Good afternoon. Thank you for having me here today.
My name is Dave Sawyer. I'm a senior fellow at the Smart Prosperity Institute at the University of Ottawa. I'm also a regulatory economist. I've been doing work in the last year for Liberal governments, NDP governments, and Conservative governments on climate policy, so I have some pretty good insight on the various views of governments and how they're implementing carbon policy within the federation. I'm going to talk a bit about where we are and do a bit of a state of play, and then finish my remarks.
Just three years ago, it seemed inconceivable that Canada, collectively, would be developing serious carbon policy that could see emissions peak by 2020. Our gap analysis now suggests that federal and provincial carbon policies together could, with some tweaks, achieve our 2030 emissions target while keeping economic impacts to a small fraction of annual GDP growth. Importantly, the emerging policy package that we see, which includes carbon pricing, regulations and innovation—including revenue recycling to deal with distributional issues that Mark and others talked about—appears sufficiently robust to cost-effectively scale ambition toward deeper decarbonization by mid-century, meaning that we have the architecture and the knobs and dials to tune the current architecture to go deeper if we choose.
But theory and modelling are not practice. In practice, siloed provincial policies and competing policy preferences continue to challenge the ability of Canada, together, to achieve cost-effective action. Blame successive federal governments that left the policy field open, allowing provincial leaders within the federation—obviously their jurisdiction—the space to step in or not. Step in many provinces have, with their own locally tailored carbon policies, giving us the jumble that now defines pan-Canadian climate effort. Also, blame partisan politics that continue to stomp on long-term economic risks.
The simple truth is that our domestic climate ambition is bundled tightly with the geopolitical expectations of our trading partners and therefore with our own geopolitical aspirations. As the world continues to demand more ambition—and in fact much of Canada's ambition has been driven externally, I would argue, certainly up until very recently—Canada, to keep costs in check, will need to address this policy fragmentation that exists.
So far, the federal government has done well to manoeuvre within the federation's fragmented policy landscape. lt has laid down a policy touchstone in the carbon policy benchmark in the pan-Canadian framework, developed in collaboration with the provinces, for Canada to accommodate tax and trade jurisdictions alike by allowing provinces to follow a minimum price schedule if taxing, or a quantity reduction aligned to the 2030 target if trading. There's flexibility there. You don't have to outsource your climate policy to the federal government if you're a province.
To address the competitiveness neurosis that pervades climate policy, the provinces and the federal government seem to be on the right track. The federal carbon price benchmark lays out a carbon-pricing hybrid for the large industrial emitters, or the emission-intensive, trade-exposed industries. The federal system mirrors and builds on current efforts in Quebec and Alberta, which use performance benchmarks to cost only a fraction of GHGs but, as Dr. Leach said, “maintain the price signal” to reduce emissions.
Of course, British Columbia, Saskatchewan, Ontario, Nova Scotia, Newfoundland and Labrador, and Manitoba now have all proposed or are developing similar carbon-pricing schemes for their industrial emitters. We expect Ontario to move in the near term to outline its new industrial carbon-pricing system. Yes, it's true: The “Resistance” has proposed carbon-pricing schemes. Why? It's simple—industry demands it.
They worry about competitiveness. We did work for 300 large industrial facilities in Alberta and Ontario, and competitiveness is top of their minds. By extension, it's top of governments' minds, obviously.
Most economists and policy wonks will in turn tell you that they like the federal carbon-pricing benchmark. lt pushes economy-wide carbon pricing while setting price or quantity standards to better align the subnational patchwork. This alignment is needed to contain costs, but by accommodating this provincial patchwork, the pan-Canadian framework has perhaps understandably kicked the can down the road. It has almost institutionalized these provincial silos, thereby running risks of locking in high-cost mitigation islands, with everybody doing their own thing at a high cost. This is what really keeps the policy wonks awake at night: a continuation of this high-cost fragmentation with misaligned carbon costs across policies and jurisdictions—high cost within policies, high costs across jurisdictions.
Of course, there is more to carbon policy than carbon pricing. Governments of all stripes understand this, with the pan-Canadian framework reflecting provincial carbon policy packages that include regulations, carbon pricing, innovation funding and co-operative governance structures. Currently, the federal government's forward regulatory plan has 14 or so regulations or amendments that are listed under development in advance of the carbon-pricing plan. Notable among these are proposed regulations for methane in oil and gas, as with Alberta; a clean fuel standard, as with British Columbia; vehicle regulations and HFC controls.
Most carbon policy folks will agree that this regulatory agenda makes sense. Existing equipment, building and vehicles regulations can be tweaked to address policy gaps, and importantly can be scaled to deeper ambition. Typically, they save folks money on the cost of operations of equipment in the long term. Economists can get onside, somewhat, with the regulations if they're performance-based, meaning they enable compliance flexibility to act a lot like a carbon price. The federal vehicle standards that Prime Minister Harper implemented have this trading carbon pricing aspect in them. We see more regulations emerging to that effect, and economists typically think that's a good way to go.
Still, support for more regulatory action is polarized: Either you believe regulations address market failures and deliver more reductions, or you think they are expensive relative to carbon prices. As with carbon pricing, there's debate and argument about the best way to go. Since regulations are good at hiding costs deep in regulatory impact analysis, politicians tend to like regulations because of the low political cost per tonne. If you want to get something done, quietly, you regulate and hide the costs.
As a last thought, one needs to think of carbon policy within the federation as so much more than carbon pricing. The challenge within the federation is not whether we should price carbon. We are already pricing carbon in a big way. Indeed, it is literally the law of the land, starting on January 1 of this year. As this decarbonization mega-trend intensifies, we need to work beyond politics to keep costs down and drive innovation that is globally salable. Then, of course, hardening our economic resilience to increasingly dangerous weather might also require a bit of attention.
Thank you.