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An oil pump jack in a field near Calgary on July 21, 2014.Todd Korol/Reuters

If lower oil prices are as bad for Canada's economy as rate-cutting Bank of Canada Governor Stephen Poloz insists, the central bank might consider assessing the risks to the economy in a world where constraining carbon emissions becomes less of an abstract notion and more of a daily reality. For a petro-economy such as Canada's, the financial risks associated with the pending battle against climate change are much greater than any cyclical downturn in oil prices.

The bank would be wise to consider the future we're heading towards. When even energy-friendly bodies such as the International Energy Agency say the world needs to act now if we're to avoid the worst outcomes of what climate change has to offer the planet, then Canada should realize it can ill afford to stick its head in the sand any longer. Indeed, the Canadian economy will need much more than a minor cut in interest rates to adapt to what's coming. Instead, the country will need to make some major shifts in economic strategy.

For the Bank of England, for instance, the prospect of restrictions on carbon emissions is real enough to prompt a study on the broad implications for the U.K. economy. The findings are expected to be announced by Mark Carney, formerly of the Bank of Canada, in September. It begs the question about whether Canada's central bank should be doing the same. If the likelihood of a carbon-constrained future is a concern for the U.K. economy, then it's undoubtedly an even bigger issue for a jurisdiction such as Canada, where the energy industry and the country's economic well-being are even more closely linked.

Nowhere in the country is a Plan B more necessary than Alberta. Whatever impacts global-emissions constraints hold for the country as a whole, they'll be much more significant for Alberta's petro-dominated provincial economy. Premier Jim Prentice is understandably putting on a brave face by telling Albertans that the decline in oil prices is just a temporary slump. At some point, however, even he must consider the consequences of the inevitable controls on global emissions that are to come.

Alberta, like petro-economies everywhere, will soon have more pressing problems than simply managing the boom-and-bust cycles that define the commodity world. Such challenges are hardly trivial, but the climate-change-inspired policy looming on the horizon carries more profound ramifications for oil prices than any mere cyclical downturn.

Neither Ottawa nor Alberta's provincial government has a plan in place to address what happens when the imperatives of confronting climate change make depressed oil prices the norm. How likely is that world? You don't have to look any further than the recent U.S.-China emissions accord or the actions that are expected to stem from the upcoming United Nations Climate Change conference in Paris to realize the type of changes that are in store for the economics of oil.

How well Canada adapts to that world will depend in large part on decisions made around taxes and carbon. No jurisdiction in the country needs to contemplate the need for carbon taxes more urgently than Alberta. While falling oil prices spurred discussion of a provincial sales tax to help plug the hole in the province's royalty revenues, Alberta needs to consider more consequential measures. For a useful model, Mr. Prentice wouldn't have to look any further than his neighbour to the west.

In contrast to Alberta's largely cosmetic Specified Gas Emitters Regulation that does little to curb emissions or raise revenue for the province, British Columbia has implemented a much more comprehensive carbon tax. Regardless of whether the fuel source is coal, gasoline, diesel, natural gas or propane, the tax doesn't discriminate, levying a $30 per tonne charge on emissions from all carbon fuels. In the most recent fiscal year, it netted $1.2-billion in extra revenue for B.C., an amount that would surely make a difference to royalty-deprived Alberta.

The prospect of a carbon tax admittedly goes against the grain of Alberta's energy-doting history. The province, though, needs to recognize that if an emission-constrained world is going to limit the royalty revenue it collects from extracting fossil fuels, then it will be better off with a tax regime that adds money to provincial coffers when fuel is burned. Liberal Leader Justin Trudeau suggested as much in a speech at Calgary's Petroleum Club last week while laying out his national carbon-pricing plan. A meaningful carbon tax would add a few cents a litre at the pumps, but I suspect many Albertans would pick that option over broad-based tax increases, jam-packed classrooms or shuttered operating rooms.

From pipelines and rail regulations to fiscal and monetary policy, Canada needs to undertake a fundamental rethink of its economic future. The current cyclical correction in oil prices might be challenging, but there's a far bigger shoe yet to drop on the country's oil-fuelled dreams.

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