Assessing Canada’s current climate policy

For two decades, Canadian governments have set ambitious targets for reducing greenhouse gas emissions, but their policies have consistently failed. Like previous governments, today’s federal Conservative government promises that its policies are better, and claims that these will reduce Canadian greenhouse gas emissions to 20 per cent below their 2006 levels by 2020.

Our research group at Simon Fraser University has performed numerous assessments of Canadian climate policies at the federal and provincial levels.¹ Here we provide a short assessment of the main elements of the federal government’s current climate policy.

Lessons from past failures

Before turning to the specific policy proposals, it is important to note some key lessons from the failures of the past 20 years, as described in the growing research literature on climate and energy policy failures.²

1. Emission targets are meaningless by themselves and are often a red herring. Some environmentalists have applauded politicians for setting aggressive targets for greenhouse gas reduction (“stretch targets” or “aspirational targets”) and the media tend to focus on these. As a consequence, many politicians select ambitious targets even while their actual policies have negligible likelihood of achieving them.³
2. Noncompulsory policies, such as information provision (labels, advertisements) and modest subsidies, do not increase the cost of emitting greenhouse gases and therefore fail to cause substantial emissions reductions. If climate policies leave the atmosphere as a free waste receptacle in a market economy, greenhouse gas emissions will continue to rise.
3. Only compulsory policies that impose a cost for emitting greenhouse gases or for acquiring greenhouse gas–emitting technologies will reduce greenhouse gas emissions. These are regulations on technologies (like renewable electricity requirements and vehicle emissions standards), regulations on emissions (like emissions cap-and-trade) and emission charges (like carbon taxes).
4. To make substantial greenhouse gas emission reductions throughout the economy as inexpensively as possible, compulsory policies need to have economy-wide application. In the case of emissions cap-and-trade or carbon taxes, virtually all greenhouse gas emissions must be covered.
5. The two most prominent emissions pricing policies are emissions taxes and emissions caps (with permit trading). In their purest designs, they differ in that emissions caps set an absolute limit on emissions while emissions taxes fix a price for emissions. Permits totalling the emissions cap are allocated according to some criteria (such as by historical levels or by auction) and then these permits can be traded. Under the cap, the permit trading price, and thus the cost of greenhouse gas emissions, is uncertain in advance. In contrast, with emissions taxes, the cost of greenhouse gas emissions is certain, but the emission reductions that will occur are uncertain; government cannot be certain how industries (and households if the policy is economy-wide) will respond to the tax. Many researchers note, however, that policy design details when implementing cap-and-trade can blur this distinction, with some of these details reducing the quantity certainty of caps and others reducing their pricing uncertainty.⁴ Thus, the distinction between emissions caps and emissions taxes is not nearly as significant as sometimes portrayed. Emissions pricing throughout the economy is key and both policies can achieve this if designed properly.

The current government’s climate policy

In March 2008, the federal Conservative government issued its latest climate policy proposal, which modified slightly the proposal it had issued a year earlier.⁵ The key component of its policy is to cap greenhouse gas emissions from industrial plants in the oil and gas, manufacturing, electricity generation and mining sectors, which together produce 50 per cent of the country’s emissions.⁶

Unfortunately, the government’s emissions cap only applies to industrial emissions and thus excludes from emissions pricing 50 per cent of Canadian emissions. Sources of unregulated and thus unpriced emissions include residences, institutions, office buildings, light industry, personal transportation, freight transportation, urban waste, agriculture and forestry. This means that the government’s climate policy fails to apply an economy-wide emissions pricing signal, which is one of the critical lessons from the failed climate policies of the past (lesson 4 above). While the government claims that it will implement effective policies for the other 50 per cent of Canadian emissions, these have not been presented in a way to suggest that economy-wide emissions pricing will be the outcome. Claims of emissions reductions in these sectors from a combination of information programs, subsidies and a few efficiency regulations should be treated with considerable scepticism, given the similarity with the failed climate policies of the past two decades.

The government claims that the industrial emissions cap will reduce Canadian greenhouse gas emissions by 165 megatonnes by 2020 from their expected (“business-as-usual”) level. However, the policy has two attributes that cause substantial uncertainty about its effectiveness.

First, instead of an absolute cap on industrial emissions, the government is applying a cap on the intensity of emissions from industrial activities – such as emissions per tonne of steel, per kilowatt-hour of electricity or per barrel of oil. The policy calls for reductions in the greenhouse gas intensity of production of 18 per cent by 2010 (relative to 2006 levels) and then a further intensity reduction of 2 per cent per year after that. If each industrial sector grows at the rate the government expects, then the anticipated emissions reductions could be achieved. But if emission-intensive sectors grow more rapidly than expected, then the full reductions will not be achieved.

