The federal government wants to ‘future proof’ carbon pricing but still lets big emitters off the hook.

At the beginning of November, the federal government delivered its fall Economic Statement. It was another failing on the climate front. In the foreword to the statement, Chrystia Freeland, Deputy Prime Minister claimed that “we can lead the fight against climate change” but then proceeded to ignore it.

One of the few initiatives the Liberals did offer is something called, ‘carbon contracts for difference’. This is the government’s effort to ‘future proof’ Trudeau’s signature climate policy, carbon pricing.

Poilievre’s promise to “axe the carbon tax” coupled with industry’s complaints about future uncertainty have worried the Liberals enough to have them work to protect carbon pricing against future governments. Protecting climate policies against climate wrecking future governments is a good thing. The question is whether Canada’s carbon pricing is worth ‘future proofing’?

Carbon pricing is often portrayed as one of the most efficient policies for reducing greenhouse gas emissions. It is the federal government’s cornerstone climate policy and Trudeau’s climate legacy.  Recall at COP 26 (he didn’t attend COP 27) Trudeau used the podium to pat himself on the back and to encourage the world to follow Canada’s lead on carbon pricing. But back home the policy was, and still is, a bit of a mess.

In 2021 the Supreme Court’s decision that upheld the constitutionality of the

Greenhouse Gas Pollution Pricing Act provided the federal government with the power to act on climate. But in that ruling the Supreme Court clearly stated that the court had nothing to say about the effectiveness of carbon pricing.

It is the effectiveness of Canada’s carbon pricing system that needs to be assessed.

Canada’s Environment Commissioner criticizes the carbon price system 

In early October, the federal Commissioner of the Environment and Sustainability submitted a number of reports to Parliament.  Report 5 addressed carbon pricing. It provided recommendations designed to strengthen the carbon pricing system and in doing so, exposed some of the problems with the current system.

Last year, SCAN!’s critique of the federal Liberal Climate Plan, ‘Recipe for Failure’ outlined a series of problems with the carbon pricing system.  The recent report of the federal environment commissioner reinforces a number of those criticisms.

One of the problems with carbon pricing is that its projected effectiveness in reducing GHG emissions is based on complex modelling. In turn, those models are constructed with various sets of built-in assumptions which, may or may not, accurately predict outcomes.

Unfortunately, Report 5 provides little assurance that the government’s carbon price emission reductions will materialize. As the report notes: “We did not examine the effectiveness of the federal approach to carbon pricing in terms of the amount of emissions reduced, as it was still too early for results to be measurable.”

Does carbon pricing work?

Carbon pricing has been in place federally since 2019. There are only 7 years remaining until 2030 and still the government can’t measure the effectiveness of carbon pricing.

In its 2030 Emission Reduction Plan the government insists carbon pricing will provide a huge share of its proposed emission reductions and yet, no one knows what, if anything, carbon pricing is doing to reduce emissions. That’s troubling. In fact, the Trottier Energy Institute, in a report last year, concluded that the emission reductions from carbon pricing will be considerably less than what the government has forecast. Other researchers and some climate action groups have argued the carbon price is far too low to have a substantive effect on GHG emissions.

Canada’s carbon pricing system consist of two parts. One is the carbon levy that consumers pay at the pumps and in heating bills. The other part is called the OBPS— Output Based Pricing System —which applies to large emitters.

After four years no one knows if part 1 is influencing consumer behaviour in any significant way. After four years we do know that Part 2 is riddled with holes, temporary patches, and ‘get out of jail free’ cards. Admittedly, the Environment Commissioner wasn’t quite so blunt in its criticism. Even so, the report on carbon pricing provides more evidence of a broken system; “weaknesses in these systems could limit Canada’s ability to meet its emission reduction target”.

Big Emitters are the problem

There are 1400 big emitters in Canada that are responsible for 40% of the country’s GHG emissions. Canada’s carbon pricing system lets these big emitters off the hook.

The carbon price system is riddled with mechanisms such as emission intensity rules, questionable offsets and credit swaps, overly generous breaks in carbon costs that allow companies to avoid their responsibilities. That is the case with the federal system and it is even more the case in the provinces and territories.

The Environment Commissioner was particularly concerned about this: “We found that Environment and Climate Change Canada had established weak requirements for provincial and territorial large emitters programs…which allowed some industries to benefit from larger breaks in carbon costs and would reduce the effectiveness of the carbon price.”

The report continues:

“This finding is important because large emitters programs constitute a partial exemption from the “polluter pays” principle. If the programs are not sufficiently stringent, the long‑term incentive to reduce carbon emissions will be weaker for a large amount of Canada’s carbon emissions. Moreover, the overall burden for reducing Canada’s carbon emissions could shift from producers to consumers.”

More patches won’t fix the system

On November 22, the federal government announced that it will impose its carbon price system in provinces (Newfoundland and Labrador, Nova Scotia, and Prince Edward Island) that missed the deadline for introducing carbon pricing. It also indicated that Alberta and Saskatchewan had improved their industrial carbon price systems. Those announcements serve to reinforce the inadequacies in Canada’s pricing system. In its press release the Pembina institute welcomed the changes but noted its concern that “the stringency of industrial pricing systems may still be too low to drive decarbonization consistent with a net-zero economy by 2050.”

Last year COP 26 ended with the faint hope of keeping the goal of 1.5 degrees alive. This year COP 27 has accepted that the world’s major polluters have propelled us well beyond that critical threshold. Canada has committed to reduce GHG emissions by 40-45% below 2005 by 2030. And it is betting our future that carbon pricing will get us there.

There is a certain logic to the appeal of carbon pricing. Putting a price on carbon should reduce emissions, because it makes dirty energy and production processes more expensive than clean ones. So says the theory. But maybe it would be more effective to turn that around and make clean energy and production processes cheaper than dirty ones. And maybe it would be more effective to put a cap on big emitters’ emissions and then drive down those levels year after year.

The Liberal government is building up a complicated and rickety market for carbon. There are carbon charges and exceptions, credits and offsets, carbon trading and now ‘carbon contracts for difference’. And with all this manoeuvring the goal of reaching Canada’s 2030 emission reduction target, once again, recedes.

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