CANADIAN CARBON POLICY

As we review the current status of Canadian carbon policy in the wake of the 2019 Election, it is clear that the concentration and focus of the federal government on carbon policy during its first term was significant, at least compared to any other area of policy.^[2] In particular, the government:

• signed the Paris Accord;
• negotiated the Pan-Canadian Framework with the provinces to introduce the concept of carbon pricing and to lay out a pathway to materially reduce the carbon intensity of the Canadian economy;
• passed the Greenhouse Gas Pollution Pricing Act to ensure that some form of carbon pricing actually came into effect across the country targeting a gradual increase to $50/t by 2022; and
• prepared a long-term strategy to achieve deep-decarbonization by mid-century.

Some critics have suggested, however, that Canada’s carbon policy, and in particular its specific targets for future emissions reductions, are longer on aspiration than on likely achievement. There is some history behind that skepticism.

A central feature of every fresh Canadian carbon policy since the Kyoto Protocol is a grand vision accompanied by a stirring declaration of intent to act. However, any material actions have generally been deferred, only to be taken at some unspecified time in the future. This has resulted in relatively few reductions in the level of actual carbon emissions regardless of any declared goals or targets.

So, in 2005, the base year for calculating Canadian targets under the Paris Accord, carbon emissions were in the neighbourhood of 732 Mt per annum. After more than a decade, the adoption of various ambitious targets for future emissions reductions and various government initiatives almost too numerous to count, carbon emissions in 2016 were still up at 704 Mt per annum — only a 4 per cent reduction from the 2005 base year.

Now, in fairness, both population and economic growth meant that the overall carbon intensity of the Canadian economy declined materially over that period even if actual emissions did not. The objective of both national and global carbon policy, however, is to actually reduce carbon emissions per se — and on that front the rhetoric of Canada’s carbon policy has yet to be met by commensurate action.^[3]

Indeed, since the Kyoto Protocol was signed in 1997:

• Canada has yet to meet any target it has set to reduce carbon emissions, including those under the Kyoto Protocol itself or the subsequent Copenhagen Agreement.
• Canada will clearly miss its 2020 target under the Paris Accord which was set at 20 per cent below the levels of its 2005 base year — or roughly 585 Mt. Canada currently projects its 2020 carbon emissions could be closer to 700 Mt, more or less — which would be in a range of 15 per cent to 20 per cent higher than the 2020 target.
• Canada is not yet on track to meet its 2030 target under the Paris Accord, which was set at 30 per cent below its 2005 base year — or roughly 512 Mt. Canada currently projects its 2030 carbon emissions could plausibly be as high as 701 Mt. To be fair, with various additional measures that have been announced but not fully implemented, 2030 carbon emissions might possibly be lowered to 592 Mt — but even this would be roughly 15 per cent above the 2030 target.

EMISSIONS TARGETS AND WILLINGNESS TO PAY

Canada’s struggles with emission targets are hardly unique. Virtually all countries which are major carbon emitters have an “emissions gap” of one form or another under the Paris Accords: either they have declared reasonable targets but are not meeting them or they are meeting their targets but the targets themselves are not sufficiently ambitious to meet the goals of the Paris Accords themselves. The United Nations Environment Program has indicated that the current targets and commitments established under the Paris Accords fall far short of what is needed to meet the goals of holding temperature increases to less than 2.0°C above pre-industrial levels and preferably to 1.5°C above:

“On an annual basis, this means cuts in emissions of 7.6% per year from 2020 to 2030 to meet the 1.5°C goal and 2.7% per year to meet the 2.0° C goal. To deliver on these cuts, the levels of ambition…must increase at least fivefold for the 1.5°C goal and threefold for the 2.0°C.”^[4]

Canada’s own emissions gap has persisted for roughly a generation and the emissions gaps in other countries are plainly both widespread and significant.

