Cap-and-trade: Canadian after all?

Blog - April 8, 2011 - By Clare Demerse

At a news conference earlier this week, federal cabinet minister John Baird called the Liberal Party's cap-and-trade proposal "incredibly divisive" and "un-Canadian."

It's a surprising statement, and not just because Minister Baird's own government said it supported cap-and-trade as recently as 2009. Nearly 80 per cent of Canadians currently live in provinces whose premiers support cap-and-trade: British Columbia, Manitoba, Ontario and Québec have all expressed interest in joining with U.S. states in the Western Climate Initiative cap-and-trade system.

Baird explained his comments by stating that "we can't be pitting one part of Canada against another and trying to redistribute wealth from Alberta and Saskatchewan to other provinces." Albert's premier shares these concerns, according to his spokesperson, and so does Alberta's Wildrose Party.

As we explained in an earlier blog post, there's nothing inherent in cap-and-trade that requires "wealth transfers" between provinces. The regional impacts of the system depend on the way it's designed. A system that includes the auction of emission allowances, as the Liberal Party's proposal does, provides governments with a significant source of revenue that they can use to "smooth out" regional impacts that could be seen as unequal.

From the perspective of cutting greenhouse gas pollution, what we're most interested in is seeing governments implement effective policies: we want to see systems that avoid loopholes and produce an adequate price on pollution. We also want to see stronger federal investments in reducing emissions, and auction revenues are a great way to help pay for those.

But regional issues matter too, especially politically, so they're an important and legitimate part of the climate policy discussion in Canada.

Settling the regional question

When it was first released on Sunday, the Liberal platform said little about the destination of the revenues raised through its cap-and-trade system, stating only that the proposal would "be equitable across all regions of the country."

A truck passes the sign that marks the entrance into Alberta from B.C.But in a letter to the editor released this week, Alberta Liberal Senator Grant Mitchell offered new details about the regional design of his party's cap-and-trade plan. Senator Mitchell explained that "the money raised through the auctioning of credits under the system will stay in Alberta. It will be invested through partnerships with the province and industry in technologies and science to reduce greenhouse gas emissions and ensure the protection of water."

So if regional fairness was the only concern of the cap-and-trade critics we've been hearing from, this news should be very reassuring. Far from being divisive, it looks like cap-and-trade could be as Canadian as maple syrup or pond hockey.

It's absolutely fair for politicians to disagree about the best way to cut greenhouse gas pollution, and to propose competing approaches. But they owe it to Canadians to discuss the real costs and benefits of policies, not to make overstated claims about their effects.

It's our experience that a lot of Canadians are genuinely interested in understanding the choices Canada faces in cutting its greenhouse gas pollution. And for those who really want all the details, read on for a few more words about carbon pricing in Alberta.

Regulations yes, but cap, no

Senator Mitchell's letter credits Alberta with being "the first jurisdiction in North America to have implemented a cap and trade system." Unfortunately, that's not quite right. While Alberta does have an emissions regulation that sets greenhouse gas emission targets for industry (and was indeed the first province in Canada to take this step), it's not a cap-and-trade system.

The distinction is that Alberta's targets are set in terms of greenhouse gas intensity, which means emissions relative to economic activity (for example, emissions per barrel of oil produced, or per tonne of steel).

So in Alberta's system, companies can — and do — meet their intensity targets even if their overall emissions have increased. Unfortunately, it's become an annual ritual for us at Pembina to critique each of the Government of Alberta's reports on the system, pointing out some of its design flaws and questioning the use of the word "reductions" when Alberta's actual greenhouse gas pollution is still growing.

More broadly, it's worth remembering why governments would choose to implement carbon pricing systems in the first place. Cap-and-trade is designed to reduce greenhouse gas pollution. With that objective, it's natural that it will have a greater effect on industries that emit more greenhouse gas.

Just as a tax on junk food means more to candy bar manufacturers than it would to companies that sell skim milk, cap-and-trade will have more of an effect on oil sands companies and coal producers than on banks or software companies. (And for wind and solar companies, carbon pricing is great for business, helping to make them competitive against what are currently "cheaper" options.) Those effects don't mean that carbon pricing targets a particular region; instead, they're the consequence of targeting pollution.

Good news for Alberta

Even with aggressive carbon pricing, Alberta would continue to have the strongest GDP growth in Canada over the next decadeFortunately, Albertans possess all the ingenuity and engineering skill they need to prosper within environmental limits. In a 2009 economic modelling study we published with the David Suzuki Foundation, we found that Alberta's GDP growth over the next decade would continue to be the strongest in Canada, even under an aggressive carbon pricing system. The same analysis found that Alberta's oilsands would continue to expand, but companies would invest more in environmental technologies in the process.

For once, we'd love to see a political leader flip the regional narrative on its head by making the case that Alberta actually has more to gain from environmental regulations than other parts of Canada do. That's because cap-and-trade could produce more Alberta-based innovation, lead to stronger local air pollution benefits, and ensure that Alberta's oil companies retain their access to markets that increasingly favour low-carbon fuels. Commitments like the Liberal Party's can also ensure that the funds Alberta companies pay for cap-and-trade allowances stay in their province of origin, providing a significant new source of revenue for environmental improvements or other provincial priorities.

That's a news conference that would really be worth watching.

Clare Demerse
Clare Demerse

Clare Demerse was the director of federal policy at the Pembina Institute until 2014.


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