Thank you, and good afternoon.
Thank you for inviting me to appear before the committee on this very important issue. It is a privilege to speak to you today.
I'm a professor in the Department of Economics and the School of Public Policy at the University of Calgary. My comments are based on my expertise as a researcher on carbon pricing issues and climate policy design.
Canada faces a challenge in reducing emissions and simultaneously protecting the quality of life and economic growth that we enjoy. Adaptation to and mitigation of climate change is a complex problem, and addressing it deserves careful evaluation of policy options. We are also facing unprecedented global uncertainty and numerous economic shocks, which place new constraints on feasible policy actions. My comments today reflect both my support for emissions reductions and my desire to see careful climate policy design that maximizes benefits and minimizes costs to Canadians.
I will make two points today.
First, Canada's existing industrial emissions pricing systems, the federal OBPS and those put in place by provincial and territorial governments, are designed to incentivize emissions reductions and protect competitiveness. The systems achieve these two objectives by pricing emissions, an economic bad, and subsidizing output, an economic good. Subsidizing output reduces the cost of compliance for regulated firms and maintains domestic and international competitiveness. All of these systems are designed to increase stringency over time as the need to protect competitiveness decreases with more global action to reduce emissions.
An additional benefit of protecting competitiveness is that it also mitigates the cost effects on households and businesses. My research, and that of my colleagues Trevor Tombe and Kent Fellows, among others, demonstrate that the overall effect of emissions pricing on the economy is small. For example, at $80 per tonne, the average increase in food prices from the federal OBPS is 0.5%. Importantly, a consequence of protecting competitiveness is that Canada's emissions are higher compared to an alternative policy that does not offer that protection, such as a full carbon tax.
Second, these systems can and should be improved in response to domestic and international changes. Canada's decentralized federation and shared federal-provincial jurisdiction over the environment means flexibility in design for provinces and territories. While flexibility allows for policy experimentation and customization for each jurisdiction's unique economic context, it also has negative consequences. The 10 different systems differ in share of emissions priced, thresholds for when facilities are subject to pricing, performance standards for regulated facilities, and the time path of stringency increases, just to name a few key differences.
One important consequence of this flexibility is different emissions credit prices across Canada, which matters for more than just fairness. Differential treatment of a specific sector or facility reallocates capital and labour throughout the economy, moving these production inputs away from their most productive use. This artificially expands some sectors and shrinks others and lowers Canada's productivity. Differential emissions prices, either implicit or explicit, in different sectors result in some firms engaging in more costly emissions reductions than would otherwise be the case. The consequence is more costly emissions reductions overall, increasing the cost of meeting Canada's targets. Another way to think about this issue is that differential system design and price levels are a barrier to internal trade. This impedes economic growth and reduces productivity.
An important opportunity for improvement is working to harmonize markets and harmonize the policy environment, reducing the total cost of emissions reductions and reducing the total cost of addressing climate change. This requires co-operation across Canada. Federal action alone is insufficient.
Thank you for your time. I look forward to answering your questions.