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1.0 Introduction

This Report provides technical background information and analysis in support of the NRTEE Advisory Note, Achieving 2050: A Carbon Pricing Policy for Canada. The Technical Report has two main purposes:

• The report complements the Achieving 2050: A Carbon Pricing Policy for Canada, providing additional details on the analysis underpinning the conclusions in the Advisory Note. By integrating the research commissioned or developed by the NRTEE, including economic modelling, it illustrates the main Advisory Note?s grounding in credible and original analysis; and,

• The report provides a useful policy design framework and reference tool for policy makers. Designing carbon pricing policy to achieve deep and long-term carbon reduction targets is multifaceted and complex. This report both identifies important design and implementation issues but also evaluates trade-offs between the main design options for addressing these issues.

The research and evidence in this report has been informed by consultations with stakeholders through the Carbon Pricing Project Expert Advisory Committee, through consultation in regional outreach sessions across Canada, and through a peer-review process. The research, analysis and findings contained in this report, and the process of its development have been informed through regular interaction with NRTEE members.

1.1 The Carbon Emissions Pricing Policy Project

In January 2008 the NRTEE released a report ? Getting to 2050: Canada?s Transition to a Low-Emission Future ? which presented a number of key recommendations to the Government of Canada. The report recommended:

• Canada needs to implement a strong greenhouse gas (GHG) emission price signal across the entire Canadian economy in order to successfully shift Canada to a lower GHG emissions pathway;¹
• The basis of such a price signal should be a market-based policy either in the form of an emission tax, a cap-and-trade system, or a combination of the two;
• The price signal should be complemented with other regulatory policies; and,
• Canada should establish a Canada-wide plan that leads to better coordination of complementary federal, provincial and territorial GHG emission reduction policies.

Getting to 2050 concluded that different carbon pricing policy instruments could deliver significant GHG emission reductions over the long-term. However, it observed that the effectiveness of each policy is a question of design and implementation, and that policy design matters. It also highlighted that there would be implications for Canada, and that policy design could help to minimize costs while ensuring emission reduction targets are achieved. Building on these conclusions, the NRTEE has undertaken the research and analysis set out in this report, in order to better understand:

• The implications of carbon pricing to achieve the Government of Canada?s carbon emission reduction targets of 20% below current (2006) levels by 2020 and 65% by 2050; and,
• The design of a preferred carbon pricing policy to achieve these targets. The project also examines policies that complement carbon pricing, addresses the barriers affecting technology deployment, and considers issues of implementation.

These two broad areas provided the basis for approaching the research and formulating the carbon pricing policy presented in the Advisory Note. Each of these areas is discussed below.

1.1.1 Implications of Long-Term Carbon Targets

To explore a number of important implications of attaining deep and long-term targets, three research activities were undertaken by the NRTEE:

• Competitiveness Assessment. This research assessed how carbon pricing policy could affect the competitiveness of industries and sectors. The work then developed a framework for understanding competitiveness risks arising from climate policy;
• A Technology and Investment ?Road Map?. This research provided a forecast scenario for describing how a carbon price could drive the deployment of technology to achieve emission reduction targets between now and 2050. The forecast also provided an indication of the capital investments through time implied by this technological transformation.
• The Sectoral, Regional and Household Implications of Pricing Policies. This research provided a detailed articulation of the likely distribution of both costs and emission reductions by sector, region and for households. It revealed where instrument choice may have a role to play to address impact concern.

