Canada's Emerging Framework With Carbon Fee and Dividend
This training provides an overview of the Canada’s emerging climate action plan - the Pan-Canadian framework, a mixture of federal and provincial initiatives with carbon pricing in place across the country. It provides policy details in the context of the larger global efforts within the core objectives of the Paris Agreement highlights research from Canada’s Ecofiscal Commission, The Pembina Institute, and Clean Prosperity
For important updates since this training was held, be sure to tune in on Thurs. Feb.18th at 8 pm ET for a training on Understanding Updates to Canada's Carbon Fee & Dividend Policy. In the meantime, see this CCL Blog article: Canada ramps up its carbon price, moves to quarterly dividends by Cathy Orlando, CCL International Outreach Manager.
On October 2018 in what can be described as an example of visionary leadership, the federal government of Canada announced that the Pan Canadian Framework on Clean Growth and Climate Change would come into effect in 2019. Canada’s climate action plan is actually a mixture of federal and provincial initiatives with the result that carbon pricing mechanisms will be in place across the country.
Before getting into the detail of the Pan Canadian Framework, here is a profile of greenhouse gas emissions from Canada:
- In 2016 total emissions from Canada equalled 704 million metric tonnes or 1.6% of total global emissions.
- The argument is often made that whatever Canada accomplishes to curtail future emissions will have no effect on the global total.
- However, 35% of global emissions come from Canada plus the group of countries with similar and lower rates of emissions. If all of these countries were to ignore their regional obligations, the outcome would be catastrophic. Further, as an advanced economy Canada has an important leadership role to play in acknowledging climate reality and taking action to implement meaningful climate action plans.
- The profile of emissions by economic sector and province reflects the contribution of the oil and gas sector to the national economy. Emissions from this sector account for 26% of the total and much of this comes from upstream release of methane from oil and gas sector activities.
- Electricity accounts for only 11% of national emissions which is about half what is typical for an advanced economy. The lower emissions from the electricity supply sectors stems from the extensive use of hydro across much of the country and continued use of nuclear power along with the shut down of coal power plants in Ontario.
- Heavy industry, agriculture and waste account for the remainder of national emissions.
- Provincially, only 15% of Canadians live in the oil and gas rich provinces of Alberta and Saskatchewan yet these provinces account for nearly half of national emissions. Rates of emissions on a per person basis in the remainder of the country are about 4 fold less than is the case for Alberta and Saskatchewan.
Pan-Canadian Framework on Clean Growth & Climate Change
Canada’s Federal Backstop Plan
- If Canada is to meet its commitment under the Paris Agreement, each province must have effective climate action plans designed to achieve meaningful targeted cuts in emissions.
- The Pan Canadian Framework on Clean Growth and Climate Change provides a set of minimal standards for carbon pricing and other policies that must be met within provincial climate action plans or these will be imposed on noncompliant provinces by the federal government.
- Core to the Pan-Canadian Framework is a benchmark minimum carbon fee or equivalent applied to fossil fuels in the form of a provincial cap and trade program. Under the Pan-Canadian Framework carbon fees start at $20 per tonne as of April of 2019 and increase by $10 annually arriving at $50/tonne by 2022.
- A system of output based allocation will be implemented to limit the potential for relocation of companies in emissions-intensive trade-exposed industries.
- Addition policies within the Pan-Canadian Framework include a phase out of coal-fired power plants by 2030 and a 40-45% cut in methane emissions from the oil and gas sector to be in place by 2025.
- Finally, clean fuel standards applied to the life cycle carbon intensity of fuels is an important component of the Framework and this measure alone is projected to reduce national emissions by about 4%.
Carbon Leakage and Output-Based Allocations
A system of output-based allocations is incorporated into the climate action plan of Alberta and is an important component of the Pan-Canadian Framework.
The system is designed to minimize the incentive for carbon leakage while retaining a market-driven pricing/trading system to incentivize industry to cut emissions. Carbon leakage refers to a relocation of emissions from a jurisdiction with effective carbon pricing in place to a jurisdiction without carbon pricing. In most cases the process follows a physical relocation of the operations of a company.
Companies that operate within industries classified as emissions-intensive and trade exposed could be in situations of asymmetry in carbon pricing that incentivize a relocation of operations.
Output-Based Allocations start by establishing an efficiency performance standard of emissions released per unit of production.
- For example, if there are four firms working in the same industry with varying rates of emission per barrel of oil produced. The emissions efficiency standard is then set to the most efficient practices of firm A.
