate Change Process to use our energy-economy model to estimate what Canadian policies were needed to achieve Canada’s Kyoto commitment for 2010; readers may recall that it was to be a 6 percent reduction below 1990 emissions levels. Our estimate was that the emissions price needed to rise quickly to about $150 per tonne of carbon dioxide, which would, for example, increase the price of gasoline in our cars by about 40 cents per litre.

Needless to say, the government did not adopt this high price for greenhouse gas emissions. In fact, it did not apply any price to emissions. That was the Liberals. And since 2006, the Conservatives have done the same. Canadian federal governments talk earnestly about climate policy leadership and yet, 20 years after starting to “act” on this risk, they still have not implemented, even tentatively, the one policy that is absolutely essential if emission reductions of any amount are to occur. That’s depressing.

It is depressing in part because researchers like me spend most of our time figuring out how to design emissions pricing policies so that their negative impacts on individuals, certain industries and regions will not be excessive. Policy advisors to government are now aware that Canada can gradually raise the price of emissions and combine such a policy with various mechanisms to ensure that the costs of the policy are not onerously concentrated on any one group. These policies have been demonstrated in various European countries and now even in a Canadian province, British Columbia.

At the federal level in Canada, a key issue is to make sure that national climate policy is not seen as unfair to any particular region. This is not easy, in part because of different perceptions of fairness and in part because some regions are more greenhouse gas–intensive and therefore may be expected to incur greater costs in the process of reducing emissions. While some optimists talk about all the business opportunities in the new green economy, the reality is that reducing greenhouse gas emissions imposes costs on the economy (costs that we are willing to incur in order to address the climate risk). Those costs result from the higher capital costs of more efficient buildings and equipment, production of alternative fuels such as nuclear and renewables and, in some places perhaps, the adoption of expensive processes that capture carbon from energy sources and store it underground—called carbon capture and storage.

Although these expenditures to reduce greenhouse gas emissions would occur right across the country, more would occur in regions that were especially emissions intensive, such as Alberta and Saskatchewan. Just because these reductions occur in these two provinces does not mean that this region should have to pay all the costs. Anyone can pay for them. As long as the mechanism we use to allocate the costs does not prevent the low-cost reductions from occurring, economists don’t care who pays. The allocation of the costs is an equity or fairness issue—in other words, a political issue.

But while everyone can agree that Canada should allocate the costs fairly, there are different ways of defining what is fair. And one’s preference for one definition over another is usually linked to one’s financial self-interest. (What a surprise!) The “polluter pay” principle argues it is fair that emitters bear all the costs of either reducing their emissions or paying taxes or emission permit fees for the damages their remaining emissions cause. If you are not a polluter, this seems fair. By this measure, Alberta and Saskatchewan would have to shoulder the lion’s share of the burden in Canada. In contrast, the “sovereignty” principle argues that polluters must be protected to some degree from economic harm when governments suddenly change laws and regulations. If you invested in a new coal-fired electricity plant or an oil sands plant in 2005 (both of which should last for decades) and, in designing it, you carefully complied with all existing pollution regulations, you would argue that it is only fair you be compensated for losses if that plant is rendered uneconomic by new pollution charges or restrictions. A third fairness criterion, the “ability to pay” principle, argues that people or countries that are poor should pay less than those that are wealthy, so certain areas of Atlantic Canada and the North would benefit from this principle. That would certainly seem fair to those who are less well-off.

How do we find our way out of this conundrum? As with all debates about equity, the solution is likely to be the result of some interplay of political negotiating power, legal rights and public sympathies. Alberta and Saskatchewan could threaten to leave the Canadian confederation. This is an extreme negotiating card they are reluctant to play, but the threat can help when they feel that the population, and thus political weight, of central Canada will otherwise lead to an unfavourable definition of fairness by the federal government. Alberta and Saskatchewan, or their ­emissions-intensive industries, might argue that they have a legal right to compensation for investments made in good faith under the previous regulatory regime. But given the massive wealth creation resulting from the fossil fuel industry, there is also pressure on the two provinces to recognize their comparative wealth and thus bear a greater share of the costs of reducing greenhouse gases, and both provinces have openly accepted some responsibility in this regard.

