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Canada’s industry should support carbon pricing, not fight it

First published on Carbon Pulse on 24 April 2019

The Canadian industry associations’ claims about the negative impact of carbon pricing on jobs and competitiveness are exaggerated and lack empirical evidence. Pollution pricing incentivizes companies to innovate, which will be necessary to guarantee their competitiveness in the long-term.

Six months before the Canadian federal election, industry players are meeting in Toronto to discuss carbon pricing, an issue which has polarized the country’s politics over the past months, and turned into a bitter fight over what will be the current Prime Minister’s legacy.

The Canadian government has been developing a carbon pricing system which has started to  price pollution at CA$20/tCO2e in 2019, rising by CA$10 annually thereafter. The scheme consists of two parts, a carbon tax on fuel and a mechanism that prices pollution based on the amount of greenhouse gas emissions released for a specific amount of production, an “output-based pricing system” (OBPS).

The different provinces can either adopt the federal plan (if they haven’t yet got a sufficiently ambitious plan of their own) or develop their own pricing mechanisms. While it may sound good on paper, this flexibility has led to significant tensions: some provinces which already had systems in place had to modify them and others are suing the federal government for forcing carbon pricing upon them.

Industry associations are stirring up the tension with their dramatic claims about unachievable targets, lost jobs and overall negative impacts on competitiveness. But many of these doomsday predictions are unlikely to come true.

Uncertainty and competitiveness concerns seem to be the two issues keeping industry representatives awake at night. Yet, as the European experience suggests,  these fears are blown out of proportion, and the regulatory measures put in place to ease industries’ worries are often disproportionate. If it can be any warning, in Europe, protective measures are blatantly overcompensating the industry, to the extent that it has earned a windfall profit of over €25 billion from the free allowances that it is granted under the EU Emissions Trading System.

Contrary to industry claims, the OBPS does not cap emissions or set emission reduction targets for companies. As an output-based measure, it only makes companies pay for a small fraction of their industrial emissions, allowing endless pollution growth if output grows. There are various levels of stringency to the mechanism, depending on the sector, but even the most stringent level will require industrial emitters to pay a carbon fee only if their emissions intensity is higher than 80% of the industry-wide average.

For example, assuming that a specific industrial sector has an emissions intensity of 1tCO2e, i.e. in order to produce one unit of a good, a company has to emit one tonne of CO2e, on average. The 80% benchmark means that a company will not have to pay for the first 0.8tCO2e they emit per good they produce. If a company produces 10 goods and emits 8tCO2, it will pay nothing. If it produces 10 goods and emits 11tCO2, it will pay a fee on the 3 tonnes which are in excess of its allocated amount. If the company emits less than 8tCO2e for the production of its 10 goods, it will receive extra permits which it can sell to those companies which emit more.

This is far from a carbon tax which would truly make polluters pay. For some heavy industry sectors, the threshold is even set at 95% of average emissions intensity. Moreover, the argument about impacts on competitiveness and about “carbon leakage” – the idea that pricing emissions makes companies move their production to countries with less stringent environmental laws, thus leading to unchanged global emissions- lacks empirical evidence and is vastly exaggerated. If it were true, a border tax on imports from countries with no carbon pricing could be the counter-measure. Yet as an increasing number of regions start to implement carbon pricing, the already weak argument becomes less and less valid.

In fact, in 2016, the OECD showed that environmental regulation was only a minor factor affecting a company’s choice of location. In 2018, the same institution showed that the EU ETS had no negative impact on companies’ economic performance, a finding which is also supported in a 2019 paper published in a prestigious economics journal which concludes that the EU ETS led companies to invest more in their European infrastructure.  And indeed in Canada, the four provinces with a carbon price in place before the federal system started were growing faster than any other province.

Finally, the Canadian industrial players complain about the lack of certainty in the evolving design of the mechanism and the patchwork of measures arising at a provincial level. This is indeed problematic as it makes the scheme very complex, and difficult to track. However, certainly some of the uncertainty stems from the industry calling for constant revisions to the carbon pricing policies. For example, cement companies – some of which already earned millions in windfall profits from the EU ETS – have been very vocal against British Columbia’s carbon tax, asking for the sector to be exempted from it, and many other sectors have been calling for less ambitious benchmarks for the federal OBPS.

The Canadian carbon pricing plan is not perfect, but it is a crucial part of Canada’s action on climate change. If all stakeholders supported an ambitious carbon pricing scheme, the overall stability and coherence of the policy would improve.

Instead of dragging their feet, Canadian industry associations should embrace this flexible incentive that will help them to decarbonize, while granting them full freedom regarding the exact technologies and processes to be used. At the end of the day, this is the only way for the industries to continue thriving in a low-carbon world in the future.


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