How to make real climate policy without destroying the Canadian federation: Insightful new CD Howe report on regional equity concerns of Canadian climate policies

George Hoberg and Stephanie Taylor
December 14, 2010

With the Cancun UN meetings now completed, attention is turning back to national governments and whether key players are willing to solidify or increase their commitments to greenhouse gas mitigation made in Copenhagen. At that December 2009 meeting, the Government of Canada continued its policy to wait for and follow United States actions. With US failure to enact climate legislation in 2010 and the Republicans taking over the House of Representatives, US policy is stymied. Canada continues its refusal to act meaningfully without US action.

There are many obstacles to action in Canada, but a potent combination of three stands out:

  • a highly decentralized political system granting significant power to provinces;
  • strong provincial resistance by fossil fuel dominated provinces, especially Alberta; and
  • a federal government that is both Conservative politically, and with respect to climate and energy policy, made of, by, and for Albertans.

As a result of this potent combination, regional equity concerns have been a fundamental obstacle to political progress.

This reality is tackled head on in a new report published by the CD Howe Institute and written by Jotham Peters, Chris Bataille, Nic Rivers, and Mark Jaccard. In the report, the authors address the existence of different conceptions of interregional equity, while acknowledging that “since people tend to intertwine their self-interests with their definitions of equity, it is no surprise – both internationally and within Canada – that the most vigorous and convinced proponents of each definition of equity are often those who do best under that definition.” (Page 2)

Three philosophies of cost distribution

The authors summarize three main definitions of equity, consistent with the different approaches to interregional equity in climate policy proposed by various provinces. The first, known as “polluter pays”, approaches equity from the perspective that those who cause environmental harm through their emissions should be made to pay. The authors note that this is similar to the “egalitarian” approach, whereby everyone has an equal right to pollute a certain amount, with those who emit more paying to do so.

The second approach – the “sovereignty” approach – emphasizes that punishing regions for their current emissions is unfair, due to the fact that the decisions to adopt GHG-intensive technologies were made long before it was determined that GHG emissions should be curbed. This, in turn, is similar to the “equal cost” approach, in which jurisdictions face roughly equal emissions reduction costs, regardless of the level of their GHG emissions.

Finally, the “ability to pay” approach distributes costs such that wealthier jurisdictions bear a larger cost burden than poorer jurisdictions which are less able to absorb the costs.

Distributing the impact of meeting Canada’s target according to the three philosophies

The report goes on to outline three cap-and-trade scenarios, all designed to meet Canada’s goal of reducing GHG emissions 17% below 2005 levels by 2020: intensity-based cap-and-trade, a federal auction of carbon permits with cuts to federal personal and corporate income taxes, and a federal auction of carbon permits with cuts to provincial personal and corporate income taxes. The three scenarios nicely illustrate the differences in interregional equity that can result from policies designed to meet identical goals.

The first scenario is the most advantageous to Alberta and Saskatchewan, with combined annual GDP growth between 2010 and 2020 of 2.10%, assuming perfect capital mobility. Meanwhile, the rest of Canada would see 1.86% in annual GDP growth. Intensity-based cap-and-trade would also result in a financial transfer of 1.0% of 2020 GDP into Alberta and Saskatchewan, and a transfer of 0.3% of GDP out of the rest of Canada. It is somewhat unclear which definition of equity this scenario best fits, given that it advantages the jurisdictions with the highest GHG emissions.

Of the three, the second scenario – permit auction with cuts to federal personal and corporate income taxes – is the least satisfactory from the perspective of Alberta and Saskatchewan. Under this scenario, the two prairie provinces would experience annual GDP growth of 1.87% between 2010 and 2020, compared to 2.05% in the rest of Canada. Alberta and Saskatchewan would also see 3.8% of 2020 GDP leave the region, while the rest of Canada would experience an inflow of 0.9% of 2020 GDP. This scenario could best be described as an example of the polluter pays approach.