This decision to set an intensity cap instead of an absolute cap puts Canadian climate policy in a unique situation relative to the emissions caps already applied or currently under consideration in other jurisdictions around the world. If the Canadian government truly intends to hit its 2020 emissions reduction target, one has to ask why the government would not simply set this as an absolute cap, thereby ensuring an outcome that it promises will happen anyway. Since the government promises this outcome (a 20 per cent reduction in emissions by 2020), why would it not provide Canadians with the assurance that this time our policies will not fail, simply by converting the intensity cap to an absolute cap?

Second, the policy outcome is especially uncertain because of various flexibility mechanisms that allow industrial emitters to do things other than reduce their own emissions in a given year. Some critics have especially focused on the policy’s allowance of “technology fund” payments as an alternative to in-house emissions reduction – the assumption being that such payments will eventually translate into future emissions reductions once the funds are applied to special investments like CO₂ pipelines, carbon capture projects and electricity transmission lines.

This is troubling. But a much more troubling flexibility provision is the allowance for industrial emitters to purchase domestic “offsets” as an alternative to in-house emissions reduction. An offset occurs when an individual or firm pays another individual or firm to reduce their greenhouse gas emissions as a means of offsetting its own emissions. For an offset mechanism to actually reduce emissions, the offset payment recipient must reduce emissions from what they otherwise would have been. This payment is identical in practice to the subsidies that past governments provided for emissions reductions, and herein lies the problem. One reason past subsidy programs were ineffective is that it is impossible to determine definitively that an emission reduction action would not have taken place without the subsidy (or offset payment). Researchers trying to estimate these effects have found, for example, that a certain percentage of households do install better insulation when renovating their homes even in the absence of subsidy or offset policies. Yet it is impossible to know in advance who these people are, and so they are inevitably eligible for the subsidy or offset. Thus a certain percentage of subsidy/offset funds are captured by “free riders,” meaning that the assumptions about the “additionality” of the program need to be adjusted downward – sometimes severely.

This is one of the reasons that governments in other jurisdictions tend to limit the recourse to offsets to 10 to 15 per cent of the total reductions that must be achieved by regulated entities. Yet, the current government plan allows use of offsets for up to 100 per cent of the emissions reductions required by industry. To estimate the effect of the government’s claim for emissions reduction, therefore, it is necessary to estimate the percentage of offsets that industry will rely on and the likely additionality of these offsets in terms of actually reducing emissions – rather than simply paying unregulated firms and households for actions they would have taken in a business-as-usual world.⁷

The government would dramatically increase the chance of achieving its reduction targets by closing the offset loophole in its industrial emitters policy, or at least by limiting the recourse to offsets to a level that is consistent with other jurisdictions, namely in the range of 10 per cent of total required emissions reductions. This would dramatically increase confidence that the government’s policies will reduce industrial emissions to the levels it has promised, even though the policy still lacks an emissions pricing signal that would provide reductions in the other sectors of the economy.

We conclude that, as currently designed, it is highly unlikely that the policies of the government of Canada will achieve the target of reducing national emissions 20 per cent below 2006 levels by 2020. The lack of an economy-wide emissions price and the allowance for 100 per cent offsets for industrial emitters make it highly likely that emissions will be significantly higher than target levels in 2020 and indeed might even be close to today’s levels.

Notes

¹ Mark Jaccard, Nic Rivers, Christopher Bataille, Rose Murphy, John Nyboer and Bryn Sadownik, Burning Our Money to Warm the Planet: Canada’s Ineffective Efforts to Reduce Greenhouse Gas Emissions (Toronto: C.D. Howe Institute, 2006); Mark Jaccard and Nic Rivers, Estimating the Effect of the Canadian Government’s 2006–2007 Greenhouse Gas Policies (Toronto: C.D. Howe Institute, 2007).

² More detail is provided in Jeffrey Simpson, Mark Jaccard and Nic Rivers, Hot Air: Meeting Canada’s Climate Change Challenge (Toronto: McClelland and Stewart, Douglas Gibson Books, 2007).

³ Some nongovernment organizations have still not learned this lesson. The Sierra Club grades Canadian political parties in part on the magnitude of their stated emissions reduction targets. See www.sierraclub.ca

⁴ C. Fischer, C. Hanson and W. Pizer, “Carbon Taxes and Cap-and-Trade Programs: Not Necessarily Either/Or,” Resources for the Future (working paper), 2008.

⁵ Government of Canada, Turning the Corner: Taking Action to Fight Climate Change, 2008.

⁶ Government of Canada, Turning the Corner: Regulatory Framework for Industrial Greenhouse Gas Emissions, 2008.

⁷ Eligible offsets include actions such as energy efficiency, renewable energy, methane capture at landfills, conservation tillage in agriculture and conversion of agricultural land to forest for carbon storage.