CHAPTER ONE SETTING THE STAGE In its 2007 climate change plan entitled Turning the Corner, the Government of Canada announced ambitious long-term greenhouse gas (GHG) emissions reduction targets for Canada of 20% below 2006 levels by 2020 and 65% by 2050. In January 2008, the National Round Table on the Environment and the Economy (NRTEE or Round Table) released a report entitled Getting to 2050: Canada?s Transition to a Low-emission Future, recommending that the government implement a strong, clear, consistent, and certain carbon1 price signal across the entire Canadian economy as soon as possible in order to successfully shift to a lower GHG emissions pathway. We determined that market-based instruments?either a carbon tax, a cap-and-trade system, or a combination of the two?were necessary, with complementary policies in certain sectors, to achieve the government?s targets. We identified technology development and deployment as central to reducing emissions and determined that pricing carbon would foster this. Finally, we said the overall impacts on the Canadian economy, while significant for some sectors and regions, were manageable in the long run.

Table of contents Messages About the NRTEE Acknowledgements Executive Summary 1 Setting the Stage 2 Carbon Pricing Policy - Goals and Objectives 3 Carbon Pricing Policy - Essential Design Elements 4 Carbon Pricing Policy - The "Road Map" 5 Carbon Pricing Policy - Outcomes and Impacts 6 Carbon Pricing Policy - Governance and Implementation 7 Conclusion and Recommendations Appendix: Glossary Adobe PDF version (2.4 mb)

Our research went further than before in demonstrating that this policy approach was the most effective path to transition Canada to a low-emissions future. But important questions of actual carbon policy design and implementation demanded further attention. Which carbon pricing instrument was best for Canadian circumstances? How should it be designed and how would it work? How should the transition be managed and over what time period? What are the implications for Canada?s economy of achieving deep emission reduction targets and how can we address concerns about competitiveness and fairness? What are the international implications of one policy choice over another?

These all raise fundamental issues of carbon pricing policy design and implementation that governments will have to consider. Recognizing this need, the NRTEE embarked on a year-long research program to reinforce our Getting to 2050 report that would result in new advice on the most effective carbon pricing policy for Canada, in the form of this report. The Round Table implemented an ambitious and detailed research agenda comprising eight background studies, the formation of a national expert advisory committee to review our research along the way, and original economic modelling and analysis. Preliminary conclusions were tested with environmental and economic stakeholders in a series of regional consultations across the country. And at each step of the way, members of the Round Table reviewed the research and considered its implications culminating in this advisory note and a more detailed companion background technical report.

1.1 Key Considerations and Assumptions

We made a number of considerations and assumptions in our research and our approach to ensure validity and relevance.

• We use the Government of Canada?s GHG emissions reduction targets. Adopting the government?s own targets of 20% below current (2006) levels by 2020 and 65%² below current levels by 2050 ensures our research is grounded in current approaches. It also ensures that the government can, with confidence, use these findings now to determine what will be needed in the long run to achieve stated policy goals and targets.
  
  
• We use the fast and deep emissions reduction pathway. The government?s medium- and long-term targets are reflected in the NRTEE?s fast and deep emission reduction pathway from Getting to 2050. This report adopts this pathway and implies a fast start to emissions reductions prior to 2015, and a sustained and long-term focus on carbon pricing to deliver low-cost emission reductions in time. This was chosen as the preferred pathway because it avoided three specific risks: not attaining deep emissions targets, higher economic costs, and higher cumulative GHG emissions.
  
  
• We recognize that our carbon pricing policy differs from some findings in getting to 2050. In Getting to 2050 we assessed a Canada-alone scenario, where it was assumed that the government?s targets were achieved through domestic abatement action alone. In this report, we adopt a more considered assumption that Canada will need to balance the costs of domestic action with the benefits of looking toward international carbon markets for lower-cost emission reductions. This reflects stakeholder input and our own learning and consideration during this project.
  
  
• We are focused on the long term, not the short term. The past year has seen significant developments in many of the major drivers that influence climate policy and emissions growth: oil prices rose by over two-thirds and dropped precipitously from a historical peak, a global economic recession looms large, and a new US administration with new commitments on climate policy has taken office. These are all important developments and we have strived to take as much of this into account as possible, from setting assumptions for our economic modelling, to setting transition time frames, to contemplating responsive policy options. In certain respects they make any policy choice at this time that much more difficult. But they also reinforce the core need for Canada to have a robust and adaptable carbon pricing policy framework that can accommodate new developments while keeping us on the path of achieving deep, long-term emission reductions.
  
