After years of waiting and being uncertain about the effect of US climate rules on Canada, the answer is becoming clear: huge. However, the major impacts of the new emission rules could be felt just as much through new trade arrangements as through the environmental changes themselves. Although American legislation is far from final, most of the likely variants include something called “border adjustments,” that in effect add a surcharge to products from countries that don’t have climate rules in place that are considered comparable to those in the U.S. The adjustments could add significantly to the cost of exporting just about anything from Canada to the US. This would move the resolution of climate change regulations out of the area of environment and energy policy into the entirely different realm of trade policy, with all the complications that might entail.
Lisa DeMarco, Macleod Dixon’s senior expert on climate change, recently told an audience of generators that, “If you want to export power, you may have to purchase allowances or pay a tariff based on the emission performance level of your jurisdiction or facility.”
Even if Canada’s climate rules are adjusted to harmonize with those in the US, major risks remain. Canada’s role as supplier of hydrocarbons to the rest of the world could easily be treated as a “carbon debit” against many products, producing impacts on the entire economy. It all depends on whether responsibility for the carbon emissions is pinned on the producer or on the consumer.
Jack Mintz, a widely respected authority in the field based at the University of Calgary, is concerned that the US cap and trade system as currently proposed has serious deficiencies of which Canada should be wary. Writing in the Globe and Mail on May 23 he said, “Federal and provincial governments will feel pressured to harmonize their policies with the U.S. to minimize distortions in trade, at the cost of adopting what could be a highly inefficient and unfair carbon pricing model.” He notes that with the cap and trade system, “the carbon price will fluctuate according to the state of the economy. Price variability makes it hard for businesses to adopt the expensive technologies that will clearly be needed to realize climate change objectives. Further, many complex issues arise with cap-and-trade systems, such as determining allowances for new facilities and the phasing out of old ones. Offsets are notoriously difficult to monitor at an international level.”
Quite possibly the wider problem is the complexity of negotiating trade agreements and environmental agreements at the same time. Mintz says, “The proposed border adjustments in the House bill will likely result in a large number of legal challenges under the World Trade Organization and NAFTA. Too much discretion will be needed to measure the value of carbon in a product to determine the tariff. And when products are produced by global chains, it will be nearly impossible to discern which country's carbon regime is embodied to the product. Even if Canada adopts a cap-and-trade system instead of a carbon tax, equivalence will become a never-ending game of conflict unless the systems are identical.”
Canadians will have to think carefully about whether to proceed with a made-in-Canada system versus adopting a US-style system. A made-in-Canada system could be much fairer and more efficient, but tie up Canadian producers in complex trade negotiations for long periods of time. We will also have to consider whether trade policy objectives should drive environmental agreements or vice versa. DeMarco points out that in Canada, the federal government has the predominant jurisdiction to deal with trade issues related to climate change rules. For this reason, allowing trade considerations to dominate would significantly complicate the progress of systems for carbon management that are designed and implemented at the provincial level.
DeMarco also notes that significant work remains to be done to make environmental attributes into a usable financing vehicle. It is possible that clarifying how such environmental financing is expected to operate in Canada will help identify key features of the most suitable path forward. With such an approach the provincially-developed systems, both for emissions management and for domestic content requirements, could be more focused, potentially stabilized and more straightforward for investors to use as part of financing arrangements.
However it develops, Mintz warns that Canadians, and pretty well everyone else, are at the beginning of a long road on the regulation of GHG emissions.