The Paris Gap – Pitfall for Canada

Contributed by Robert Lyman © 2020

In July, 2020, the Canadian Energy Centre, an organization of the Alberta government, published a report based on a study that it had commissioned from Navius Research of the economic costs for Canada of attaining the emissions reductions associated with the Paris Agreement. Navius Research is an economic research and consulting firm based in Vancouver, British Columbia. This article offers a summary of, and comment on, the report.

The Nature of the “Paris Gap”

At the 20th conference of the parties to the United Nations Framework Convention on Climate Change (UNFCCC) held in Paris, France in December 2015, the parties could not agree on a common target or goal for reductions in greenhouse gas (GHG) emissions . Instead, they committed to submit a series of voluntary plans to reduce emissions with the ultimate goal of restraining the increase in average global temperatures to no more than 2 degrees Celsius, and ideally no more than 1.5 degrees C, over those that existed in pre-industrial times. Canada was thus free to adopt its own voluntary target. The Harper government proposed in 2015, and the Trudeau government confirmed in 2016, that Canada would aim to reduce emissions by 30% from those that prevailed in 2005 by 2030. In effect, that meant a national emissions target of 511 million tonnes (Mt) per year by 2030.

After 26 years of setting (and missing) emission reduction targets, in 2018 Canada’s GHG emissions were 728 Mt. Since 1992, Canada’s federal and provincial governments have introduced an ever-increasing stream of regulatory, subsidy, taxation, and other measures to reduce emissions, but the combined effects of economic and population growth have more than offset the results of these measures. The number and cost of measures has increased considerably since the election of the Trudeau government in 2015 and the approval by federal, provincial and territorial governments of the Pan-Canadians Framework for Clean Growth and Climate Change in 2016. The policy and program measures adopted up to 2018 were estimated by Environment and Climate Change Canada as likely to reduce emissions from 2018 levels to 623 Mt by 2030 (I.e. the “Promised Policy Case) , leaving a so-called “gap” of 112 Mt to be reduced.

The Research Brief prepared based on the data from Navius Research aimed to measure the impact of eliminating the 112 MT gap, by assessing the impact on the Canadian and Alberta economies, employment levels and investment levels.

Methodology

Navius Research uses its gTech model, which it describes as “the most comprehensive model available for forecasting the greenhouse gas and economic impacts of climate policy in Canada. Its inclusion of technological change, macroeconomic dynamics, and fuels markets mean that it is ideally positioned to forecast how the broad range of policies implemented in Canada will affect energy competitiveness and household welfare.” Navius states that the gTech model “provides a detailed accounting of the types of energy-related technologies available to households and businesses to reduce emissions. In total gTech includes200 technologies across more than 50 end-uses.”

The federal government’s biennial report to the United Nations lists 237 different emission-reduction policies and measures now in place. Each type of measure has its own costs and effects, both in terms of the economy and the environment. As it is extremely difficult to project exactly which combination of additional measures governments are likely to employ going forward, Navius adopted an important simplifying assumption. They assumed that the federal government would use the single, most economically-efficient measure – an increase in the carbon dioxide tax and the full (i.e. 100%) recycling, or refunding, of the revenues received from that tax back to the public.

Using that assumption, Navius estimated that the federal carbon dioxide tax would have to rise from $50 per tonne in 2022 (its projected rate under the current schedule of planned increases) to $116 by 2030.

Navius acknowledges that this is a conservative assumption.

Economic Consequences

According to the Navius analysis, the economic conditions will be far worse in 2030 than they would have been under the Promised Policy case:

• Canadian GDP will be $54 billion lower.
• Alberta’s GDP will be $13.5 billion lower
• In other words, most of the adverse income effects (i.e. $41.5 billion) will occur in provinces other than Alberta.
• There will be 300,000 fewer full-time equivalent jobs in Canada
• Investment in Canada will be $19.5 billion lower
• Investment in Alberta will be $3.5 billion lower
• Thus, most of the investment losses (i.e. $16 billion) will occur in provinces outside Alberta.

GHG Emissions Reductions

Under the Promised Policy case, Canada’s GHG emissions from the oil and gas sector are projected to grow from 157 Mt in 2015 to 163 Mt in 2030. Navius estimates that meeting the “Paris gap” would require emissions from oil and gas to decline by 31 Mt, from 163 MT to 132 Mt. Navius further estimates that Alberta oil and gas sector emissions would have to decline from 136 Mt in 2015 to 112 Mt in 2030, or 24 Mt. While Navius does not state the implications, it is clear that that major reductions in planned oil sands expansions would be necessary. Further, the reduction of 12 Mt in oil and gas operations outside of Alberta (i.e. in Saskatchewan and Newfoundland) could have major impacts there as well.

