Dr. Aaron Henry is the senior director, natural resources and sustainable growth, at the Canadian Chamber of Commerce.
If you were to listen to those living in the Ottawa bubble, you would feel assured that our efforts to address the climate crisis need only go as far as the 49th parallel. After a few years of our neighbour to the south retreating from the Paris Agreement and declaring climate change a hoax, you might excuse the Ottawa set for focusing on things here at home.
But the world has changed – rapidly so. New international policy regimes are gathering momentum. As climate policy becomes climate trade, there are both opportunities and challenges for Canada. New policies and pressures, including environmental, social and governance (ESG) metrics, calls for international emission accounting systems and the European Union’s recently announced carbon border adjustment mechanism (CBAM) are developments Canada cannot afford to turn a blind eye to. So why are we?
The answer may begin with bureaucratic rigidity. Canada moved ahead with a focus on emission reductions that exclusively favours using domestic policies to achieve our climate goals, in part because our major trading partners were uninterested. Today, there are real opportunities for Canada to benefit from its early-adopter advantage on its implementation of carbon pricing and methane equivalency regulations, as well as our low-emitting power grid. In a carbon-constrained world, a country that can export carbon-neutral or low-carbon commodities, with strong social and governance practices, has the potential to capture global market share or gain a premium on its products.
However, the task policy makers must grapple with is how to cross through the valley of the present to these long-term possibilities. Canadian exporters, steel producers and sectors such as mining and minerals and energy have, for the most part, supported carbon pricing and made investments to decarbonize their operations. Their international competitors have not faced the same regulatory costs nor the same motivation to walk with a lighter ecological footprint. For Canada’s resource sectors, and Canadians writ large, the 2020s will likely prove the hardest decade of our energy transition, precisely because the upfront costs of decarbonization and carbon pricing are here – and the rewards of global markets for sustainable products are not.
Instead of waiting for global markets to recognize Canada as a producer of low-carbon sustainable goods, policy makers need to work at the international level either to guide import patterns or find additional means to reduce the costs of decarbonization for our industries. These goals will require a vision that extends beyond the United Nations Climate Change Conference (COP26) negotiations taking place this November in Glasgow. As an export-dependent country, we need to ensure that our climate ambitions form a competitive advantage. Here’s how we do this:
Canada needs to be aggressive in ensuring our industries do not fall on the wrong side of the EU’s CBAM. As designed, by 2030 Canada’s carbon price will be $100 a tonne more than the EU’s. Canadian products should be recognized accordingly. Looking beyond the EU, Canada should explore how we can offset the costs of decarbonizing for energy-intensive export-exposed industries such as cement or steel producers and encourage other jurisdictions to ramp up their ambition.
Everybody wants to see the Paris Agreement’s Article 6 ratified at COP26, as it promises clarity on how countries can trade global emission reductions. According to the International Emissions Trading Association (IETA), global carbon credit trading could save US$250-billion a year in climate investments from now until 2030 if done well. Yet there are other opportunities that may be easier to broker. A big one would be to work with trading partners and key jurisdictions to create alignment on offset protocols. For example, Canadian companies cannot use carbon credits generated outside Canada to comply with provincial or federal regulations (Quebec’s cap-and-trade deal with California is the exception). Resolving this would reduce the risks of credit scarcity and make compliance more cost-effective.
Finally, if we want the market to recognize the environmental sustainability of Canadian companies and products, we must engage on ESG metrics, which have played a crucial role in getting investors and companies to address climate risks. Yet with so many different frameworks cropping up, and each one measuring ESG standards slightly differently, they end up doing little to help investors and buyers compare companies or products meaningfully. Canada must seek leadership on this issue and ensure its position as a resource-producing country is recognized in an international ESG metric and, consequently, an international emission accounting system.
Canada needs to pivot, and quickly, to exploit a rare opportunity to begin reaping the benefits of its climate ambitions. The climate crisis isn’t bound by borders, and Canada’s climate success can only be determined by how we work with our major trading partners to make the world greener.
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