Janis Sarra is Presidential Distinguished Professor and professor of law at the Allard School of Law, University of British Columbia, and a scholar in residence at the Peter Wall Institute for Advanced Studies.
Climate change is on the agenda in this year's election campaign – a welcome development. Yet missing from the debate is a comprehensive strategy to finance the reduction of greenhouse-gas emissions, our most immediate challenge.
Canada is highly vulnerable economically, given its heavy reliance on fossil fuels. Under any scenario consistent with a 2-degree-Celsius warming, the majority of our reserves will not be used, leaving our energy sector at risk financially. Yet Canada lags behind most of the developed world in determining how we are going to fund climate mitigation and adaptation.
The country has failed in its previous commitments: Environment Canada's Emissions Trends 2014 report shows that without additional measures, by 2020, Canada will only have reduced its emissions by a fraction of what is required.
To date, the language of "carbon pricing" in this election campaign has masked the decisions that need to be made. The World Bank reports that under our current approach to emissions, within 45 years, the majority of global land surface will be subjected to unprecedented heat waves, water and food scarcity, and irreversible loss in biodiversity.
The consequences for our financial security are also significant.
A report last month by a global think tank found that climate change poses a significant systemic risk to the portfolios of diversified investors, in turn threatening the security and financial well-being of their beneficiaries – all of us.
Another study reports that value at risk due to climate change could be a permanent reduction of between 5 per cent to 20 per cent in portfolio value within 15 years.
At the same time, there is a burgeoning speculative market related to climate change, from derivatives to catastrophe bonds, reminiscent of structured financial products that largely precipitated the global financial crisis. We need an effective finance strategy, creating economic incentives to address climate change.
A carbon tax is arguably the most effective strategy for actually changing the current trajectory. It needs to be broadly implemented and enforced. Businesses have profited from the use of fossil fuels and intrusion into natural carbon sinks, but they have been able to externalize the costs because our environmental laws only address immediate harms, not the long-term effects of emissions.
Even when companies budget for environmental protection, the short-term structure of financial reporting on a quarterly or annual basis fails to account for long-term harms to the environment, exacerbated by pressures on company directors to show short-term returns for capital market funders.
Corporations are economic actors, and we need strong incentives to change conduct, both in emissions reduction and in developing long-term strategies to conserve energy and shift to cleaner energy sources.
A carbon tax offers such an incentive. It is equitable in that it can be applied according to the amount of carbon emissions generated, and it is fair if revenue generated is systematically used for adaptation. A carbon tax would immediately reduce the pace at which greenhouse gas (GHG) emissions are growing and then encourage a rapid move toward a carbon-neutral society.
One modest example is British Columbia's broad-based carbon tax on fossil-fuel consumption; the tax currently provides 3 per cent of the province's budget and is progressive in its design. While "cap and trade" mechanisms have been endorsed by some political leaders, they merely incentivize companies to search for places to purchase the tax credits, rather than to shift their energy sources and uses to reduce GHG emissions.
Political leaders should commit now to four steps in moving forward on the climate finance issue.
– Decades of externalizing the costs of carbon emissions need remedying through a meaningful global carbon tax.
– There should be a sustainability tax on all transactions in the climate finance market.
– The fiduciary duties of directors and officers need to be enhanced to encompass sustainability.
– There needs to be a rethinking of return on capital, including forceful stewardship by institutional investors.
These steps are achievable. Ontario successfully implemented its policy to put an end to coal use. In May, five Canadian institutional investors managing $480-billion in assets urged the federal government to back targets for clear emissions reductions. Carbon taxes already generate $6-billion (U.S.) a year in revenue in Europe, placing those countries well ahead in their move toward a more sustainable world.
A carbon tax and a tax on speculative climate markets would give Canadian governments the resources to assist the most vulnerable sectors and communities in converting energy practices. The time to act is now.