Report Indicates Canada Should Implement National Climate Policies Ahead of U.S. On January 25, 2011, the National Round Table on the Environment and the Economy (“NRTEE”) released its report: Climate Prosperity- Parallel Paths: Canada- U.S. Climate Policy Choices. The report explores both the economic and environmental implications of Canada harmonizing with the U.S. on climate policy and identifies Canadian climate policy choices that will lead to long-term reduction in emissions while managing the economic impacts of potential U.S. and domestic policy choices.

The report concludes that given the uncertainty about U.S. commitment and direction on climate change and the difference between the Canadian and U.S. economies and emissions profiles, and keeping in mind the need to stay competitive, Canada should begin to implement emissions rules now and harmonize policies with the U.S. in the future.

The report highlighted four conclusions regarding Canada-U.S. harmonization on climate policy:

  1. Harmonization on carbon targets will have different implications for Canada compared with harmonization on carbon price. This is due to Canada’s distinctive emissions profile, especially its projected oil sands production and its energy-economy structure. Harmonizing Greenhouse Gas (“GHG”) Targets will lead to higher carbon prices in Canada and decrease Canada’s competitiveness, while harmonizing carbon prices would increase Canadian competitiveness, but result in fewer emission reductions and would cause Canada to fall short of its stated 2020 target.
  2. Competitiveness concerns can be addressed through targeted policy measures that would reduce the impact of competitiveness concerns on those sectors representing the 10% of Canada’s economy that is considered to be emissions-intensive and trade-exposed.
  3. Trade Measures: U.S. legislative proposals to account for carbon content on imported goods and products, as well as low-carbon fuel standards can be managed if Canada adopts equally stringent policies.
  4. The Costs Imposed by Canada’s own climate policies are likely to have the most impact on Canadian industry and therefore will be present regardless of when Canada implements its climate policy actions, but delay in implementing policies will increase these costs in the long-run.

Based on these conclusions, the report reviewed available policy options toward achieving harmonization and the associated trade-offs between realizing domestic emission reductions and reducing competitiveness risk. The report recommends that Canada take a transitional approach by immediately implementing an economy-wide cap-and-trade system with carbon prices to be contingent on U.S. prices and with harmonization remaining an option for the future.

In the short term, Canada would implement a transitional policy with the following elements:

  1. Contingent Carbon Pricing to establish a price collar that limits the Canadian carbon price to be no more than $30/tonne CO2e higher than the price in the U.S. as a compromise between harmonizing with U.S. targets and U.S. carbon prices;
  2. National Cap-and-Trade System with auctioning of permits and revenue recycling back to carbon emitters to minimize impact on industry sectors and address regional balance concerns;
  3. Limited International Permits and Domestic Offsets to keep domestic carbon prices lower for Canadian firms to maintain competitiveness and further harmonizing with U.S. policy direction, while still ensuring that the bulk of compliance would be achieved through domestic abatement or investment in low-carbon technologies; and
  4. A Technology Fund as part of contingent pricing, where revenue from additional emissions permits would be deposited into a national Low-Carbon Technology fund to stimulate investment in needed emission reduction technologies.

In the longer term, an integrated North American carbon market can be established if the U.S. implements its own cap-and-trade system that it is willing to link with a Canadian system.

The benefits of this approach are:

  1. Maintaining competitiveness and economic growth;
  2. Driving clean technology investment;
  3. Ensuring regional and sectoral equality;
  4. Managing risks of American carbon protectionism;
  5. Preparing Canada for Harmonization; and
  6. Achieving real GHG emission reductions.

The report suggests that a phased approach would prepare Canada to harmonize effectively with the U.S. when it is ready and allows Canada to adjust its policies to address U.S. actions. In this way, the report suggests Canada can best ensure that the economic impacts on Canada are manageable while still making sustained environmental progress toward achieving its 2020 targets without delay.