Canada Is a Test of Climate Ambition

Last in a four-part series on oil-dependent economies and their transition to a zero-carbon future. Read part one on Saudi Arabia here, part two on Russia here and part three on Nigeria here.

Angel Gurria, preparing to step down after 15 years as secretary general of the Organization for Economic Cooperation and Development, had parting words of advice as the world considers its post-Covid recovery: “Put a big fat price on carbon.”

Canada is already there.

The question of how the largest fossil fuel producers tackle the existential shift to a greener future is crucial for the rest of the world, too. Last year, Canada became the first of these to really ramp up efforts with an ambitious climate plan, including a significant increase in its carbon levy to help slash emissions and meet its commitment under the Paris Agreement. It’s a real-life green policy experiment in a country with plenty of vocal lobbies in its resource-rich provinces. The Supreme Court recently ruled in favor of the federal plan to tackle the “existential threat” of climate change and against recalcitrant regions that claimed the tax exceeded Ottawa’s jurisdiction.

Making good a 2015 campaign pledge, Prime Minister Justin Trudeau in 2016 announced a carbon pricing plan. It allowed provinces to develop their own mechanisms to make polluters pay, be they consumers or heavy industry. He later introduced a federal backstop plan, covering those with insufficient or no blueprints of their own. Encouraging news — but at the proposed rate of price increases, Canada would still fall short on commitments to cut emissions 30% below 2005 levels by 2030. In December, Trudeau’s government accelerated the pace, as part of a wider C$15 billion program of measures, hitting a far more impressive C$170 by 2030. The question is whether that package can be sustained, and indeed replicated, by others.

Canada Is a Test of Climate Ambition

The idea of charging polluters for the damage they cause isn’t new. Economist Arthur Pigou hammered out the idea of taxes on activities that have hidden social costs a century ago. But theory has long been more popular than practice. Even with China’s nascent efforts, the World Bank estimates that in 2020 barely a fifth of the world’s greenhouse gas emissions were covered by any sort of levy. Only a sliver of those are priced anywhere near the $40 to $80 per ton that the 2017 Stern-Stiglitz report estimated was necessary by 2020 to hit Paris goals, a level that rises to $50 to $100 per ton by 2030. Even in Europe, where carbon is near record levels, it is trading at above 40 euros, so not far off $50.

Canada has plenty of idiosyncrasies. Oil and gas are the most significant exports, but energy accounted for only roughly 10% of nominal gross domestic product in 2019, making it far less reliant than, say, Saudi Arabia or Russia. Domestic energy generation is also low-carbon, thanks to hydropower. Plus there’s potential for wind, solar and carbon capture and storage. The federal government, meanwhile, is focused on climate and many Canadians want to see green action. Yet populist leaders holding sway in oil and gas-rich provinces like Alberta are less convinced. Even green-minded Trudeau spent $3.4 billion buying the Trans Mountain oil pipeline in 2018.

Canada Is a Test of Climate Ambition
Canada Is a Test of Climate Ambition

There are still clear lessons for the rest of the world.

First and foremost, it’s a welcome — and all too rare — demonstration of climate ambition. The 2030 target pushes the cost of polluting straight to the point where the cost of inaction becomes too great. It helps that Canada can build on experiments in its provinces, some of which have priced carbon, and recycled the revenues, for over a decade. That empowers the center to act even against loud voices like that of Doug Ford, premier of Ontario, who has called the tax “worst thing you could ever see,” or Alberta’s Jason Kenney, who argues “Ottawa elites” fail to protect his province’s interests. The Supreme Court has just added to the sense of urgency and zeal by ruling the national carbon tax is constitutional because of the nature of the threat at hand — dismissing objections from Saskatchewan and other regions that had pushed back against the federal move.

As Rohitesh Dhawan, recently of Eurasia Group, pointed out to me, the sharp rise in price does raise the risk of leaning too hard on one policy lever. That perhaps explains in part the concessions and exceptions — say for industries facing intense trade competition— but also the extensive measures introduced alongside it. These include tighter rules on methane and coal plants, subsidies for building retrofits, support for infrastructure and the prospect of a carbon border tax. 

Another lesson is that timing makes a difference. Ottawa’s latest plan comes as a climate-friendly administration takes over in the U.S., reducing the risk of losing trade to a carbon haven, while Europe last year approved the world’s largest green stimulus. Chris Bataille, of the Paris-based Institute for Sustainable Development and International Relations, suggests it’s also taking advantage of a moment when populism appears to be not quite gone but perhaps ebbing in Canada. Falling demand for crude, meanwhile, is already impacting carbon-intensive oil sands production: Significant investment in new capacity is unlikely, even if operations may yet continue for some time.

Canada Is a Test of Climate Ambition

But is Canada’s push so challenging that it will provoke a populist backlash? It helps that businesses have largely accepted the move, while the opposition Conservative Party is moving toward stronger climate commitments to woo back voters. It’s unclear whether efforts to tight up carbon rules and close loopholes after the Supreme Court ruling will change that.

David Keith, climate science veteran and professor at Harvard University, warns that the real cost has not yet hit. That point will come in a few years’ time, and only then will we see if we have a sustainable program, or enough economic pain to feed a yellow vest-style, grassroots populist revolt.

Much will depend on how voters perceive the impact of the extra costs, and whether they see rebates and other subsidies as sufficient compensation, given 80% of families should be getting more back than they pay. It’s encouraging that most British Columbia residents don’t see their provincial levy, more than a decade old, as having impacted household finances, even if over a third also say it hasn’t changed behavior either.

Canada Is a Test of Climate Ambition
There are already a few trouble spots. Renegade provinces have lost their court battle, but there’s still resistance. A patchwork of taxes and measures makes schemes hard to compare and difficult to navigate, especially for companies operating nationally. There are plenty of loopholes to close too. Most concerning of all is the threat from an unexpected quarter: vaccines. The slow pace of immunization against Covid-19 has outraged Canadians. If it costs Liberals the next election, jabs may well deprive the world of its most ambitious climate plan yet. 

Making polluters pay is vital. But the price tag needs to stick.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.

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