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Market News

 October 30, 2009
Exploration of Two Canadian Greenhouse Gas Emissions Targets

 By: Matthew Bramley, David Suzuki Foundation

GLOBE-Net (October 29, 2009) - M. K. Jaccard and Associates reviewed the feasibility and cost of two levels of greenhouse gas emissions reduction in Canada for the David Suzuki Foundation and the Pembina Institute. The first is a 25% reduction in GHG emissions below 1990 levels by 2020; the second is compliance with the Canadian government’s announced commitment to a 20% reduction of GHG from 2006 levels by 2020. (See GLOBE-Net News article).

The core Policy Package supporting the study’s findings is a carbon dioxide equivalent (CO2e) emissions price, implemented as a full auction upstream cap and trade system or a carbon tax covering all combustion and almost all fixed process emissions.

For the ENGO target the emissions price path begins at $50/tonne CO2e in 2010 rising to $200/tonne CO2e in 2020. For the GOVT target the emissions price path begins at $40/tonne CO2e starting in 2011 rising to $100/tonne CO2e in 2020. Assuming that government spending, with the exception of the climate policies, will remain constant between the reference and policy scenarios, carbon pricing revenues are recycled as follows:

  • A portion is used for the purchase of international emissions permits;
  • A portion is used for public-good spending programs to improve public transit and upgrade the electricity transmission grid to allow more geographically dispersed renewable electricity generation. The chosen programs have clear and distinct public goods characteristics (i.e., those goods not effectively and efficiently provided by private markets). Relative to the 2020 reference case, these investments increased transit use by an average of 35% across Canada (in the absence of the carbon price), and allowed intermittent renewables (mostly wind power) to capture up to 25% of generation in some regions;
  • A portion is used to compensate households for their carbon charges1 and increased energy costs for heating and electricity (not transportation);
  • A portion is used to purchase verifiable and additive domestic agricultural offsets;
  • A portion is used to refund a sufficient amount of carbon charges to non-fossil fuels sectors to maintain output at their 2008 level (only the industrial minerals and metal smelting sectors required this refund);
  • The remainder is used to directly reduce personal income taxes until government spending and revenue are returned to their reference case levels. This includes compensating for changes in all other government revenues (i.e., corporate and sales taxes and royalties) caused by the policy package. While other recycling mechanisms are plausible, the report only considers labour (i.e., personal income) tax recycling as per specification from DSF and Pembina.

The carbon price is supplemented by a full suite of complementary regulations. With the exception of the carbon capture regulation, included only under the ENGO target, complementary regulations are based on carbon market failures of coverage or operation.

The regulations are as follows:

  • The confinement of venting and flaring in the upstream oil and gas sector solely to safety purposes, with a carbon charge imposed for all registered safety emissions.
  • A requirement that all new commercial buildings be built to LEED Gold standard or higher and residential buildings be 50% more efficient than current standard practices. Both categories of new buildings are also restrained from directly combusting fossil fuels, including natural gas, for heating in British Columbia, Manitoba and Quebec. All electricity options are allowed, including baseboards and ground and air source heat pumps.
  • A requirement that all new vehicles meet the California GHG emissions standard, with a gradually tightening standard due to become virtually zero by 2040.
  • A requirement that as of 2011, white good appliance energy efficiency standards be raised to the most efficient commercially available versions of late 2008, and are gradually tightened over time.
  • A requirement that almost all landfills be covered and the landfill gas flared or used to produce electricity and heat as the economics warrant.
  • For the ENGO target only, carbon capture and storage (CCS) of all formation CO2 from new natural gas processors, process CO2 from new hydrogen production facilities, and all combustion CO2 from all new coal fired electricity plants, oil sands facilities, and upgraders starting in 2016. This regulation, while not associated with a clear market failure, is meant to limit the carbon price level for the rest of the economy. It also helps reduce the cost of the deeper target by driving technological innovation and reducing costs associated with CCS.

The policy assumes the ENGO policy package is announced in late 2009, with the carbon price starting in January 2010 and the other policies in January 2011 (except for the carbon capture regulation starting in 2016). The GOVT package is announced in late 2009, with all policies implemented in January 2011.

The analysis shows that the carbon charge and complementary polices chosen are not sufficient alone to meet the targets. Their effect under two scenarios was tested: one where the OECD countries impose policies as stringent as Canada (OECD acts together - "OAT"), and one where Canada goes significantly further than its OECD trading partners (Canada goes further -"CGF"). To make up the difference between the target and domestic emissions reductions, purchases of international emissions permits are necessary in both scenarios.

For the ENGO target in the "OECD acts together" case, purchases of 101 Mt CO2e per year in 2020 are necessary, while in the "Canada goes further" case, 80 Mt of purchases are required. For the GOVT target in the "OECD acts together" case purchases of 73 Mt per year in 2020 are necessary, while in the "Canada goes further" case, 56 Mt of purchases are required. Fewer permits are required in the "Canada goes further" cases because there are greater reductions in output.

Employment - The model shows that employment in all regions continues to grow from 2010 to 2020 under all scenarios, slightly faster under the climate policy scenarios than in the BAU (Business as Usual) scenario. Firms hire more under the climate policy scenarios because labour costs are lower, while at the same time labour supply increases in response to the recycling of carbon revenues to reduce personal income tax.

Economic Impacts - The economy grows under all scenarios without climate policy the overall economy grows 27% from 2010-2020, and 23-25% under the climate policy scenarios. Alberta’s economy grows 57% without climate policy, and 38-6% with climate policy. GDP per capita also grows under all scenarios and in all regions: without climate policy Canada’s GDP per capita grows 24% from 2010-020, and 20-2% under the climate policy scenarios. Alberta’s GDP per capita grows 42% without climate policy, and 25-2% with climate policy.

The relative regional impacts of the "OECD Acts Together" and "Canada Goes Further" scenarios very significantly. While the differences are not large at the national level (nominal 3.0 vs. 3.2% of GDP for ENGO (Table 15)) because Canada’s overall economy is dominated by the service sector and much of the country’s industrial sector is only moderately carbon intensive, the relative impacts are much higher for Saskatchewan (nominal 2.8% difference) and BC, Manitoba and the Atlantic provinces (0.6%). Across the nation, there is a migration of capital and labour out of carbon and trade exposed sectors (e.g., fossil fuels) to sectors that are less carbon and trade exposed (e.g., manufacturing, services and renewable electricity).

Conclusion - The analysis finds that both the ENGO and GOVT targets are feasible, but require that much more broad and stringent policies be implemented than have hitherto been offered by governments in Canada, and that they be implemented very soon.

These policies are projected to trigger significant impacts on GDP with significant regional differences, especially for Alberta and Saskatchewan. BC is also negatively affected, while Manitoba is expected to benefit. The impacts of a carbon charge on GDP in Ontario, Quebec and the Atlantic provinces are compensated by an influx of capital that would have otherwise been invested in the fossil fuel industry in the western provinces, especially Alberta.

The climate policy scenarios are projected to slightly accelerate the rate of employment growth, largely because of the recycling of carbon revenues to reduce personal income tax. For more information, please download the report here.

Source: Pembina Institute