Given this consistent disparity between targets and actual achievements we are inclined to accept the view of some analysts and commentators that there is a fundamental structural reason that makes carbon reduction goals so hard to achieve. In his landmark Lloyd’s of London speech in 2015, Mark Carney, then the Governor of the Bank of England, identified “the tragedy of the [time] horizon” as a key issue that bedevils all carbon policy:

“The challenges currently posed by climate change pale in significance compared with what might come. The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security. So why isn’t more being done to address it?…We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors — imposing a cost on future generations that the current generation has no direct incentive to fix.”^[5]

Carney went on to note the specific mismatch between the time horizons of politicians and regulators and the multi-generational time horizon required to effectively limit carbon emissions. Specifically, he noted that the time horizons for actors with the power to set climate policy were attuned to the business cycle (2–3 years), the political cycle (4–5 years) and, at the far end, to mandates for assuring financial stability (10 years at most). Meanwhile the most consequential direct impacts from carbon emissions and climate change are likely to be felt over a period that starts roughly 20 years in the future and continues for decades, if not for a century or more thereafter.

Moreover, Carney said, the issue of the time horizon does not end there. He noted that the damage caused by carbon emissions was cumulative. So, from the perspective of optimal policy, societies might rationally be inclined to make significant expenditures now to avoid incurring even greater costs in the future. However, politics and specifically diverging inter-generational political interests, tend to constrain this policy approach.

All of these issues fundamentally shape the politics of carbon. At the present time, and for the immediately foreseeable future, many will feel a natural human inclination to resist making material and present sacrifices for benefits that will be realized, mostly by future generations, in the relatively distant future. It is only over time that the public’s willingness to pay is likely to materially increase as the visible costs of carbon emissions go up, as the consequences become more proximate and as a greater portion of the population can expect to be directly and adversely affected over their own lifetimes.

This is all reflected in current opinion polling and more general analyses of public attitudes to carbon policy. For example, the CBC in the summer of 2019 reviewed polling data about carbon emissions and climate change and noted as follows:

“Canadians are deeply concerned about climate change and are willing to make adjustments in their lives to fight it — but for many people, paying as much as even a monthly Netflix subscription in extra taxes is not one of them…The findings point to a population that is both gravely concerned about the heating of the planet but largely unprepared to make significant sacrifices…” ^[6]

This conclusion is substantially consistent with findings in similar surveys and analyses of both polling and utility customer data.^[7]

IMPLICATIONS FOR POLICY DESIGN

The mismatch in the timing of the costs and benefits flowing from limiting carbon emissions and any resulting limitation on the willingness of the public to pay has political and policy design implications:

“Climate change mitigation is a global collective action challenge, demanding coordinated action among many disparate stakeholders (e.g. nations, emitting industries, individual consumers). Meanwhile the benefits of climate mitigation are uncertain, unevenly distributed and accrue primarily to future generations while the costs of climate mitigation are born immediately, with acute distributional impacts for particular constituencies.”^[8]

Given these dynamics, the incentives facing policy-makers, especially elected ones, tend to support policies that:

“…minimize direct and salient impacts on businesses and households, minimize burdens on regulated and strategically important sectors and/or redistribute welfare and rents in a manner that secures a politically durable coalition.”^[9]

In terms of the implications for specific policy designs:

“Policymakers have in practice preferred command-and-control regulations that are narrowly targeted (and thus allow for regulatory capture while reducing scope for opposition) and subsidies (which allow for transfers of rents while spreading policy costs broadly and indirectly across the tax base) rather than uniformly pricing CO₂.”^[10]

A recent paper from Canada’s Ecofiscal Commission^[11] focuses attention directly on the various trade-offs between the most economically efficient and effective policy tools and those which are most politically acceptable. Carbon pricing — and in particular carbon taxes imposed directly and openly on individuals and households — appear to be among the most effective and efficient ways of reducing carbon emissions. However, their very visibility can make them the most politically challenging and disruptive to implement. Meanwhile specific regulations imposed on particular industries or sectors — or subsidies granted to other industries and sectors — are often costlier or more cumbersome or less effective than carbon pricing. However, they can often be designed to be less politically visible to individuals or households and therefore less politically disruptive.

