While many Canadians have been keeping an eye on climate change developments south of the border, there have also been important developments in Canada that may raise some eyebrows.
On April 16, 2009, the National Round Table on the Environment and the Economy (NRTEE) released a report entitled Achieving 2050: A Carbon Pricing Guide for Canada. The report concluded that “Canada must act decisively now if we are to achieve our 2050 emission reduction targets,” and recommended carbon prices in the $100 to $200 per tonne range as “responsible, reasonable, and realistic for Canada.” Prices in this range are characterized by the NRTEE as “the least economic cost” by which the federal targets of 20 per cent below 2006 levels by 2020 and 65 per cent below 2006 levels by 2050 can be met. In fact, Achieving 2050 is premised on the finding that national carbon prices upwards of $300 per tonne post-2025 would be required without complementary regulations and other measures recommended in this report to contain carbon prices below a $200 per tonne upper limit in 2025.
As a bridge between government, business, academia, and the public interest, the NRTEE is uniquely positioned to advise on greenhouse gas (GHG) policy, and its report, based on over a year of technical analysis and industry input, is likely to influence national carbon pricing in Canada. Achieving 2050 emphasizes absolute rather than intensity-based targets, reflecting the growing reality that US and many Canadian jurisdictions are moving in the direction of absolute targets.1 It recommends the development of a uniform, national, economy-wide cap-and-trade system no later than 2015, transitioning from emissions-permit allocations to a full auction of emissions permits by 2020:
- 2010–2015: “Fragmented Period,” leading up to a hard cap in place by 2015;
- 2015–2020: “Transition Period,” leading up to a full auction in place by 2020; and
- 2020+: “Unified Period,” during which most emissions permits will only be available by auction or from other permit holders through the carbon trading market.
The recommended five-year Fragmented Period is workable with recent US and Canadian announcements to implement a cap-and-trade system close to 2012. These include recent announcements by the Saskatchewan, Québec, and Ontario governments of proposals to implement cap-and-trade legislation based on absolute targets.
Fundamentals of a Canadian Cap-and-trade System
The NRTEE recommends an absolute national hard cap be put in place by 2015, reflected by emissions permits granted or auctioned annually. Under the hard cap, various regulated emitters would be able to trade emissions permits within a Canadian carbon market. The recommended cap-and-trade system would also include price-certainty elements reflective of carbon-taxation instruments. As the NRTEE points out, many implemented or announced plans in Canada to date in fact reflect a blend between cap-and-trade and carbon tax policies; there is no pure cap-and-trade system proposed or implemented in Canada at present.2 Hybrid cap-tax regimes offer the advantages of the reduction certainty imposed by the cap-and-trade elements, and the price certainty imposed by the carbon tax elements. Individually, each approach has significant drawbacks: a carbon tax offers speed of implementation but the disadvantage of political aversion, while cap-and-trade poses fair allocation of permits challenges but the disadvantage of price uncertainty in the event of shortages or poor carbon market liquidity. The price-certainty element of Canadian systems is reflected in the technology funds through which regulated emitters can comply at a predetermined price per tonne.
Leading up to a hard cap by 2015, the NRTEE recommends that during the Fragmented Period an auction be phased in and output-based allocations generally limited, but that sectors particularly exposed to trade and cost challenges retain output-based allocations.
Following implementation of a hard cap in 2015, a full auction (zero allocation) would be introduced during the Transition Period. A full national auction is recommended no later than 2020, with the exception of the electricity sector where a full auction is recommended immediately because permit costs can be passed through to customers.
National Regime: All Jurisdictions, All Emissions
The NRTEE recommends unifying existing provincial efforts into a national scheme during the Fragmented Period. A national approach covering all jurisdictions and all emissions is seen as economically superior to fragmented regimes. Achieving 2050 suggests that no emissions should be deliberately omitted at the outset because reduction costs will only increase in future years, and that regional impacts should be targeted through “income support” rather than a fundamental dilution of the carbon price. In the NRTEE’s view, Canada’s long-term international competitiveness would not be well-served by inter-jurisdictional domestic competition, and our engagement in international markets should be reinforced by cohesive action at home. Yet creating one national regime may be difficult in light of competing provincial and federal constitutional jurisdiction over the regulation of GHG emissions, significant provincial policy variations, and recent Ministerial announcements suggesting federal deference to provincial regimes that are no less stringent than federal requirements. Achieving 2050 suggests that focus must shift from equivalency to standardization, although mechanisms and processes do not currently exist through which to forge a unified national price or approach.
