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An effective carbon price won’t harm Canada’s competitiveness

Let's start with a prediction: Any move Ottawa makes toward a price on carbon pollution will be greeted with a chorus of concerns about competitiveness.

Expect to hear that companies will be at risk. That some will pull up stakes and move to jurisdictions where they can pollute more. And that we'll all be poorer as a result.

We're making a very safe bet. Those concerns surface every time a government decides to price carbon, in Canada or elsewhere. Donald Trump's election as President of the United States has only made the chorus louder. But here's what often gets lost in the noise: there are ways to design carbon-pricing systems to address those competitiveness concerns.

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And that is exactly what we expect Canadian governments to do. Here's how.

A price on carbon could change a company's competitive position by making the fossil fuels it uses (or produces) more expensive – or by making the clean technology a company produces more valuable.

For most companies, the price of fossil fuels is a minor variable compared with other factors that influence competitiveness, such as prices throughout the supply chain, exchange rates and demand for their products. In such cases, the price on carbon will work exactly as intended: it will encourage them to waste less energy and to invest in cleaner technologies.

But for a small fraction of companies, the risks are higher. Emissions-intensive companies generate a lot of carbon pollution, so they feel a carbon price more strongly. Trade-exposed companies compete internationally, potentially against firms producing the same commodities in places with less strict environmental regulations.

For operations that are both emissions-intensive and trade-exposed, a price on carbon could lead to a result no one wants: companies leaving Canada to operate in places where they can emit carbon pollution without constraint. That's obviously bad news economically, but it would also be environmentally counterproductive – a carbon price should encourage companies to clean up their operations, not relocate them.

No government puts a meaningful price on carbon without considering this problem, known as leakage. So as Ottawa follows through on its commitment to price carbon pollution across Canada in 2018, there are plenty of real-world examples to draw from that take competitiveness into account.

Getting the design right starts with correctly identifying the size of the problem.

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Very few industries objectively qualify as both emission-intensive and trade-exposed. A 2015 assessment from Canada's Ecofiscal Commission concluded that just 5 per cent of Canada's economy meets that test.

That means 95 per cent of our economy has little to fear – and, potentially, much to gain – from pricing carbon pollution. And for sectors with more on the line, there are many ways governments can help.

Ontario and Quebec already price carbon through a system known as cap-and-trade, which creates a market for pollution permits. Both jurisdictions give free permits to many sectors, attempting to maintain the financial reward for cutting carbon pollution while reducing potential risks to competitiveness. In Alberta, which applies a levy on carbon emissions, many companies will receive rebates in proportion to their output.

It may sound like it defeats the purpose to price carbon pollution and then return some of the money to companies. But think of it as being similar to taxes on cigarettes: making them more expensive helps cut down on sales, even if the money raised doesn't go into anti-smoking programs.

As a targeted solution where it's really needed, rebates such as these can make sense. Used well, they can help guard against companies relocating. More importantly, they help give governments the confidence to put a price on carbon pollution in the first place.

In fact, experience suggests that – far from ignoring the prospect of competitiveness risks – governments usually worry about them too much, and end up giving out rebates too freely as a result. To avoid that, rebates should be transparent and governments should commit to reviewing, early and often, how they treat vulnerable sectors.

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Merran Smith and Clare Demerse are the executive director and federal-policy adviser, respectively, at Clean Energy Canada, a think tank housed at Simon Fraser University's Centre for Dialogue.

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