The obstacles to organizing effective collective action to limit carbon emissions are on continuous display and operate at every level. At the global level, they have led to the outright failure or to the weak implementation of international agreements and accords. For instance, most recently the Madrid Conference was supposed to — but did not — resolve the mechanisms for a global system of trading in emissions credits required to implement the Paris Accords. At the national level, we have seen several decades of failure by Canada to meet its declared emissions targets. And at the sub-national level, we have seen very recent attempts to effectively shield local populations from federal carbon pricing signals by proposing to exempt individuals or households from some or all of federal carbon taxes or to offset them by decreasing provincial taxes on items like gasoline or home heating fuel.

To meet our future carbon emissions targets, it will not be enough to have policies that meet the concerns of traditional economics. We will need to devote equivalent effort to designing and implementing a mix of policies that are politically sensible and realistic and that can bridge the gap between our best intentions and our actual results.

1. This is a revised version of “Carbon Policy and Emissions Targets” originally published by Stikeman Elliott online: <www.stikeman.com/en-ca/kh/canadian-energy-law/Carbon-Policy-and-Emissions-Targets>.
   *Jason Kroft (partner), Jonathan Drance and Glenn Cameron (senior advisors) and Victor MacDiarmid (associate) with Stikeman Elliottt LLP.
2. See generally Environment and Climate Change Canada, “Canada’s 2018 Greenhouse Gas and Air Pollutant Emissions Projections” ISSN 2562-2773 (Ottawa: 2018) [2018 Emissions Projections]; Environment and Climate Change Canada, “2019 National Inventory Report 1990–2017” ISSN 2371-1329 (Ottawa: 2019) (background information on Canada’s current and historical carbon emissions projects and policy direction as well as its actual and projected levels of carbon emissions).
3. See Ecofiscal Commission, “Bridging the Gap: Real Options for Meeting Canada’s 2030 GHG Target” (November 2019) at 3–5, online (pdf ): <ecofiscal.ca/wp-content/uploads/2019/11/Ecofiscal-Commission-Bridging-the-Gap-November-27-2019-FINAL.pdf> [Ecofiscal]; 2018 Emissions Projections, supra note 2 at 10, 41 (particularly the charts and the related text).
4. United Nations Environment Program, Press Release, “Cut global emissions by 7.6 per cent every year for next decade to meet 1.5°C Paris target – UN report” (26 November 2019), online: <www.unenvironment.org/news-and-stories/press-release/cut-global-emissions-76-percent-every-year-next-decade-meet-15degc>.
5. Mark Carney, “Breaking the Tragedy of the Horizon – Climate Change and Financial Stability” (29 September 2015) at 2–3, online (pdf): Bank for International Settlements <www.bis.org/review/r151009a.pdf>.
6. Éric Grenier “Canadians are worried about climate change, but many don’t want to pay taxes to fight it: Poll”, CBC (18 June 2019), online: <www.cbc.ca/news/politics/election-poll-climate-change-1.5178514>.
7. Jesse D. Jenkins, “Why Carbon Pricing Falls Short” (April 2019) at 8, online (pdf): Kleinman Center for Energy Policy <kleinmanenergy.upenn.edu/sites/default/files/policydigest/KCEP-Why-Carbon-Pricing-Falls-Short-Digest-singles.pdf>.
8. Jesse D. Jenkins & Valerie J. Karplus, “Carbon pricing under binding political constraints” (2016) United Nations University World Institute for Development Economics Research Working Paper No 2016/44, online (pdf): <www.wider.unu.edu/sites/default/files/wp2016-44.pdf>.
9. Ibid at 2.
10. Ibid.
11. Ecofiscal, supra note 3.