Carbon Tax and Revenue Implications

As noted previously, Navius assumed that the carbon tax rate would increase from $50 per tonne in 2022 to $116 per tonne in 2030. It seems to assume that the carbon tax rate under the Promised Policy Case would be $50 per tonne in 2030.

Using Navius’ assumptions and estimates, the revenues from the carbon tax in 2030 would be (623 Mt x $50 =) $31.15 billion. With the higher tax rate but lower emissions level, the revenues from the carbon tax in 2030 would be (511 Mt x $116 =) $59.28 billion, almost twice as high.

Comments

Econometric models can be useful tools for comparing the potential economic effects of alternative policy measures, but they offer fewer insights concerning the likely effects of a single set of measures. The are usually “general equilibrium” models, meaning that they involve analyses of multiple goods markets, with the underlying assumption that the overall economy will trend over time to “equilibrium”, an economically-efficient or optimum allocation of resources at what may be a higher or lower level of income. The assumed natural tendency of markets to equilibrium often has the effect of producing quite low estimates of the effects of policy “shocks”, with little attention to the “transaction costs” or problems of adjustment experienced as some industries and companies go out of business.

The value of such analyses thus depends considerably on the mathematical equations used to construct it and the assumptions used to develop the scenarios.

The numbers produced by the Navius analysis should therefore be viewed in context. Generally, they are probably under-estimates. The projected $54 billion in foregone GDP in 2030 is sizeable, but only represents 2.2% of Canada’s GDP in that year. Far more important is which industries, firms and regions will be worse off and which better off, but the report offers only limited insights into this. Proportionately, the Alberta provincial economy and the oil and gas industries will definitely be worse off, which will come as no surprise to those who have observed the effects of climate policy in Canada to date.

The projected $41.5 billion reduction in income in provinces other than Alberta in 2030 should serve as a wake-up call to the people living in those provinces. This is especially true in Ontario and Quebec, where the larger part of the income reductions will undoubtedly occur. They will be in the industries that traditionally supply goods to the oil and gas and mining industries and in other emissions-intensive industries, notably metals fabrication, steel, petrochemicals, and cement. The economic pain inflicted by climate policy is about to spread more evenly across the country.

For most of the 28 years during which governments in Canada have applied GHG emission reduction policies, they have emphasized regulatory measures and subsidies. Even today, three years after the introduction of carbon dioxide pricing at the federal government level, the lion’s share of emissions reduction arises from non-pricing policy tools. Navius has assumed for simplicity sake that the incremental measures needed to reduce emissions to the 511 Mt level will all be in the form of higher carbon taxes. This is reasonable given the difficulty of projecting the wide range of other measures that will be applied, but it risks significantly under-estimating the economic costs of the measures taken.

Probably of equal importance, Navius assumed that 100% of the revenues collected by governments through carbon dioxide taxes will be returned to the public. In fact, under the current federal regime, the government committed to return only 90% of the revenues from carbon dioxide taxes and an unspecified portion of the revenues collected from the output-based pricing system that applies to large industrial emitters. As experience in British Columbia and in most other jurisdictions has shown, the share of carbon dioxide taxes retained by governments to be spent on discretionary programs tends to rise over time. In Quebec, the provincial government has implemented an emissions trading system and made no commitment to return any of the resulting revenues directly to provincial residents. The assumption of a 100% recycling of carbon pricing thus understates the adverse economic effects of the policy measures that would be needed to meet the 2030 target. A “best guess” of the actual recycling would probably be 70% or less.

Due to the focus on meeting an emission reduction target in a single year, the Navius analysis does not address how large will be the cumulative costs of the incremental policy measures that may be taken from now to 2030 and beyond. It of course, does not try to estimate the cumulative cost of all the 273 existing measures and of those that went before them from 1990 on.

Finally, of course, one should consider the magnitude of the environmental benefits from these economic, investment and employment losses. A reduction of 112 MT in emissions would represent a 15% reduction in Canada’s 2018 total, or 0.3% in global 2018 emissions. That percentage will almost certainly be lower by 2030. The effects on the global climate, in other words, will be too small to measure.

About the Author

Robert Lyman is an economist with 27 years’ experience as an analyst, policy advisor and manager in the Canadian federal government, primarily in the areas of energy, transportation, and environmental policy. He was also a diplomat for 10 years. Subsequently he has worked as a private consultant conducting policy research and analysis on energy and transportation issues as a principal for Entrans policy research group. He is a frequent contributor of articles and reports for friends of science, a Calgary-based independent organization concerned about climate change-related issues. He resides in Ottawa, Canada. Full bio.