Climate Policy and Rural Canada – A Tale Of Three Cities

Contributed by Robert Lyman 2019. Lyman’s bio can be read here.

EXECUTIVE SUMMARY

The government of Canada’s commitment to reduce greenhouse gas (GHG) emissions includes efforts to reduce emissions from 1,600 emissions-intensive facilities across Canada. Many are in small cities and towns in rural Canada. The purpose of this paper is to describe how current federal policies may affect those plants, with special focus on three eastern Canadian rural communities.

This Canadian carbon dioxide pricing system operates differently across the country. Under the Canadian government’s “backstop” regime, which applies in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Prince Edward Island and Newfoundland and Labrador, there are two key elements:

• A carbon dioxide tax, or levy, applied to emissions resulting from consumption of fossil fuels; and
• An output-based pricing system for industrial facilities that emit above a certain threshold, with an opt-in capability for smaller facilities with emissions below the threshold.

The output-based pricing regime imposes emissions restrictions on industrial facilities that emit 50 kilotonnes (kt) or more of carbon dioxide equivalent per year. Large emitters only pay the levy on their emissions above a threshold.

The government claims that this complex system will provide an important incentive to reduce emissions. In fact, the effect of the system will vary significantly among industries and among the facilities in a given sector. The marginal cost of the carbon charge imposed on a firm will be determined by the emissions-intensity of its facilities, by their performance compared to other firms in the same industry, and of course by the rate of the carbon tax. The firms with the highest marginal emissions will face the highest competitiveness risks. It is not possible to know in advance which firms will face the highest charges, as the emissions-intensity standards have not been set and data is not publicly available about the marginal emissions production or costs of the many covered firms. The Quebec emissions trading system will have similar effects.

I selected three facilities that play a large role in the economies of the communities in which they operate and are in industries highly vulnerable to international competition. The three are the Iron Ore Company of Canada Carol Project in Labrador City, Newfoundland and Labrador; the Graymont New Brunswick Inc. plant in Havelock, New Brunswick; and the Alouminerie Alouette aluminum plant at Sept-Iles, Quebec.

Labrador City has a population of just under 10,000 people and neighbouring Wabush has another 2,000. The city is located in a fairly remote area on the Labrador/Quebec border.
The iron ore plant is one of the largest emitters of greenhouse gases in the province, with annual emissions of 992,666 tonnes in 2017. It is by far the largest employer in the region. If the plant were to close, it would probably make the associated railway system uneconomic and thus force it to close as well. There are no other significant resource development or employment opportunities in the immediate region, so closing the plant would largely turn Labrador City and Wabush into ghost towns.

Graymont Ltd. is the third largest lime-producing company in North America. It is the leading supplier of lime and limestone products throughout the Maritime provinces and the State of Maine. Havelock is a rural village in central New Brunswick, 45 km west of Moncton, with a population less than 50. The Graymont plant produced 76,403 tonnes of carbon dioxide equivalent in 2017. The closing of the Graymont plant would not have major direct employment effects, but it would have a large impact on the other firms in Atlantic Canada that rely upon the plant for limestone supplies, requiring them to seek alternative supplies at higher costs from more distance sources.

Alouminerie Alouette is an aluminum manufacturing company based in Sept-Iles. It is the largest primary aluminum smelter in the Americas. The company generates about $440 million per year into the provincial economy. Sept-Iles is a city with a population of about 26,000.

In 2017. Alouminerie Alouette was the third largest emitter of GHGs in Quebec, with total emissions of 1,156,400 tonnes of carbon dioxide equivalent in 2017. If this plant closed, it would deal a sharp blow to the income and employment of eastern Quebec, a region with few other large investment prospects.

The three plants all sell their products in domestic and export markets in competition with others, mainly in the United States. The competing plants in the U.S. and other countries, for the most part, will not incur similar carbon dioxide taxation expenses, as the governments do not plan to impose regimes similar to the Canadian one. Consequently, for competitive reasons, the Canadian plants will not be able to raise their prices to recover the higher taxation costs

In October 2019, the Conference Board of Canada published a report entitled Tipping the Scales, an analysis of the effects of Canada’s current carbon dioxide taxation regime on the competitiveness of Canadian industries and of the potential for “carbon leakage” affecting emissions-intensive industries. The Conference Board found that, even at the tax rates that will apply in the period to 2022, the incremental costs have the potential to displace about $10 billion of Canada’s GDP and reduce employment by 48,400 jobs among the emissions-intensive industries and their suppliers. This will have disproportionate impacts in the Prairies and Atlantic Canada.

There is a bitter irony here. Much of the opposition to the globalization of trade in Canada and other western countries has been due to the adverse effects of increased imports on our industries and the people they employ. Yet, many of the same groups that most criticize the effects of economic globalization strongly support the consequences of Canada pursuing global climate objectives through policies that will place our remaining industries at risk.