There is one option in the federal discussion paper that does not allow Canada to meet its Kyoto commitments as negotiated in Bonn and Marrakech. Option 4, which uses credits for "clean energy" exports, continues the federal government's search for loopholes within an already negotiated agreement. This is troubling for several reasons.
First, it weakens Canada's targets. The urgency of climate protection is becoming increasingly evident. Using these credits does not remove the need for the world to drastically reduce its greenhouse gas emissions. Therefore, their use will simply delay action, and analysis from the IPCC and others shows that any delay means increased costs of reduction in the future.
Second, these requests come on the heels of the Bonn and Marrakech meetings, where Canada was granted numerous concessions, including the generous use of forest and agricultural sinks to meet Kyoto targets. Canada's international reputation will be tarnished by demanding further concessions.
Third, asking for credit for exporting natural gas and electricity is tenuous at best. There is no evidence that these exports will reduce greenhouse gas emissions from the U.S. During the 1990s, natural gas exports to the U.S. increased by 233% while that country simultaneously expanded coal-fired power capacity and dramatically increased its greenhouse gas emissions. Exports of relatively cheap energy from Canada to the U.S. will continue to discourage energy efficiency and clean energy development.
Finally, if Canada expects credit for these exports, will we also have to transfer credit to other countries for our imports of renewable energy and energy efficiency technology? This is important, given that Canada already relies on imported renewable technology from both Kyoto signatories and non-signatories; the Pincher Creek wind farm in Alberta uses American wind turbines, and installed wind turbines in Ontario were manufactured in the Netherlands. Given the nascent nature of Canada's renewable energy industry, these imports will continue.
The reality is that there is no need for these credits. Option 1 of the federal paper allows Canada to meet its Kyoto commitments with an improvement in the economy and without "clean energy" exports. Canada must, therefore, drop its demand to receive credits.
Domestic Emissions Trading
The AMG's analysis indicates that a domestic emissions trading (DET) program will decrease the economic costs of meeting the Kyoto Protocol. On this basis, it would make sense to implement a DET in conjunction with targeted measures that address emissions from sectors and activities not covered by the DET.
The DET spelled out in Option 1 ("broad as practical" program on upstream emissions, covering 80% of Canadian emissions) has the lowest costs to the economy. In fact, the economy grows more than it would under a business-as-usual scenario. The "upstream" nature also means that at most 500 firms would participate, decreasing the administrative costs of such a program.
The crucial element of an emissions trading program, however, is that the emission permits are auctioned, not distributed for free to firms based on historical emissions (as proposed in Option 3). As acknowledged in the discussion paper, fossil fuel suppliers would increase their revenues and profits if they were simply given tradable permits, essentially rewarding polluters for past activities. The program can instead fulfill the "polluter pays" principle (one of the stated policy objectives) and give firms an incentive to decrease emissions by auctioning permits.
The added benefit of auctioning tradable permits is that it will create a pool of revenue estimated at $4.5 billion per year. The federal discussion paper, for the purpose of the analysis, allocated this revenue to income tax cuts. This revenue should instead be used to mitigate some of the economic effects of ratifying the Kyoto Protocol by implementing transition programs for workers and communities, and by offsetting higher energy prices.
Worker and Community Transition
There will be both job losses and job gains in the energy sector as a result of Canada meeting the Kyoto Protocol. A CCPA analysis (Making Kyoto Work: A Transition Strategy for Canadian Energy Workers) showed that if Canada reached its Kyoto targets, 12,800 Canadian energy workers would lose their jobs over ten years, but 16,000 new energy jobs would be created over the same time period. These estimates were based on data from the AMG's first analysis, released in November 2000. The AMG's more recent report has more optimistic employment numbers.
Employment will increase even in Canada's hardest hit sector, but what has to be remembered is that workers who lose their jobs won't necessarily be the ones who fill jobs created in the new energy economy. The solution to this challenge is to create transition programs to help workers who are displaced find new jobs. A "Just Transition" program would include: opportunities for workers to retrain or upgrade their education; income support so workers can undertake skills upgrades; and relocation funds. A program covering all 12,800 displaced energy workers would cost just over $1 billion , easily covered by the revenue generated from auctioning permits.
