Achieving 2050: A Carbon Pricing Policy for Canada
- An economy-wide carbon price signal is the most effective way to achieve the Government of Canada’s medium- and long-term emission reduction targets and reduce cumulative emissions released into the atmosphere.
- That price signal should take the form of an economy-wide cap-and-trade system that unifies carbon prices across all jurisdictions and emissions and prepares us for international linkages with our major trading partners.
- An effective carbon pricing policy needs to find a balance between certainty and adaptability— it should be certain enough to transmit a clear, long-term price signal to the economy upon commencement to encourage technology and change behaviour, yet adaptable to changing circumstances and future learning.
- There is a cost to delay in the form of higher carbon prices later to meet targets, and a cost to maintaining Canada’s current fragmented approach to carbon pricing policies in the form of reduced GDP and higher carbon prices over time.
- Canada’s economy will continue to grow under this policy—it is forecast to be twice as large in 2050 than today—but this will be smaller than if no carbon pricing policy were adopted.
- New federal/provincial/territorial governance mechanisms and processes should be put in place to achieve a harmonized Canadian carbon pricing policy.
- Technology development and deployment, along with the electrification of the energy system, is central to emission reductions and is stimulated through an economy-wide carbon price signal, as well as appropriate public investment in carbon capture and storage and renewable energy.
- Complementary regulatory and technology policies in the transportation, buildings, oil and gas, and agricultural sectors are also required to ensure broad-based emissions coverage at an overall lower price, reduce total emissions, and meet government targets.
The NRTEE’s Proposed Carbon Pricing Policy
The carbon pricing policy proposed in Achieving 2050 has two main goals. First, it seeks to achieve the Government of Canada’s medium- and long-term greenhouse gas emission reduction targets at least cost. Second, it seeks to minimize adverse impacts of achieving these targets on regions, sectors, and consumers. Key elements of the policy include:
- A national cap-and-trade system to price carbon and provide real market incentives for firms and households in Canada to change their technology choices and behaviour in order to reduce emissions.
- Complementary regulations and technology policies to improve the cost-effectiveness of the cap-and trade system by broadening coverage across all key emission sources, while supporting targeted technology development and deployment.
- Participation in international markets through trading and credit purchases to help reduce economic costs at home by allowing Canadian firms and consumers access to credible reductions internationally.
- A new climate governance mechanism, including a carbon pricing and revenue authority to ensure collaborative and coordinated implementation of the carbon pricing policy over time, making sure it sends a clear and certain price signal to industry and consumers, while remaining responsive to new information and situations.
A Single National Cap-and-Trade System
The central element of the Round Table’s carbon pricing policy is a single national cap-and-trade system that will unify carbon prices and policies across all emissions from all sectors and all jurisdictions, based on a cap apportioned between:
- Large emitters. This covers approximately 51% of emissions and addresses fugitive and process emissions, and provides a signal for carbon capture and storage.
- Rest of the economy emissions. For the additional 36% of emissions in buildings, transportation, and light manufacturing, the portion of the cap would be applied at a point in the fuel distribution chain to those that distribute or import fuel, thereby limiting the number of trading entities while broadening coverage throughout the economy.
The remaining emission reductions come from sectors that are not affected by a carbon price. Complementary regulations will deliver reductions from these sectors.
Full trading of permits between the large emitters and remaining emissions in the economy would be enabled before 2015, unifying the carbon price. Full auction of permits and the unification of prices across jurisdictions, would have to occur no later than 2020.
Potential Impacts and Outcomes
The NRTEE’s research and modelling shows that with a carbon pricing policy in place, all sectors of Canada’s economy and national income will be larger in the future than they are now. With no carbon pricing policy in place, the national economy would likely be 40% larger in 2020 and 150% larger in 2050; with an efficient policy in place, the overall economy would likely be reduced by only 1-2% in 2020 and 4-6% in 2050.
Our research points to four main impact areas that must be addressed:
- Macroeconomic impacts—generally small, and manageable over time
- Competitiveness impacts—primarily sector-specific so focus is known
- Distributional impacts—for some households to which revenue recycling can ease some economic burden
- Technology impacts—mostly positive but targeted assistance is still required
- In line with the second goal of the policy – to minimize adverse impacts of achieving the government’s targets – the report identifies measures, including the use of revenue from permit auction, to address these impacts.