1.1.2 Carbon Policy Design and Implementation

The choice of the preferred carbon pricing policy is related to both the goals to be attained and the means of addressing key implications and uncertainties. The research undertaken by the NRTEE explored the following issues:

• Assessment of International Climate Policies. Differences in climate policy between countries can lead to competitiveness risks where Canada?s domestic policy is not aligned with other major trading partners. The extent of this risk was explored through a review of other countries? policies and proposed policies;

• Policy Certainty and Adaptability. This research attempted to more clearly define how to strengthen carbon pricing policy through establishing ?policy certainty.? It also explored the importance of adapting policy through time;

• Cap-and-Trade Systems and Carbon Taxes. This research identified trade-offs for key cap-and-trade and carbon tax design decisions using a common set of policy assessment criteria, and then identified a set of principles to guide design and implementation;

• The Macroeconomic Impacts of Design Options: Economy-wide carbon pricing will have economy-wide effects and design elements such as border adjustments, international purchases and revenue recycling influence the impacts of these effects. This project used a general equilibrium model to assess a range of macroeconomic outcomes under different policy options;

• Policy Instrument Choice Preference. The objective of this research was to discuss with key stakeholders their instrument choice preferences and how these might change in time;

• The Role of Complementary Regulations in Time. This research identified how regulations can complement carbon pricing by addressing emissions that are hard to address with pricing alone. It identified when regulations are expensive relative to carbon pricing and when (and where) they can reduce costs;

• Linkages of Provincial and Federal and International Carbon Policies. This research focused on how trading systems might be linked, and how hybrid tax and cap-and-trade systems can interact;

• Technology Deployment Barriers and the Role of Research and Development. Barriers to the deployment of major technologies can impede the transition to a low carbon future. This project looked at the technology deployment forecasted by the NRTEE?s modelling and then asked the question: ?Is this forecast feasible??;

• Governance. Issues of federal-provincial-territorial governance are central to implementing an effective carbon emissions pricing policy. This research assessed issues of policy harmonization and the implications of fiscal transfers between governments.

1.2 Structure of this Document

Based on the suite of research identified above, the NRTEE developed a framework for planning the design and implementation of carbon emissions pricing policy in Canada. The framework and issues surrounding design and implementation are presented in eight chapters in this report:

• Chapter 2 provides the foundation for the analysis in this report. It explains the context of the NRTEE?s new analysis and provides an overview of the broad methodological approaches used to generate this analysis.
• Chapter 3 defines the goals of carbon pricing policy. It establishes that the purpose of the NRTEE?s carbon pricing policy should be to achieve the Government of Canada?s emission reduction targets at lowest cost. The chapter then defines costs and develops a principle of cost-effectiveness.

• Chapter 4 identifies the essential elements of the carbon pricing policy. These elements are 1) a unified pricing policy with a uniform emissions price applied broadly over all emissions and jurisdictions, and 2) a robust policy that sends a long-term price signal but that can be adapted through time as required. The chapter then broadly lays out a policy framework for achieving these objectives to cost-effectively achieve the target reductions. The policy includes a carbon pricing instrument, complementary regulations, and international purchases, as well as a strategy for the implementation of these policies.

• Chapter 5 describes the possible elements, mechanisms and trade-offs for pricing policy design. Options for instrument choice, revenue use and permit allocation, border carbon adjustments, point of regulation, and offsets are evaluated.

• Chapter 6 explores design decisions pertaining to interactions between a Canadian pricing system and international markets. Linkages, and government purchases of international emission reduction credits are assessed.

• Chapter 7 evaluates the role of other policies that can complement pricing policy. Specifically, the chapter assesses complementary technology policies to enable the diffusion of low-carbon technologies; complementary regulations that broaden the scope of pricing policy; and approaches to engaging Canadians in the transition to a low-carbon economy through education and information.

• Chapter 8 explores the outcomes of a cost-effective pricing policy using economic modelling. It illustrates that a broad, long-term pricing policy can drive the deployment of low-carbon technologies so as to achieve Canada?s emission reduction targets. However, it also identifies potentially adverse outcomes of pricing policy

  ? distributional issues and risks to competitiveness ? that must be addressed by the details of policy design and implementation.

• Chapter 9 addresses issues of implementing carbon pricing policy. This analysis of implementation explores ideas for developing institutions and processes to manage a pricing policy over long periods of time. Issues related to the design of institutions, processes and approaches to adaptive policy are addressed.