Canadian Climate Policy: the Past, the Present and the Future

By Mark Jaccard
Originally published in The Globe and Mail February 16, 2009

The Past

In 2006 and 2007, Canada’s newly elected Conservative government, led by Prime Minister Stephen Harper, was much criticized by the opposition Liberals, NDP, Bloc Quebecois and Greens for its unwillingness to promise that Canada would meet its Kyoto Protocol commitment to reduce greenhouse gas (GHG) emissions in 2010 to 6% below their 1990 level. Since emissions were already more than 20% above this target, and the Kyoto deadline was imminent, these parties were obviously engaged in political posturing. Although it had been clear to experts and politicians for some time that Canada could not possibly meet its target, much of the public still associated Canada’s commitment to Kyoto with action on climate change. The opposition parties found it politically advantageous, therefore, to link the governing Conservatives to Canada’s Kyoto failure. The participation of the Liberals in this charade was particularly galling given the fact that they were responsible for negotiating the Kyoto target in 1997 and ratifying the protocol in 2002. Yet, throughout their lengthy tenure in power, under Prime Minister Jean Chretien, the Liberals failed to implement policies that would stop or even slow the country’s rising GHG emissions.

During the national debate over Kyoto in 2006-07, it was rarely mentioned that missing a GHG emissions reduction target was nothing new for Canada. Yet our country has been setting and then missing GHG reduction targets since 1988, when the Conservative government of Brian Mulroney first set targets for 2000 and 2005.

Surely there is something to be learned. Canada now has over two decades of experience in setting GHG emissions reduction targets, and then implementing policies to achieve these targets, only to see emissions continue to climb unabated. We have missed the 2000 target, the 2005 target and soon the 2010 target. In spite of this, Canada’s current government speaks with conviction about its new target for 2020 and especially about its aggressive target of a 60-70% reduction by 2050 – a much safer timeframe from a political perspective. (Maybe our politicians have learned something!)

What we should have learned is that policies that fail to price GHG emissions (sometimes called carbon pricing) will not reduce emissions. Non-compulsory policies that provide information about energy efficiency and fuel switching, or even modest subsidies through grants, low interest loans and voluntary offsets, will not reduce emissions. As Nicholas Stern emphasized in his UK government report, of the requirements for effective climate policy “the first is the pricing of carbon.”

The Present

It bears repeating. Climate policies that leave the atmosphere as a free waste receptacle will not reduce emissions. But how do we price carbon? Former Liberal leader, Stephan Dion, unsuccessfully promoted a carbon tax in the 2008 federal election. That is a very transparent way of pricing emissions. But as he found out, a bit too transparent. Another way is for government to cap emissions and allocate tradable permits that equal the cap. Such a system could start with industry. Permits could be allocated based on a firm’s previous emission levels, or they could be auctioned (some or all). Then firms could trade the emission permits. Those who find it relatively cheap to reduce emissions could have surplus permits to sell to those who find reduction expensive. The trading price of permits effectively provides a carbon price that creates the business case for investments in GHG abatement. Even the fuels used by consumers (gasoline, diesel, natural gas and oil for home heating) can be part of this system. Retailers of these fuels would simply be required to purchase permits to cover the carbon content in the fuels they sell, a carbon price that would be embedded in the prices faced by consumers.

Stephan Dion learned the hard way what most politicians around the world already know: if a carbon price is required, it is preferable that politicians not be directly identified with its effect on consumer prices. This is why the Europeans, the Australians and the US are all designing and implementing cap and trade policies instead of the more direct and transparent approach of carbon taxes.

An even more indirect means of carbon pricing is to regulate fuels and technologies. More than half the states in the US have a renewable portfolio standard, a regulation that requires a growing share of electricity generation to come from non-emitting renewable sources like wind, solar, hydropower, biomass and geothermal. Vehicle emission standards are also widespread, as are building and appliance efficiency standards. A growing number of jurisdictions now apply low carbon fuel standards, which effectively force gasoline and diesel retailers to blend a minimum percentage of biofuels like ethanol or biodiesel. In many jurisdictions, these policies are combined with subsidies to help new technologies over the initial development hurdles, as is the case with some new renewables technologies and with carbon capture and storage where fossil fuels might still be attractive.

All of these compulsory, carbon pricing policies – carbon taxes, emission caps, and technology and fuel regulations – will be combined in various ways in different jurisdictions. But the trend toward compulsory policies like these is inevitable. The sooner we acknowledge this, the sooner we replace emissions reduction talk with emissions reduction action.

The Future

Canada is sure to follow this trend. But we are not there yet. In 2007, the Conservative government rolled out its “Turning the Corner” climate policy. While this policy represents a nudge in the direction of carbon pricing, it is still woefully inadequate and needs a quick and dramatic revamp. First, the government claims that its policy includes a “cap” on industrial emissions. Actually, it does not. It has a “performance standard,” which requires the intensity of emissions (emissions per unit of industrial output of steel, oil, etc.) to decrease over time. Depending on the rate of output growth, emissions might not fall the desired amount. The government must change this to an absolute cap, as the Europeans have done and as the US government is about to do. Second, the so-called cap in Canada applies only to industrial emissions. There is no carbon pricing for the 50% of Canadian emissions that come from transportation, buildings and small industry. The cap must be extended to all emissions in the economy. Third, the so-called cap includes an enormous loophole. Under the cap, industries do not need to reduce their emissions if they can instead pay non-regulated industries and consumers to “apparently” reduce their emissions – what is commonly referred to as “offsets.” But offsets are subsidies. And we already know from our previous policy failures that subsidies are flawed. Often, we end up paying people for a more efficient fridge, but they buy a bigger one, for house insulation, but they expand their house, to plant trees on their farm, while the neighbouring farm converts its woodlot to farmland. If we instead put a cap on all emissions, offsets are not necessary. Everyone is required to participate in permit trading, which means that carbon pricing becomes universal – which is the only way we make the substantial reductions in emissions that scientists are calling for over the coming decades.