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