Canadian climate-change policy is supposedly rooted in a practical desire to make our country, and planet, livable in the future. But despite this sensible urge, the debate so far appears to be lacking in realism. With Prime Minister Stephen Harper at the Copenhagen climate summit, it's time to get real on how to achieve a national climate-change policy.
The basic truth ignored by the current policy debate, including the recent joint report from the David Suzuki Foundation and the Pembina Institute, is that Canada exists as a federal system. Ottawa and the provinces share jurisdiction over the environment, as well as the fiscal levers that can be used to regulate carbon emissions. Reducing emissions will be costly, but any serious attempt to craft a workable climate-change policy cannot afford to create a massively uneven distribution of the burden across provinces. The provinces must be partners, not opponents.
In the long absence of any coherent or believable federal climate-change plan, many provinces have already established their own policies. Both British Columbia and Quebec have a carbon tax. Alberta imposes intensity reduction targets on its largest emitters. Many provinces have also joined transborder agreements. For example, B.C., Manitoba, Ontario and Quebec are all members of the Western Climate Initiative along with seven U.S. states, including California and Washington.
When it comes to Canadian climate-change policy, the provinces got there first. And they are not going to leave without due recognition and compensation. We cannot ignore this reality.
The basic Suzuki/Pembina case calls for an initial carbon price of $40 a tonne in 2010 rising to $100 by 2020, which would generate $40-billion annually. The specific price for carbon is not important at this point. Neither is the choice between a tax or cap-and-trade mechanism. What is critical to the effectiveness of any system is that it impose a uniform price broadly across all forms of carbon. But in order to create a single national carbon regime, the provinces must be persuaded to give up their claim to provincial carbon taxes and permit schemes. How to do that? Share more of the money with the provinces.
Suzuki/Pembina, along with most other climate-change analyses, fails to recognize the necessary federalism component to climate-change policy. The bulk of the revenue generated by the proposed carbon tax would be spent by Ottawa on transit, electricity, international permits and tax cuts. About a third of Ottawa's portion would go to lowering federal personal income tax. The remaining share, about 18 per cent, would be returned to the provinces to be spent at their discretion. Provinces that suffer a bigger hit to their own tax revenues get a bigger share of this pot.
This combination of carbon pricing and revenue disbursement leads to a substantial wealth drain-out of energy-producing provinces. Alberta would experience a significant decline in its economic growth. The same goes for B.C and Saskatchewan. On the other hand, Ontario and Manitoba stand to make gains in output and employment.
Not surprisingly, Saskatchewan and Alberta have condemned this scenario. Rob Renner, Alberta's Environment Minister, told The Globe and Mail it was "divisive" and unworkable. He's right.
But the Suzuki/Pembina recommendation that Ottawa spend most of the carbon tax money is simply one possible scenario among many.
For instance, all revenue could be returned to the province in which it was collected. Remember, the goal of a carbon tax is to internalize the costs arising from carbon emissions. This is accomplished regardless of where the money goes once it is collected. There is no need for Ottawa to be the main beneficiary.
Full return of revenues in this way would substantially reduce the pain felt in Alberta. While the oil and gas industry would no doubt suffer under the new tax regime, there would be no wholesale regional redistribution of wealth. Such a system would share the burden of a carbon tax more evenly across all provinces and in a more transparent fashion. This would substantially improve the opportunity for agreement across all provinces.
Alternatively, the Suzuki/Pembina allocation could be reversed, with the provinces receiving the lion's share and the minority going to Ottawa. Such a split would still allow the federal government to offer some political sweeteners directly to voters or hard-hit sectors and would be attractive to the provinces. Some sort of federal-provincial revenue split along these lines may prove to be the most palatable for all governments concerned. It seems the only realistic option.
In theory, a single government implementing climate-change policy without need for negotiation or compromise seems appealing. But this is not the fact of life in Canada. In a host of policy areas shared between the federal and provincial governments - from health care to tax policy - it is not just about what is efficient but what is possible. And this means the provinces are going to have a big say on climate-change policy.
Tracy Snoddon, an associate professor of economics at Wilfrid Laurier University, is co-author of Clearing the Air on Federal and Provincial Climate Change Policy in Canada , published by the Institute for Research on Public Policy.