Originally published in The Globe and Mail November 30, 2010
At Cancun, Mexico this week, world leaders will try yet again to reach a global agreement on reducing greenhouse gas (GHG) emissions. The frequent excuse made by Canadian governments for inaction as part of reaching a global agreement is that the costs will be unfairly concentrated in specific regions.
Canadians certainly understand this concern, given the widely held assumption that climate policies will especially hurt fossil-fuel-intensive regions. Politicians from Alberta and Saskatchewan have attempted to associate proposals for federal pricing of GHG emissions with the much-maligned national energy program of the 1980s, which residents of these
provinces associate with economic decline and wealth transfers to Central Canada.
However, there are means by which Canada can moderate the regional impacts of GHG reductions. In particular, emissions pricing policies can be designed to distribute economic impacts more evenly, and even to prevent interprovincial transfers of income. If Canada is to meet its current GHG reduction targets of 17 per cent below 2005 levels by 2020, there are three broad policy strategies for doing so at relatively low cost to the overall national economy, each with different regional effects.
The first policy forces lower emissions per unit of economic activity (for example, tonnes of GHGs per dollar of output). This “emissions intensity standard” would apply to all emissions in the economy and would achieve the 17-per-cent target. Those who reduce intensity beyond what is required get permits they can sell to others. This policy is similar to the intensity policy Alberta currently applies to industries there.
The second policy sets an absolute cap on emissions and auctions permits to equal the cap. Auction revenues collected by the federal government are returned as federal personal and corporate income tax cuts. This policy is identical to the approach B.C. currently uses to recycle all its carbon tax revenue.
In the third policy, the government still sets an absolute cap on emissions and auctions permits to equal the cap, but returns to each province the exact amount of auction revenue generated. The provinces then cut their personal and corporate income taxes proportionally: Provinces with the most emissions would see the largest cut in personal and corporate income taxes.
Economic growth will slow down somewhat with the adoption of any of these policies.
Under the first policy, the intensity approach, it is likely that economic growth in Alberta and Saskatchewan would slow down less than in the rest of Canada – wealth would actually be transferred to these provinces from the rest of the country. This is because emitters there have lower-cost options for reducing emissions, and with an intensity approach, they don’t pay for their current emissions – only for those that exceed their intensity targets.
Under the second policy, the cap-and-trade system with emission revenues returned through cuts in federal taxes, interprovincial transfers from Alberta and Saskatchewan to the rest of Canada would be substantial, as would be the decline in economic growth in Western Canada.
Under the third policy, the cap-and-trade system with emission revenues returned to the province of origin and used to cut provincial taxes, Alberta and Saskatchewan would not experience a significant slowdown in economic growth. By definition, there would be no additional transfers out of the region.
The key message is to question the argument that Canada cannot price GHG emissions because the economic impacts would inevitably fall harshly on Alberta and Saskatchewan. This need not be so, but it is indeed a convenient excuse for inaction.