- Each firm is then given emissions credits equal to the standard. Firm A’s actual emission are equal to the amount of credits issued. Actual emissions exceed credits issued for firms B, C and D. Credits can be sold between companies on the open market.
- At the end of the reporting period firms with emissions in excess of credits in hand must pay the carbon pricing fee within the jurisdiction for any emissions in excess of the credits in hand. The actual blended price per unit of total emissions will vary with the magnitude of excess emissions over credits in hand.
- Efficient companies that meet the standard do not pay carbon fees and all companies are incentivized to cut emissions.
- The system provides a break to industry while achieve a balance between maintaining the incentive to change practices and minimizing the incentive to relocate to a lower cost jurisdiction without carbon pricing.
- Output-Based Allocations must not become a haven for high emitting companies but instead must monitor transparent.
With symmetry in carbon pricing and border adjustments between jurisdiction there is no need for Output-Based Allocations and emissions-intensive trade-exposed companies can operate without special consideration under carbon pricing mechanisms. For more information, here’s CCL Canada’s Laser Talk page on Output Based Pricing Systems.
Comparison of Emissions and Climate Action Plans
- Canada’s climate action plan is based on provincial cooperation and recognition of responsibility to contribute to the national effort.
- British Columbia, Alberta, Quebec, Nova Scotia, Prince Edward Island, Newfoundland and Labrador have climate action plans that are compliant with the Pan-Canadian Framework.
- As of the beginning of 2019, Saskatchewan, Manitoba, Ontario, New Brunswick are not compliant.
Overview of Compliant Provinces
To review, here are the climate action plans of provinces that are compliant with the Pan-Canadian Framework.
- Quebec’s cap and trade system cover over 80% of provincial emissions and is linked to the California system and is the foundation of one of the more effective and well-designed climate actions plans among the world’s advanced economies.
- The cap and trade system is core to achieving targets of a 20% in emissions by 2020 advancing to 37.5% by 2030 followed by deep decarbonization by mid-century relative to emission on record for 1990.
- British Columbia introduced an economy-wide carbon tax in 2008 applied to fossil fuel products. The tax covers 70% of provincial emissions and in 2018 sat at $35 per tonne of carbon dioxide. Going forward BC’s carbon tax will increase by $5 on an annual basis.
- Following IPCC recommendations for advanced economies BC has targeted a 40% cut in emissions by 2030 advancing to 60% by 2040 and 80% by mid-century.
- Alberta recently introduced the provinces climate leadership plan.
- The plan is based on an economy wide carbon fee applied to fossil fuels that currently sits at $30 per tonne,
- Phase out of coal power plants by 2030,
- Implementation of a system of output-based allocation applied to heavy industry
- And placing a cap on emissions from the oil sands.
Overview of Noncompliant Provinces
Starting in April 2019 the policies of the Pan-Canadian Framework will be implemented in noncompliant provinces.
With the announcement of Pan-Canadian Framework implementation, the system of recycling of carbon fee revenue back to the economy was clarified.
- 90% of carbon revenues collected from a given province will be rebated directly to households in the province.
- Saskatchewan as an emissions intensive province will collect more carbon revenue per person such that rebates will be higher than is the case for the other provinces with the Pan-Canadian Framework in operation.
- The average household rebates are estimated to be in excess of additional expenses that will be incurred with higher costs fossil fuel products.
- Consumers and industry will be incentivized to improve energy efficiencies and otherwise change practices to lower emissions lower cost options.
British Columbia & Saskatchewan since 2008
A comparison of emissions and climate action policies in British Columbia and Saskatchewan illustrates the need for implementation of the federal backstop on provinces without adequate carbon pricing or a meaningful climate action plan.
- In British Columbia absolute emissions have dropped by 5% compared to the pre-carbon tax period and sales of fossil fuel products declined by 17%. Economists estimate that carbon pricing in British Columbia’s has resulted in somewhere between a 5 to 15% cut in emissions when compared to a scenario for emissions in the absence of carbon pricing.
- In comparison, Saskatchewan had no carbon pricing or meaningful climate action plan in place since 2000. Fuel sales in Saskatchewan increased by 30% and absolute emissions went up by 7.5%.
- These differences in emissions between British Columbia and Saskatchewan cannot be attributed differences in economic growth as GDP growth rates were similar for both provinces.
