Contributed by Robert Lyman © 2020. Lyman’s bio can be read here.
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. Carbon leakage is the term used by analysts of climate change policies to describe the movement of firms’ investment and economic activity and the related greenhouse gas emissions (GHGs) out of a country when climate policies make it less economic for them to continue operating in the country imposing the policies. When emissions “leak” or are displaced to other jurisdictions, the effect may actually be to increase global emissions. This is a summary of the report, the full text of which can be found here:
The system of carbon dioxide pricing and taxation in place in Canada is a balkanized one in which the rates of the taxes, emissions trading permits and other charges and fees varies across the country. Under the federal government’s “backstop” system that applies in most provinces and territories, the carbon dioxide charge imposed is $20 per tonne of carbon dioxide equivalent in 2019 and this will rise to $50 per tonne in 2022. The rate is virtually certain to continue rising after that. The Conference Board study examined the effects of carbon dioxide pricing today.
The alleged objective of the charges is to reduce GHG emissions by raising the cost to consumers and industry of using the energy services provided by the combustion of fossil fuels (oil, natural gas and coal). The increased cost is intended to discourage use and, in theory, to provide an incentive to the suppliers of non-fossil fuel alternatives. However, the charges also have unintended and undesirable consequences.
Emissions intensive industries include natural resources extraction industries in forestry/logging, mining, and oil and gas; electrical utilities; manufacturing industries producing pulp and paper, wood products, basic chemicals and agricultural chemicals, petroleum and coal products, mineral products and primary metals manufacturing. They account for 10 per cent of Canada’s economy. More important, they account for close to 40 per cent of total non-residential investment. They are especially important to the Prairies and Atlantic Canada regional economies.
Using $30 per tonne as the average carbon dioxide tax over the 2018 to 2022 period, Conference Board analysts calculated that Canada’s emissions-intensive and trade-exposed industries (i.e. those vulnerable to losses in sales due to foreign competition) could incur up to $10 billion in “compliance costs”, meaning the costs of either reducing emissions or paying the penalties for failing to do so. They assume, however, that half of these costs will be reduced due to “policy relief”, the granting by governments of exemptions to protect the more vulnerable firms and regions. Even the $5 billion in costs, however, has the potential to displace about $10 billion of Canada’s GDP and reduce employment by 48,000 jobs.
The higher costs imposed by carbon dioxide taxation will have adverse effects on the competitiveness of Canadian firms in both domestic and export markets. The size of the impact will depend on several factors, including whether competitive conditions allow the firm to pass on the cost to customers in the form of higher prices. The top three emissions-intensive industries most exposed to competition in export markets are pulp and paper products, coal mining and primary metals manufacturing.
Also important to the amount of leakage that may occur is the level of the carbon dioxide taxes or charges imposed by governments in the countries to which Canada exports. The Conference Board analysts quote an “average nominal carbon price” globally of U.S. $14 per tonne before policy relief and U.S. $8 per tonne after policy relief. (This is a perplexing figure given that Canada’s three largest trading partners (i.e. the USA, China and Mexico) have average carbon dioxide taxes of U.S. $2 per tonne or less, and 10 out of the countries identified as “peer jurisdictions” have no carbon dioxide pricing regimes at all.)
The study did not examine the higher compliance costs or the higher losses due to foreign competition that would result from carbon dioxide taxes at $50 per tonne or at the much higher tax rates (up to $100 per tonne and higher) that may be imposed over the period to 2030. Even so, the potential for “carbon leakage” is quite large. This is especially the case for Canada’s non-ferrous metal manufacturing facilities, such as aluminum smelters and chemicals; natural gas production; some oil sands production; chemicals and petrochemicals; and electricity exports from provinces that rely largely on fossil fuel generation.
In terms of emissions reduction, the Conference Board estimates that at the $30 per tonne rate, GHG emissions in Canada would drop by 19 million tonnes of carbon dioxide equivalent. However, the report states:
“This is not the best way for emissions reductions in Canada to be achieved, as they come at a very high cost. It is worth noting that these reductions are estimated before considering any potential leakages. So, the net reduction in global GHG emissions is likely lower, and could result in an actual increase in some cases.”
The Conference Board of Canada’s reports previously have consistently supported the use of carbon dioxide taxes and charges, and the Board has implicitly accepted the thesis that humans are responsible for causing catastrophic global warming. This paper does not depart from that position, but warns about the adverse trade effects and appears to argue for a change in the design of the present Canadian program.
Even an emissions reduction of 19 million tonnes of CO2 equivalent per year would be far below the target for 2030 set by the federal government. Environment and Climate Change Canada, in its report on Canada’s emissions outlook in 2018, estimated that the current carbon dioxide taxation regime would reduce emissions by 80 million tonnes per year.
It is notable that in this report the Conference Board ignores the effect of the many different programs and regulations in place in addition to carbon dioxide taxes. These also impose heavy costs on Canadian firms and may have large trade effects, including those associated with “carbon leakage”.
Robert Lyman has written a number of documents on carbon policies in Canada, most notably: “Carbon Taxation: The Canadian Experience”