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How to manage diverging Canada-U.S. climate-change ambitions

Glen Hodgson
Senior Fellow

This article was originally published in The Globe and Mail on May 2, 2017.

Ambitious greenhouse gas (GHG) reduction targets have been set on both sides of the Canada-U.S. border. But climate policies in Canada and the United States are beginning to go in very different directions. Canada need not change its overall course on GHG emissions, but it will likely need to make adjustments for the duration of the Donald Trump administration, while remaining on course for shaping a low-carbon economy.

The first step in responding to President Trump’s climate policy is to determine whether there really is a problem on the horizon. The U.S. and Canadian economies are similar, but not identical, with structural differences nationally and regionally. Specific circumstances matter; a policy change on the U.S. side of the border does not automatically mean negative impacts on Canada. Each country has its own monetary, fiscal, micro-economic and trade policies, and a flexible exchange rate that acts as a shock absorber. Businesses adapt to these differences.

How might Canada cope with a divergence in climate policy by its dominant trading partner? The Trump administration has stated repeatedly its intention to move away from the Obama climate agenda. Mr. Trump signed an executive order to reverse course on the regulation of coal as a fuel for generating electricity, and the U.S. Environmental Protection Agency has undergone a leadership change. Fuel-efficiency standards for autos are expected to be moderated, among other measures. The United States might even leave the Paris Accord on climate change.

Firms in Canadian sectors with intensive GHG emissions that are open to trade, such as petrochemicals or cement, could be exposed to a loss of competitiveness if U.S. environmental standards slip. For firms in these sectors, one policy option to level the playing field would be selective carbon tax rebates, or free emission permits under cap-and-trade. British Columbia has already chosen to rebate temporarily the provincial carbon tax to the cement sector, to help B.C. producers compete with cement imports from the United States.

There are already different environmental policies and practices at the state and provincial levels. Canadian provinces have introduced or are developing different approaches to pricing carbon. A pan-Canadian carbon price will be introduced by the federal government in 2018, with the revenues returned to the provinces. In the United States, California in particular is committed to pursuing a low-carbon policy agenda, regardless what happens under a Trump administration. California’s state economy is by far the biggest in the United States, and larger than Canada’s. Quebec and Ontario are taking steps toward linking into California’s cap-and-trade system, specifically for purchasing emissions permits.

Meanwhile, the competitiveness of renewable technologies such as solar cells, wind and battery storage is improving rapidly. Major U.S.-based firms such as Wal-Mart are working to sharply reduce carbon within their business models and supply chains. Numerous U.S. electrical utilities are committed to decarbonizing the production of electricity. Indeed, base-load hydro-electricity imported from Quebec and Manitoba is central to the long-term strategy of U.S. states and utilities to reduce GHG emissions—even in states that voted for Mr. Trump.

The auto and light-truck sector deserves specific mention. The North American auto industry is highly integrated; more than 80 per cent of the light vehicles manufactured in Canada are exported, largely to the United States. This economic reality makes it hard for Canadian policy makers and the industry to diverge from the United States if American fuel-efficiency standards are relaxed. That said, rapid transformation is occurring in the auto sector—electric vehicles are becoming more price competitive and appealing to consumers, and automated vehicles are on the cusp of commercialization. In order to stay on course, Canada could rely more on ecofiscal policies at the gas pump to promote reduced vehicle fuel consumption.

Ultimately, the response of business investors on both sides of the border will be a decisive factor. Is Mr. Trump’s climate policy a structural change in direction, or a four-year blip in a longer-term trend toward a low-carbon future? Other major economies and GHG emitters, notably the European Union and China, are unlikely to soften their commitment to limit and then reduce GHG emissions in the coming decades. The economic costs of climate-change inaction are also going to keep rising, contradicting the remaining deniers. Selective policy adjustment, not wholesale change, would be the reasonable Canadian response in a world where the United States deviates while other major regions do not.

Editor’s note: “An earlier version of this story referred to B.C.’s assistance program for the cement sector as a temporary carbon tax rebate. In fact, it is a five-year adjustment fund to help the industry transition to lower carbon fuels; it covers only a small portion of the annual carbon taxes paid by the cement sector.”

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