The final scenario, involving a permit auction combined with provincial personal and corporate income tax cuts, aligns closely with the sovereignty (equal cost) definition of equity. Here, Both Alberta/Saskatchewan and the rest of Canada would experience equal annual GDP growth of 1.99% between 2010 and 2020. Due to the cuts in provincial income taxes, both regions would experience financial transfers of 0%.

The report appears in part to be a response to criticisms of a previous report put out by the Pembina Institute and David Suzuki Foundation (DSF) in October 2009, which was written by Jaccard’s energy policy consulting group, MK Jaccard and Associates (MKJA). In the Pembina/DSF report, MKJA modeled two scenarios: a 25-40% reduction in GHGs below 1990 levels by 2020 which reflects the recommendations of environmentalists, and a 20% reduction below 2006 levels by 2020, in line with the federal government’s GHG reduction target at the time. Despite showing that robust economic and employment growth were possible in Alberta and Saskatchewan under both scenarios, the Pembina/DSF report was attacked by Alberta Premier Ed Stelmach and Saskatchewan Energy Minister Bill Boyd as nothing more than a wealth transfer to other parts of the country (see our previous post on this).

Given how much criticism was directed at the Pembina/DSF report, it is worth examining whether the CD Howe Institute’s projections represent a move toward a sovereignty/equal pay approach, which is presumably Alberta and Saskatchewan’s preferred option. To be sure, the intensity-based cap-and-trade scenario is a marked improvement upon the Pembina/DSF forecasts vis-à-vis Alberta and Saskatchewan, though the fact that these two provinces are net beneficiaries of financial transfers means that this scenario can hardly be classified as “equal pay”. While Alberta and Saskatchewan may prefer this option, convincing the rest of the country to sign on would be difficult, to say the least. The permit auction with federal income tax reductions option is likely no more attractive to Alberta and Saskatchewan than the Pembina/DSF scenarios. Conversely, the permit auction with provincial income tax reductions option represents a true “equal pay” approach. Given that their primary concern appears to be to oppose anything that could possibly be construed as a wealth transfer to other parts of the country, it is unclear on what grounds this scenario could be opposed by Alberta and Saskatchewan.

Regional equity concerns are not an excuse for Canadian inaction

By explicitly addressing regional equity issues, the CD Howe report is a vital contribution to the climate debate in Canada. What should be obvious by now is that it is possible to craft a national climate change plan without unduly harming the economies of Alberta and Saskatchewan. Jaccard emphasized this point in a Globe and Mail piece meant to coincide with the release of the CD Howe report. In summing up the report, Jaccard noted that “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.”

The Cancun Agreements have provided some momentum to international climate negotiations. It is time for Canada to get its domestic house in order and become a serious player, and leader, in climate mitigation efforts.

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2 Responses to How to make real climate policy without destroying the Canadian federation: Insightful new CD Howe report on regional equity concerns of Canadian climate policies

  1. Andrew Leach says:

    Great post. You do a fantastic job of breaking down key misconceptions about climate policy, without failing into the trap that many people did when this report was released. If I recall, the Globe and Mail headline implied that the C.D.Howe report showed that climate policy would not harm Alberta. As you correctly point out, the report shows that you can design a policy that would imply a net transfer of wealth into Alberta while still allowing Canada to meet its GHG mitigation goals. Unfortunately, we spend far too much time in this country discussing the mechanism (carbon tax vs. cap-and-trade) and not enough time discussing stringency and rent attribution/revenue recycling from those policies. Unfortunately, the policy landscape is still littered with opinions decrying \job-killing carbon taxes\ or with papers that suggest that BC’s experience with a carbon tax suggests that people will all benefit from carbon policy. It’s too bad the world is much more complicated than that and, as you point out, policy design, the rules by which proceeds are re-assigned and the stringency of the policy matter a lot more than whether it is a carbon tax, a cap-and-trade policy, or an emissions-intensity based system.



  2. Pingback: A Canadian Election Primer on the Climate Policy Expert Consensus on Policy Design | GreenPolicyProf

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