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Is Canada’s carbon-pricing policy striking the right balance?

Christopher Ragan is an associate professor of economics at McGill University and chair of Canada's Ecofiscal Commission, Peter Robinson is CEO of the David Suzuki Foundation and Steve Williams is CEO of Suncor Energy. Robinson and Williams both serve on the Ecofiscal advisory board.

Debates about Canadian climate policy attract people from different perspectives and life experiences – including the three authors of this column. What views could we possibly share regarding sensible climate policy?

Heading up an environmental organization, Peter Robinson understandably emphasizes the urgent need to act decisively to reduce greenhouse-gas emissions. As an economist, Christopher Ragan has a professional habit of advocating the lowest-cost way to achieve any policy objective. And Steve Williams, as a leader of a large Canadian oil-producing company, naturally sees the need to protect the competitiveness of domestic business against rivals from jurisdictions with weaker climate policies.

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Given these separate perspectives, one might wonder about our responses to the working paper released Thursday by the federal government, laying out many details of the Pan-Canadian Framework on Clean Growth and Climate Change.

It is well-known that the federal government favours each province and territory implementing a broad-based carbon price within its own jurisdiction. This is crucial, as research and experience show that a well-designed carbon price is the best way to shrink emissions while allowing the economy to grow.

The real news from the release is how Ottawa plans to deal with the competitiveness issue if and when the federal "backstop" takes effect – in those situations where the province or territory decides against introducing its own carbon-pricing policy.

Research by the Ecofiscal Commission shows that competitiveness is a legitimate concern for about 5 per cent of Canada's economy; in Alberta and Saskatchewan, however, roughly 18 per cent of the economy is exposed to this risk. Dealing with business competitiveness is complicated, but effective solutions exist, and a specific one is included in the federal plan.

The central idea is referred to as "output-based pricing," and when you examine the details there are really two distinct parts to the policy. The first part is that no large industrial emitter of greenhouse gases (GHGs) will be exempted from the policy. They will all face a carbon price, starting at $10 per tonne in 2018 and increasing gradually thereafter.

The second part is that those same large GHG emitters will receive credits – as in other jurisdictions, such as California – based on their level of industrial output. The emitting company will receive credits for each extra tonne of steel or cement or aluminum (or whatever) it produces. And the company will receive a more generous allotment of credits if its emissions-intensity is lower than that of its industrial peers.

The proposed combination of carbon price and output-based credit is an excellent way to reduce GHG emissions and address the business competitiveness problem at the same time, and this kind of policy will be needed until foreign jurisdictions catch up to our carbon-pricing policies.

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For three basic reasons, we support the Pan-Canadian Framework as good climate policy.

First, the economy-wide carbon price is itself a very effective way of reducing GHG emissions, especially over time. It produces a powerful incentive for households, small businesses and large corporations to be part of the solution by switching to cleaner technologies and adopting greener practices. Reducing emissions significantly over the next few decades will be crucial for all countries, including Canada.

Second, using a broad-based carbon price ensures that market forces can be harnessed to drive innovation and generate the lowest-cost pattern of emissions reductions.

Third, on the issue of business competitiveness, the interim use of "output-based pricing" scores a direct hit. The carbon price sends a clear economic incentive for energy-intensive businesses to reduce their GHG emissions. The output-based credit generates an equally clear incentive for them to maintain or expand their production and employment. That they get more credits when being less emissions-intensive merely gives these companies extra encouragement to cut emissions. The overall package sends a clear market signal to Canadian business: Get cleaner, more efficient and even more innovative.

The three of us agree that good climate policy needs to achieve all three objectives, and that doing so is certainly possible. But it requires political determination, attention to plenty of detail and creative policy thinking. Based on what Ottawa released Thursday, we believe that Canadian carbon-pricing policy is striking the right balance.

Video: What would a federal carbon tax mean for Canada? (Globe and Mail Update)
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About the Author

Christopher Ragan is an associate professor of economics at McGill University and is the author of What Now? Addressing the Burden of Canada’s Slow-Growth Recovery, published recently by the C.D. Howe Institute. More

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