  
• We considered trade-offs. Key trade-offs in designing any carbon pricing policy must be considered. First, certainty versus adaptability?how do you create a policy framework that is certain enough to drive investment and technology but adaptable enough to accommodate new economic and environmental circumstances? Second, environmental outcomes versus economic cost?how do you design policy instruments to get emissions down while addressing current and future competitiveness and prosperity issues? This report makes recommendations based on our consideration of how best to address such trade-offs.
  
  
• We noted the changing climate policy landscape in Canada. First, the federal Liberal Party proposed a carbon tax but was defeated in the 2008 general election. Second, the federal government has indicated its intention to shift from its original intensity-based emission reduction targets, set out in the Regulatory Framework for Large Emitters as part of the Turning the Corner plan, to a hard cap on emissions, perhaps aligning with a prospective cap-and-trade system in the United States. Our carbon pricing research, which began before these developments, has taken note of both. The proposed policy framework set out in the advisory note is designed to transition from the current intensity-based system to a hard cap by 2015, or even shift sooner to an absolute cap-and-trade system as part of linking with a United States? trading system.

OUR REPORTS

The NRTEE is providing two reports setting out first, our policy advice and recommendations to governments; and second, the technical research, modelling, and associated analysis and assessment we used to consider options, assess impacts, and design instruments. Both are essential reading for climate policy makers and we offer them as tools to help inform the Canadian public policy debate on climate change and carbon pricing.

This advisory note is organized as follows:

• Chapter 2 provides information on the goals of the carbon pricing policy, which includes achieving the government?s targets, minimizing the costs of achieving these targets and adverse impacts on some segments of society and the economy.
• Chapter 3 provides the essential design elements?or ?policy wedges??of the carbon pricing policy, which includes a unified carbon price across emissions, jurisdictions, and policies in the form of an economy-wide cap-and-trade system, complementary regulations and technology policy, and international abatement opportunities; and stresses the need to manage a credible and adaptable policy over time to deal with uncertainties.
• Chapter 4 provides a detailed design and implementation ?road map? for the carbon pricing policy.

• Chapter 5 discusses likely impacts and outcomes from implementation of the carbon pricing policy, including the potential scale of the economic and technological transformation required to achieve deep emissions reduction targets, and potential adverse effects that the carbon pricing policy will need to address; and possible ways auction revenue can be used to address these effects.

• Chapter 6 focuses on issues of implementation and governance in relation to the carbon pricing policy. Key elements of this chapter include the need for an independent and transparent institution to implement the ?rules of the game? in order to maintain credibility; the need for monitoring and reporting success; and the need to update expectations that carbon prices or quantity restrictions will rise or fall relative to success.

• The final chapter of the advisory note sets out the NRTEE?s main conclusion and recommendations.

1.3 MODELLING AND ITS CAVEATS

The NRTEE has, for several years and over a number of reports, undertaken economic modelling to help us understand the implications of various carbon pricing and climate scenarios. Each year we are called upon to review and assess the government?s own methodologies and modelling as it relates to its annual reporting requirements under the Kyoto Protocol Implementation Act. We have also researched and released a report on international best practices in GHG emissions forecasting. This experience and understanding has assisted us in the use and role of modelling in this work and deepened our ability to utilize its results.

For this report we relied on established energy-economy models to conduct our analysis, supplement our knowledge, and inform our advice.³ The CIMS model, with its fast and deep scenario from our Getting to 2050 report, was used to identify technically feasible and cost-effective abatement opportunities for the medium- (2020) and long-term (2050) targets. It was also used to inform our assessment of distributional impacts, to develop the technology forecast scenario, and to assess options for complementary regulations and technology policies. We then supplemented this by applying the TIM and D-GEEM models that explored the macroeconomic impacts of the CIMS modelling results. It is important to integrate macroeconomic considerations with those of capital stock turnover and technology investment. The modelling analysis conducted for this project is in-depth and used the most recent data available. Its assumptions are conservative. Overall, it should be viewed as rigorous and robust in the face of changing economic circumstances, particularly as it considers carbon pricing within a long-term context. Full details of our modelling, including assumptions, may be found in the companion technical background report.

Nevertheless, caveats remain. The most important is the inherent uncertainty that underpins any modelling of long-term targets and policies. We are forecasting a number of factors in the long term and thus there are uncertainties associated with them and how individuals, firms, and jurisdictions will respond to them. What follows, therefore, are not absolute predictions of the specific price of carbon and the exact economic and societal outcomes of achieving the government?s medium- and long-term targets. Rather, what we set out is advice on how to achieve these environmental targets at least economic cost, and the likely impacts of achieving these targets through implementation of the proposed carbon pricing policy, based on the modelling and research undertaken. Its aim is to inform the collective public policy choices that will need to be made by shedding light and analysis, through our independent process, on what we believe is the best path forward to bring about deep emission reductions in Canada, now and for the long term.