The slower Canada is to put a price tag on greenhouse gas emissions, the greater the damage to the economy will be, a report commissioned by Environment Canada will say Wednesday.
But if Ottawa acts now to put a price on emissions - either through a cap-and-trade system, a carbon tax, or a combination of both - the long-term costs will be manageable, says the paper by the National Round Table on the Environment and the Economy.
The round table was asked by federal Environment Minister John Baird to provide advice on how to cut emissions by between 60 and 70 per cent by 2050. The paper estimates the costs of moving quickly, slowly or not at all.
"If the government neglects to clearly communicate the [greenhouse gas] price schedule well in advance, it risks causing serious economic dislocation ... because society's capital stocks will not be well prepared," the report warns.
"In essence, inadequate and delayed communication by the government of a [greenhouse gas] 'price' could lead to substantial long-term economic costs."
Done right, however, the costs over the long term will be small. If the government gives clear signals about how emissions will be priced, and how that price will rise over the long term, then companies and consumers alike can make environmentally sound investment decisions.
For example, Ontario and Alberta both need to make multibillion-dollar investments in energy infrastructure in the next few years. If they know what kind of environmental rules Ottawa will impose, they can invest accordingly. But if Ottawa dithers, and the provinces make inappropriate investments, the cost to fix those decisions after the fact will be enormous. Much of the country's machinery and equipment will roll over in the next 15 years, and so time is of the essence, the report warns.
But the price of carbon, whether it is arrived at through a market-oriented cap-and-trade system or through government-imposed rules, is probably going to have to rise to levels higher than most businesses expect, the report shows.
"On the basis of current technologies, it requires quite a price shock to lower greenhouse gas emissions," said Don Drummond, chief economist of Toronto-Dominion Bank, who has been doing similar research himself. "The sooner we get going, the better."
Many analysts assume that the price of emissions will settle at around $30 to $50 a tonne of carbon dioxide. In a recent paper by CIBC World Markets, for example, chief economist Jeff Rubin said the minimum price to stabilize emissions is $30 a tonne. The Green Party uses a slightly higher figure.
But the round table report shows that in order for the government of Stephen Harper to realize its aim of cutting emissions by 60 to 70 per cent by 2050, the price per tonne would have to rise to well over $250 by 2040, even if it ramps up quickly. If Ottawa implements a low price now and raises it slowly, the price would need to reach $350 a tonne by 2050 in order to meet the government's target.
The report does not delve into costs for individual companies or sectors. Rather, it focuses on the total cost to the Canadian economy. A quick increase in the carbon price would shave just 0.2 percentage points off growth on average every year, the report shows. A slow ramp-up of the price would shave 0.4 percentage points off annual growth.
The report's focus on long-term scenarios is troubling for Mr. Drummond.
"I think it's dangerous to put almost exclusive focus on a target as far as 2050. I think you need to have firmer short-term targets."
Comparison of changes in total GDP
A quick start to imposing a price on emissions means that in the long run, economic growth rates would be slightly lower, and Canada would lose just a year's worth of economic output. A slower start means higher costs, in the form of a lower economic growth rate, and more of a loss of output over time.
| In 1997 dollars | GDP 2011 ($trillion) | 2011-2050 compound growth rate | GDP 2050 ($trillion) | Years of lost growth |
| Business as usual | $1.27 | 1.83% | $2.61 | - |
| Slow start | - | 1.79% | $2.57 | 1.6 |
| Fast start | - | 1.81% | $2.59 | 0.9 |
SOURCE: INTERIM REPORT TO THE MINISTER OF THE ENVIRONMENT
