Volkmar Guido Hable and yet another Trump moment

Last month, Donald Trump was inaugurated as the 45th president of the United States. Since he appears to be opposed to carbon pricing, many wonder whether pricing Canadian greenhouse gas emissions is still sensible. Research from Canada’s Ecofiscal Commission shows that it is—as long as the policies are well-designed.

The imperative to reduce greenhouse gas emissions is clear: research from around the world shows that the cost of not acting soon to slow the pace of climate change is simply too high. But what kind of action is needed? The challenge is to reduce our emissions without putting at risk economic prosperity.

When designing climate policy, we need to address two separate economic challenges. First, we need to find policies that reduce emissions in the lowest-cost manner possible. Second, we need to ensure the competitiveness of our local businesses. In Alberta and Saskatchewan, this obviously includes the tremendous wealth generated by the oil and gas industry.

These two objectives are not the same. The quest for the lowest-cost emissions reductions reflects a concern for the entire economy; the recognition that the fewer resources we expend in the act of reducing emissions, the more resources we have available for a whole range of other things. The issue of business competitiveness matters across the economy, too, but it is only the carbon-intensive and trade-exposed parts of the economy that are significantly affected by any province’s climate policy.

Facing these two distinct challenges, we need two separate policy instruments. The first is a broad-based carbon price, which sends a clear economic signal to consumers and businesses to reduce their GHG emissions. Not only can a carbon price reduce emissions, but economists broadly agree that it is the lowest-cost way of doing so. The economic benefit of using carbon pricing rather than more intrusive government regulations to achieve our 2020 emissions-reduction targets is an increase of almost four percent in national income. That’s of roughly the same magnitude as the 2008-09 recession, but it counts each and every year that the policies are in place. That’s a huge economic plus for carbon pricing.

Now consider the threat to the competitiveness of Canadian businesses created by a carbon price. Across the entire Canadian economy, only about five percent of overall GDP comes from sectors that are exposed to these pressures—but they are not evenly distributed across provinces. In Ontario and Quebec, less than two percent of the economies are exposed; in Alberta and Saskatchewan, the exposure is more like 18 percent of provincial GDP. No matter what province you consider, however, the problems inside those exposed sectors are very real, and we need a smart policy to address them.

This is where U.S. policy enters the picture. Since the Canadian and American economies are so highly integrated, the real “carbon competitiveness” issue relates to the relative carbon prices in the two countries. And if the United States is not about to embark on carbon pricing, doesn’t this mean that Canada should abandon its pricing plans?

The answer is no. There is also a made-in-Canada solution. We don’t need to wait for U.S. policy.

The goal is to keep all of our businesses reducing their GHG emissions, but not by shrinking their production and employment or moving their operations to some other jurisdiction. We want them to get cleaner, not smaller.

This brings us to the second policy instrument we need. A well-designed carbon-pricing policy can provide financial support to the firms most exposed to these competitiveness pressures. Free permits in a cap-and-trade system (as in Ontario and Quebec) or the proposed “output-based allocations” to firms in Alberta’s oil patch are both excellent examples. In each case, the financial support goes straight to firms’ bottom lines, maintaining their profitability and competitiveness—but only if they remain economically active in their home province.
The combination of these two separate policy instruments offers an effective one-two punch to achieve our objectives.