In terms of impact on GDP, the NRTEE estimates that a fragmented approach would cost seven per cent to 20 per cent more than a unified national approach. The report suggests that if each province were to act individually towards reaching the same targets, 45 per cent higher carbon prices may be required in 2020, and 25 per cent thereafter — and in Alberta, possibly as high as 300 per cent above national prices over the next decade.
Unlike federal plans proposed in 2008 to apply to large final emitters (LFEs) representing almost twothirds of national emissions, the NRTEE recommends that a national cap also apply to LFEs,3 as well as to buildings, households, transportation, and light manufacturing (BHTM), which make up most of the balance of emissions nationwide. The NRTEE recommends that the LFE cap include fugitive and process emissions after 2015, and that the BHTM cap be apportioned based on the carbon content of the fuel purchased by such users.4 Emitters able to demonstrate particular hardship may be able to receive free permit allocations rather than having to purchase all permits at open auction.
NRTEE research suggests that domestic offsets created from sectors not covered by the cap-and-trade regime should initially be allowed, but phased out “rapidly” during the Transition Period. Most offsets opportunities would be eliminated by 2015 as a result of the economy-wide cap-and-trade system and complementary regulations. This recommended phase-out of offsets opportunities is counter to several federal and provincial policies in support of credible offsets projects and should be monitored carefully.
Going beyond the 2008 federal plan, which contemplated up to 10 per cent of compliance from international Clean Development Mechanism (CDM) credits, the NRTEE recommends further Canadian participation in international frameworks. Many carbon market analysts have indicated for some time the need for a domestic system to be integrated into other carbon markets, due to the potential shortage of domestic offsets and the relatively high cost of domestic abatement. Achieving 2050 confirms this view; it will be costly to attain the required domestic reductions and it makes sense that Canadian businesses be permitted to seek real and verifiable reductions beyond our borders for domestic compliance purposes. Even at $100 to $200 per tonne, NRTEE modeling suggests that sufficient reductions will not be achieved within Canada, and that affordable, credible, and sustainable foreign opportunities need to be included. The recommended phase-out of domestic offsets however, raises policy questions about whether international offsets should be indefinitely allowed or eventually phased out, particularly in the absence of cap linkages with international partners.
The NRTEE predicts a point in the future when additional domestic abatement will no longer be costeffective and international trading is advisable. According to the report, without international trading, domestic prices could rise to $300 per tonne by 2030; with only 10 per cent, international trading may hit $250, but with 30 per cent, international trading could remain below $200. International linkages could be through U.N. frameworks or directly to US or European schemes and should move towards a unified global carbon price. This recommendation is not without controversy; however, as the NRTEE recognizes the necessity of comparable systems to ensure fair prices and consistent treatment for buyers and sellers, and questions remain regarding the policy merits of Canadian compliance dollars being spent on projects outside Canada. On the other hand, bilateral linkages with the US may help address industry competitiveness concerns and mitigate compliance costs associated with undue impacts on trade-exposed sectors and stranded assets.
The NRTEE sees carbon pricing as the single most effective incentive for the adoption of abatement technology; however, carbon-price signals alone will not achieve targets at least-cost without complementary regulations, particularly in the upstream oil and gas, pipelines, transportation, buildings, landfills, and agricultural sectors.5 Complementary regulations could mandate changes to certain agricultural or energy industry practices (such as flaring or venting), vehicle standards, public transportation programs, building codes, or fuel content, for example. The NRTEE estimates that complementary regulations could contribute almost half of the necessary reductions by 2020 and almost a fifth of the necessary reductions by 2050. According to the report, enacting complementary regulations would effectively reduce the highest costs of abatement and help reduce the national carbon price to $200 post-2025, rather than the $300 that would otherwise be required to meet targets.
