Dave Sawyer is president of EnviroEconomics. He is an adviser on climate policy to governments, environmental non-governmental organizations and industry.
For business leaders, managing the carbon exposure of their Canadian operations over the past year must have been a dizzying affair. Reading the tea leaves of a continual stream of announcements could not have been easy. But two recent developments suggest it's time to reflect on corporate strategy. The first was the election of Donald Trump in the United States and the second is Friday's pan-Canadian framework on climate change and clean growth.
With president-elect Trump and Republicans controlling the levers of federal power in the United States, it is reasonable to expect backsliding on U.S. climate action. The obvious risk is that the absence of U.S. carbon costs will eat Canadian market share at home and abroad.
The election of Mr. Trump provides support for the well-practiced strategy to highlight the competitiveness risks of misaligned carbon costs between Canada and U.S. competitors. A plausible link between lost output because of higher costs in Canada resonates well, as does the spectre of reduced investment. But the Trump inaction card is not an ace. Canadian governments, as evidenced by the pan-Canadian deal and continued policy development in most jurisdictions, are less troubled by the threat of lost competitiveness. Why is this?
Concern over misaligned carbon prices has defined Canadian climate decisions for decades. Politicians of all stripes have heard the messaging and have chosen to use efficient policy in the form of carbon pricing paired with mechanisms to reduce competitiveness impacts on emission-intensive industries.
Through a mix of emission exclusions, free allocations, tax breaks and technology investments, coupled with defined cost exposure, policy within Canada is now designed to minimize the carbon risk on our large export engines. Governments now want to talk solutions, including how to accelerate innovation, technology deployment and reduce barriers to lower carbon operations.
At first glance, last week's framework deal reinforces competitiveness concerns as it signals a strong federal push for carbon reduction. It is reasonable to assume that carbon prices will increase energy costs while complementary regulations such as energy efficiency and vehicle standards will raise equipment costs (but also save fuel). The low carbon fuel standard is likely to trigger costs that will make current carbon prices look cheap.
But does the pan-Canadian framework signal a need to reflect on strategy? There are at least three areas worth considering.
First, the framework entrenches provincial carbon policy. Provinces will continue to use their own carbon-pricing revenue, implementing policy that fits provincial circumstances. The entry point for industry remains the provinces, although federal innovation programs will provide an opportunity for industry that is solutions-oriented.
However, by deferring to the provinces, industry must continue to engage multiple jurisdictions on a very diverse set of policies. There are two risks here for industry. The first is regulatory burden, where more resources are needed to accommodate the patchwork. But perhaps more significant is policy overlap, in which multiple federal and provincial policies squeeze the same emissions, raising costs but not necessarily reducing emissions. While industry is justifiably focused on minimizing the costs of emerging policy, it should advocate for the alignment of policies across the country.
Second, expectations about future carbon costs are now clear. Industry has for years advocated the need for price certainty to help make investment choices. We now have that, with carbon costs benchmarked at $50 by 2022, which looks more like $40 on a cash basis given the carbon price is not indexed to inflation. Carbon exposure can now be better defined nationally and built into financial analysis.
Third, the framework identifies the need for special treatment for emission-intensive and trade-exposed industries (EITE industries). But really, this is just window dressing given that most provincial policies explicitly accommodate EITE industries. Of more significance is a commitment to assemble the governance structures to monitor competitiveness impacts related to the implementation of the deal. Assertions about competitiveness impacts will increasingly be subject to transparent reviews to monitor and evaluate impacts. Industry will need to back up assertions with analysis.
Competitiveness risk is a real and justifiable concern that climate policy can and should accommodate. Industry needs to continue to reveal this risk, but it must also identify solutions. Governments have moved rapidly to update their climate policies and strategies. Now is likely a good time for industry to do the same.