- In Saskatchewan 67 tonnes of GHGs are emitted per person each year. This extreme rate of per capita emissions is among the highest in the world and is over five-fold greater than the per capita emissions rates in British Columbia.
- In British Columbia per capita emissions have fallen by over 13% while there has been little change in per capita emissions from Saskatchewan.
This comparison provides clear evidence of the effectiveness of carbon pricing in British Columbia when compared to the lack of action on the part of the Saskatchewan government.
Pembina Institute Emissions Model For Pan-Canadian Framework
The Pembina Institute has developed a simulator that allows for comparisons of effects of various policy scenarios on future emissions from Canada extending to mid-century.
- This particular scenario assumes successful implementation of the Pan-Canadian Framework with a continuation of annual incremental increases in carbon pricing past the year 2022 (it assumes extension of carbon pricing and other policies to 2050)
- By continually increasing the price on carbon along with other policies that comprise the Pan-Canadian Framework, Canada will be able to meet the year 2030 Paris target.
- If you remove carbon pricing from the policy framework the effectiveness of the system is grossly diminished and Canada will not be able to meet our international obligations.
- Further increases in the price of carbon will accelerate decarbonization of practices such that potentially Canada could cut emissions along a pathway that would be consistent with advanced economies driving the global effort to limit future warming to less than 2 degrees Celsius.
Canada’s Ecofiscal Commission Study on the Costs of Carbon Pricing in Canada
Canada’s Ecofiscal Commission has completed a study on the cost to the Canadian economy of implementing a national carbon price over the short term period extending to 2027.
- This study assumes a $30 per tonne starting price that goes up by increments of $10 on an annual basis arriving at $100 per tonne by 2027.
- The revenue from the carbon fee is then recycled back to the economy by various routes including transfer to households, transfer to industry, cuts in taxes or investment in clean technology.
- Costs are expressed as the impact on average annual growth rate of GDP.
- The take home: over the short-term with the price of carbon going up to $100 a tonne the cost of effective climate action is negligible regardless of the mechanism of recycling carbon fee revenues.
- Projected costs are within the margin of error of the study and are consistent with the consensus coming from economists that the costs of climate action are slight over the short term period extending to 2030.
- The study goes on to conclude that in the absence of carbon pricing, the policy framework required to achieve a 30-40% cut in emissions by 2030 is a complex and costly web of regulations that do not access the efficiencies of the marketplace.
The cost advantages of carbon pricing are enormous. The Ecofiscal Commission estimates Canada’s GDP would 3.8% higher in 2030 with carbon pricing when compared to achieving our Paris targets using set of regulations in the absence of carbon pricing.
Looking Ahead At Opportunities
As of April 2019, Canada will have a significant set of climate action plans with effective carbon pricing mechanisms in place across the country.
- Pan-Canadian Framework compliant provincial climate action plans consist of a mixture of policies, carbon pricing mechanisms and revenue recycling options designed and implemented by the particular province.
- A carbon fee with dividend payment to households is the core platform of the Pan-Canadian Framework that will be implemented in noncompliant provinces.
- By extending carbon pricing by 2022 Canada should be able to meet its current Nationally Determined Contribution target submitted under the Paris Agreement.
However, all countries including Canada must up the level of ambition of combat climate change if the core objective of the Paris agreement is to be realized.
To limit future surface warming to well below 2 C above pre-industrial temperatures, advanced economies should target about a 40-45% cut in emissions by 2030 advancing to deep decarbonization by mid century.
With global implementation of well-designed climate action plans based on a foundation of carbon fee and dividend policy, the initial costs of emissions reduction are marginal and given the similarities between Canada’s emerging climate action plan and the proposed Carbon Dividend Act in the US the opportunity exists to align carbon pricing in North America. This would eliminate the need for carbon leakage policies and allow for a higher ambition to cut industrial emissions.
Intro & Agenda
Summary of federal and provincial carbon pricing policies
Federal carbon tax and rebates
Large industrial emitters scheme
Carbon price increases under new federal climate plan
Projections of emissions reductions under new price ramp
Border carbon adjustments
Q&A Discussion (https://vimeo.com/514675775)
- Michael Bernstein
- Cathy Orlando
Intro & Agenda
Canada's Backstop –Pan Canadian Framework
Output Based Allocations
Compliant Provincial Climate Action Plans
Noncompliant Provincial Climate Action Plans
Canadian Economic Studies
The Global Effort
Take Home Messages
- Michael Bernstein
- Cathy Orlando