In 2009, the TD Bank provided funds for the David Suzuki Foundation and the Pembina Institute (two leading, non-profit, environmental organizations in Canada, which I will call DSF-Pembina) to hire MK Jaccard and Associates to assess the regional impacts of various emissions-pricing scenarios that differed with respect to the ambitiousness of Canada’s emissions reduction target and the targets of other countries. (The 2009 MK Jaccard and Associates study is titled “Exploration of Two Canadian Greenhouse Gas Emissions Targets: 25% Below 1990 and 20% Below 2006 Levels by 2020.” The DSF-Pembina report based on this study is titled “Climate Leadership, Economic Prosperity: Final Report on an Economic Study of Greenhouse Gas Targets and Policies for Canada”.) (You may be surprised to learn that I have little involvement in this 20-year-old company, which is composed mostly of my former graduate students, and that I was not even aware of this study before it was released.) In general, the DSF-Pembina emissions pricing scenarios showed that Alberta and Saskatchewan would bear more of the cost of reducing greenhouse gases and this was reflected in a slower rate of economic growth than was otherwise forecast to occur. Interestingly, though, under the emissions pricing scenarios Alberta and Saskatchewan would still have higher rates of economic growth than anywhere else in Canada. Advocates of the ability-to-pay fairness principle would see this as important.

Unfortunately—and this is a vivid example of how such debates can veer completely off the rails—the study included one scenario that would have resulted in Alberta and Saskatchewan not only paying higher costs but also actually transferring revenue to other parts of Canada. That one scenario became the lightning rod for the reaction to the DSF-Pembina study by the two provincial governments, regional interests and fossil fuel industry supporters. And naturally the mainstream media zeroed in on the controversy. Other scenarios that did not have this effect were completely ignored and the entire report was couched by some as an example of environmentalists waging war on Alberta and Saskatchewan (see Gwyn Morgan’s article in The Globe and Mail on November 9, 2009—“Zealots Throw Another Dagger at Our Oil Industry”). (See also the Canada West Foundation counterpoint titled “Sharing the Load: Addressing the Regional Economic Effects of Canadian Climate Policy”.)

This type of reaction to a simple, exploratory report by two environmental organizations gives a sense of the challenges facing a federal government aspiring to global leadership in the effort to reduce greenhouse gas emissions. Divergent regional views on what is fair will have to be reconciled to some degree and overreactions to perceived attacks on provincial rights or revenues are a norm in Canadian federalism.

Still, it is rather surprising (and again disappointing) to note how rapidly and easily European countries have been able to achieve agreements on fair allocation of the costs of climate policy, even though these countries differ substantially in terms of their fossil fuel endowments and the intensity of the greenhouse gas emissions of their economies. Yet the Europeans quickly reached an agreement to allocate their burden under the Kyoto Protocol in 1997. Then, in 2005, they reached agreement on allocating carbon dioxide permits under their industry-focused cap and trade policy to price greenhouse gas emissions. They did this by compromising on the fairness principles I described above. Industries, and thus countries, with high greenhouse gas intensities, such as Poland, were allocated extra permits, thus reflecting the sovereignty principle. However, the overall permit allocation still resulted, in most cases, in greenhouse gas–intensive countries facing greater total costs than low-intensity countries, thus reflecting to some extent the polluter-pays principle. Finally, lower income countries in the European Union, such as Portugal, received targets that were not as onerous as those of wealthier countries, reflecting the ability-to-pay principle.

For such a compromise to occur in Canada, we would likewise have to trade off between these three equity principles. The Canadian government would implement an economy-wide cap and trade system with some permits allocated freely based on the past emissions (called grandfathering) and some allocated by auction. In an auction allocation, industries bid for permits until a price is found at which all permits issued by government are allocated among auction participants. For industry, the money they pay for the permit is no different than the money they would pay the government under a carbon tax. Both the carbon tax and the cap and trade system can be designed to make sure that all fuels face a price for greenhouse gas emissions, including home heating oil and natural gas and the gasoline and diesel used in our vehicles.

Allocating permits by grandfathering instead of auction favours greenhouse gas–intensive industries and their provinces (sovereignty). To ensure there is absolutely no transfer of wealth from Alberta and Saskatchewan to the rest of Canada, some of the auction revenue can be used to cut federal income and corporate taxes, but some would also need to be transferred directly to provincial governments so they could cut their taxes or make emissions reductions investments (in renewable power, public transit, energy efficiency and perhaps carbon capture and storage) to benefit their own residents and corporations (again sovereignty). (This approach is described in Hot Air, and also described and modelled in the 2009 report by Tracey Snoddon and Randall Wigle in “Clearing the Air on Federal and Provincial Climate Change Policy in Canada,” IRPP Choices, volume 15, number 11.)

At the same time, a cap and trade policy will drive greater expenditures on reducing greenhouse gases in Alberta and Saskatchewan and this is likely to slow the rate of economic growth somewhat in those provinces while having less effect on other provinces (polluter pays and ability to pay). A balance can be found, however, where this growth reduction in Alberta and Saskatchewan is not excessively greater than reductions in other provinces. With such a balance, the rich resources of those two provinces may still allow them to lead the country in economic growth.