Certainty, Adaptability, and “Fast and Deep” Reductions
The NRTEE recommends that national GHG policy balance the certainty of stable, credible, and affordable price signals with the adaptability to respond to changing circumstances. Immediate signals must provide incentives for behavioral change and necessary investment, but at the early stages should focus on cost-containment, gradually shifting to focus on reductions. Achieving 2050 strongly recommends that there be no further delay in federal policy development and that efforts proceed despite current uncertainties, allowing for refinement as necessary. NRTEE modeling indicates that “fast and deep” reductions are needed prior to 2015 to avoid more expensive reduction costs in future years. Not unlike the concept of technology funds, the NRTEE recommends that early auction revenues be invested in necessary technologies, as well as economic impact mitigation.
Policy Wedges and Transition
Overall, the NRTEE sees three key policy wedges necessary for Canada to achieve its targets:
(a) a national cap-and-trade system to be apportioned between the LFE and BHTM groups to cap most emissions nationwide;
(b) complementary regulations and technology policies specifically directed at hard-toreach emissions; and
(c) international carbon-abatement opportunities to help align domestic prices with those of our major trading partners.
During the Fragmented Period, the NRTEE suggests initially establishing quantity certainty and initial free allocations, with a shift in the Transition Period to few fixed allocations, a full auction, phase-out of domestic offsets, and international linkages.
Governance and Economic Impacts
To ensure transparency and good governance, the NRTEE recommends the creation of an expert Carbon Pricing and Revenue Authority to collect auction revenues, determine emission permit allocations, evaluate necessary adjustments, and monitor and enforce compliance rules. After 2015, funds paid into this new body could be used to make international purchases to the extent of the domestic reductions shortfall.
Achieving 2050 estimates annual compliance costs of $3.4 billion by 2020,6 and indicates that 2020 auction revenues for the 570 MT available may be $18 billion. Distribution of this value will be important. Auction design and possible bidding blocks will require careful consideration from a compliance-costs and fiscal-management perspective. The NRTEE recommends that auction revenues be distributed to: (i) research and development and technology deployment; and (ii) income support and tax relief.
In terms of macro-economic impacts, Achieving 2050 assumes that with ‘business as usual,’ Canada’s economy would grow in the order of 40 per cent by 2020 and 150 per cent by 2050. Implementation of a cost-efficient carbon policy is expected to shrink the national economy from business as usual by one per cent to three per cent in 2020, and three per cent to five per cent in 2050. In other words, GDP is expected to grow 1.5 per cent annually and the carbon-pricing policy would impact such growth by -0.2 per cent. Corporate tax cuts are recommended by the NRTEE as the preferred counter-measure.
In summary, Achieving 2050 differs from the 2008 federal policy plans in its focus on absolute reductions rather than intensity-based reductions, but maintains the 2006 baseline year rather than a Kyoto 1990 baseline year. The emphasis on absolute objectives has significant potential to have an impact on growth industries such as the oil sands, but is tempered by the NRTEE’s acknowledgement that in some instances supplemental output-based allowances should be granted (rather than auctioned) to emitters most vulnerable to adverse impacts.
The NRTEE recommendations are specifically geared to implementing a least-cost policy, mitigating impacts on disproportionately affected industries and emitters, and minimizing negative impact on GDP, but they still call for carbon pricing in the magnitude of $100 to $200 per tonne, a number significantly exceeding previous federal plans. The NRTEE endorses incorporating carbon-taxation elements to improve price certainty, supports the concept of spending compliance dollars on technology investments and financial mitigation, and emphasizes the importance of significant international linkages.
Achieving 2050 also parts company with previous federal announcements in recommending that a capand- trade system be applied to homes and buildings, to all aspects of the transportation sector, and to most manufacturing activities — and in suggesting that a hard cap be imposed on the electric power generation sector as an immediate priority. The impacts on electricity supply mix planning and charges to customers may be among the earliest direct impacts of such a policy being implemented.
Companies in natural resource extraction and industrial facilities, power generation, commercial real estate, home building, manufacturing, transportation, and agricultural sectors, among others, may be well-advised to monitor the reaction of all levels of government to the recommendations made by the NRTEE in Achieving 2050, and to the development of carbon prices in Canada and the US.