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Smoke billows from a coal fired power plant on November 25, 2015 in Shanxi, China.

Kevin Frayer/Getty Images

The recent global climate change agreement in Paris sets out a process for reducing carbon emissions over the coming decades–one that is based principally on transparency and collective accountability. The agreement reinforces the need to rely less on hydrocarbons with significant carbon emissions, and more on low-carbon sources of energy. Although there are no targets per se in the Paris agreement, there is a collective understanding that energy sources and uses with lower carbon emissions will define the future.

So what are the key elements that will define that future for Canada and the world?

The shift toward a low-carbon economy has begun. There will be a steady transition over many decades and the low-carbon shift will be a centrepiece of economic policy in nations of all types: in market-based democracies such as Canada, the U.S. and the EU; in emerging markets, often led by India; and in China, a non-democratic, one-party state that is now the largest source of greenhouse gas emissions.

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Some ivory-tower academics have argued for a "no growth" future to cut emissions and husband resources, but a theoretical vision of "no growth" is unlikely to attract or build broad public support. In market-based democracies, voters, consumers and businesses appear ready to amend how they access and use energy, but are unlikely to easily accept a wrenching lifestyle change.

The most realistic scenario is one of steady transition driven by evolving and innovative low-carbon policies and technologies. In a hydrocarbon producing economy like Canada's, significant investments have been made in the existing carbon-rich energy system. The evolution toward a lower-carbon energy model will realistically take place over decades in order to avoid wasting already-invested capital, with related higher costs to consumers and businesses.

In China, legitimacy of Communist party rule depends on raising real living standards. However, the heavy environmental costs of China's rapid growth have become abundantly clear to all, most recently via reports of terrible air pollution in Chinese cities. Environmental degradation, including carbon pollution, will have to be addressed if the Party is to remain a credible governing force.

What's the right policy framework? Defining a low-carbon future means focusing principally on energy use by consumers and businesses, as well as on sources of energy generation. We see three central elements in shaping the future.

First, create the right incentives by putting a price on carbon. By using the price mechanism, individuals and organizations will be given a clear financial incentive to shift their consumption behaviour and minimize the costs of higher emissions. Research and a number of policy trials (notably B.C.'s carbon tax) have already demonstrated that putting a price on carbon, and allowing firms and individuals to decide how they are going to adapt, has a much smaller impact on future GDP than only using binding regulations. B.C., Quebec, Ontario and now Alberta are all moving in that direction, recognizing that putting a price on carbon is a cornerstone policy in building a low-carbon future.

Second, implement innovative regulations that shift the economy and society toward improved energy use efficiency. A lower-carbon policy framework should be wide-ranging and include the transportation grid, vehicles, the design of cities and communities, and building standards for new structures and refits. By necessity, governments in Canada and elsewhere would need to embrace innovative lower-carbon regulations, and rely on constant improvement and a search for best practices globally. Forums will be required for sharing, coordinating and implementing common best practices among governments and regulators at all levels.

And third, enhanced investment will be required in low-carbon technologies. Putting a price on carbon will improve the financial incentives for the private sector to engage in low-carbon technological research, development and investment. The public policy issue for governments is how far they wish to go in providing other support and incentives. Other countries have already taken steps to provide fiscal incentives and support regulations for innovative low carbon technologies; Canadian governments will want to examine how they could do more to incent low-carbon innovation for the global market. At a minimum, assembling an inventory of best available low-carbon technologies where leading-edge activity is taking place would help to educate Canadian businesses on the opportunities.

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The bottom line? The shift toward a low-carbon future has already begun. The full policy landscape will be defined by putting a price on carbon, innovative regulation, and enhanced investment in low-carbon technologies.

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.

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