Canada could implement a cap and trade policy to price greenhouse gas emissions quite quickly. The European policy took less than two years from conception to enactment, and our government can benefit from the European experience and from almost two decades of studying and discussing this with industry and other interests here in Canada. But, until they lost power in 2006, the Chrétien and Martin Liberals just kept discussing and discussing. And for the last four years, the Harper Conservatives have continued to talk without taking action.

This frustration with federal inaction has led some people to suggest that an alternative hope for effective climate policy is if Canadian provinces start to compete with each other for leadership, in effect creating an internal Canadian climate policy Olympics. In this sense, we might mirror what happened south of the border during the eight years of the George Bush presidency. During that period, the clear unwillingness to act of the U.S. government motivated cities, states and even groups of states to take the initiative in climate policy. The U.S. northeast has applied an emissions cap and trade policy to the regional electricity sector. California initiated negotiations on the development of a cap and trade system that has attracted the participation of many states (mostly in the west, hence the name Western Climate Initiative) and, more recently, of four Canadian provinces (Quebec, Ontario, Manitoba and British Columbia). If implemented, this cap and trade policy would lead to emissions pricing for all industry and even consumer emissions in vehicles and home heating fuels.

Except for their willingness to show interest in U.S.-led developments such as the Western Climate Initiative, Canadian provinces have not diverged much from the ragging-the-puck model of our federal government for the past decade and more. But that is changing. In 2007, British Columbia adopted a radical zero-emission electricity policy, effectively barring new investments in greenhouse gas–^­emitting electricity plants. This led to the cancellation of proposals for several large coal and natural gas plants, a dramatic reduction from where emissions were forecast to be headed. The province followed this up in 2008 with North America’s first serious emissions pricing policy—a carbon tax covering all fossil fuel–related greenhouse gas emissions that started at $10 per tonne of carbon dioxide, but has a fixed schedule for annual $5 increases to 2012 (the tax will reach $20 on July 1, 2010). Also, in 2008, B.C. passed enabling legislation to implement a cap and trade policy, dramatically tighter emissions standards for vehicles and several other key climate policies. B.C.’s climate policies vaulted the province into the ranks of the leading jurisdictions in the world.

Concurrent with B.C.’s 2007 initiative in the electricity sector, Alberta implemented North America’s first performance standards for industrial greenhouse gas emissions (sometimes called an ­intensity-based cap and trade policy), which requires industries to reduce their emissions per unit of output. Excess emissions would face a permit charge of $15 per tonne. While this policy is a good first step in motivating industries with an incentive to save $15 on each tonne of emissions they reduce, it does not, however, follow the polluter-pays principle. The charge is only levied on excess emission (above the target intensity level), so the average charge is much lower, perhaps less than $5 per tonne of carbon dioxide. Also, industry has an option of purchasing offset reductions from elsewhere in the economy, and these can be cheaper than the $15 fee. Alberta justifies this, however, on the basis that its industries (oil, petrochemicals) need to compete in international markets against products from jurisdictions that face no cost for greenhouse gas emissions. Many environmentalists are also skeptical of Alberta’s policy in that it does not apply an emissions price to final energy commodities including gasoline, home heating fuel and natural gas, so emissions pricing in the province is tentative at best.

But B.C.’s recent climate policy leadership has helped environmental lobbyists in their efforts to motivate provincial politicians elsewhere in Canada for effective climate policies. Even though the B.C. government raised the price of gasoline with its carbon tax, it was able to win re-election in 2009 against an opposition that promised to cancel the carbon tax. In 2009, Ontario launched its Green Act, an effort to encapsulate in one piece of legislation the government’s intent to become a climate policy leader. Some environmentalists argue that while the legislation has good optics, it deftly sidesteps the essential but challenging greenhouse gas pricing policy. But others note that it takes strong steps to support renewable electricity sources such as wind, solar, small hydro and biomass in preparation for the planned phase-out of the province’s coal-fired electricity plants, and sets the stage for Ontario to follow through with low-emission building codes, vehicle regulations, public transit, municipal planning and eventually a province-wide cap and trade system, perhaps in concert with Quebec or as part of the broader Western Climate Initiative.

A healthy competition among Canadian provinces might be just the formula for finally realizing effective climate policies in this country. Provincial politicians can learn from each other in terms of designing policies that navigate the challenges of being both politically acceptable yet effective at reducing greenhouse gas emissions. Environmental lobbyists can hold up ambitious politicians and their creative policies as beacons for the more reluctant provincial governments. With time, the media and the public will begin to see the results in terms of the evolution of emissions, helping them to distinguish between authentic and bogus climate policies.