There is also a need for community transition. Some communities-especially ones dependent on one or a few energy-producing or energy-intensive industries-will experience some economic impacts from climate change action. Again, the solution is not to pretend that climate change is not happening, but to allocate resources so that community adjustment can be undertaken where needed. Like workers, each community will have different needs based on its unique situation, so it is important that the federal agency assigned to community adjustment programs works in partnership with each community and remains flexible in its program delivery.
Allocating resources to worker and community transition not only mitigates climate change impacts, but also fulfills another policy objective by ensuring that no region bears an unreasonable burden. Since substantial resources will flow back to people and communities most affected by climate protection policies, any potential regional differences will be dampened.
In any case, it is important to put into perspective the provincial economic impacts. Alberta, the province most affected by Option 1, will experience economic growth of between 23.7% and 26.8% by 2012, with the latter figure the most realistic one (based on a carbon price of $10/tonne)
Energy Prices
I have pointed to Option 1 in the federal discussion paper as the option that shows the greatest economic opportunities from climate change action. Some critics have pointed to this option's effect on energy prices as a weakness. Again, these effects have to be put into perspective. The greatest potential increase in energy prices from any of the options and scenarios is a 16.7% increase in electricity prices over twelve years (assuming $50/tonne for carbon). All other potential price increases-for gasoline and natural gas, and electricity if carbon were $10/tonne-are below 10% over twelve years. Even the worst-case scenario would involve energy price increases that would go unnoticed by the average consumer, given the monthly and yearly fluctuations in the price of gasoline, natural gas, and electricity.
Those who might feel the impact of higher energy prices are low-income Canadians. Energy prices function in a regressive manner-the poor pay a disproportionate share of the cost of higher energy prices compared to middle- and high-income earners, because energy is a necessity. However, this can be taken into account. In fact, in the past couple of years, the federal government and several provincial governments gave energy rebates to low-income Canadians when energy prices soared. An even better solution is to implement a low-income energy efficiency program that helps those with low and fixed incomes decrease their home heating costs. These programs save Canadians more money than energy rebates-with the added benefit of decreasing greenhouse gas emissions-since energy savings persist for many years.
Domestic vs. International Action
The extent to which Canada should meet its Kyoto commitments domestically vs. internationally (through the purchase of international carbon permits or through available international mechanisms) depends on how seriously it takes climate change. If it feels climate change is a serious issue-and it should-then it should work to reduce emissions domestically as much as possible. Further reductions will be required in the post-Kyoto timeframe. Beginning the shift in our economy as soon as possible will lower the overall economic costs. By delaying domestic action, Canada ventures further down the road of fossil fuel dependence as we build up infrastructure such as oil and gas pipelines and coal- and natural gas-fired power plants.
Committing to act domestically will drive technological change and innovation in the Canadian economy, especially in renewable energy and energy efficiency industries. It will enable domestic firms who are developing greenhouse gas-reducing technologies to enter the market and have a demand for their innovations. This will set up the economy for further emission reductions in the future. It will also allow Canadian investment dollars to stay at home, rather than being used to invest in American or European firms who are already ahead in clean energy development. Canada can further encourage renewable energy production by implementing a renewable portfolio standard of 10% by 2012, a target that still falls short of the one adopted by the EU.
Other important reasons to act domestically are the many so-called co-benefits of reducing reliance on fossil fuels, including improved air quality. The Canadian benefits of improved air quality from climate change action are estimated at $300 million to $500 million per year. This estimate does not include other co-benefits like decreased health care costs associated with respiratory illnesses, decreased impacts on other industrial sectors such as forestry and agriculture, or economic savings from not having to adapt to climate change. Adaptation-relocating communities due to rising sea levels or melting permafrost, dealing with weather-related disasters like droughts, floods, and ice storms, and many others-will be costly. Natural ecosystems will continue to be impacted as well. Unfortunately, no comprehensive study has estimated the full range and value of co-benefits.
Conclusion
Canada needs to act on climate change and it needs to do it within the scope of the Kyoto Protocol. This will not mean economic hardship for Canadians but will, in fact, mean a stronger economy that is better poised to take advantage of tremendous growth opportunities in renewable energy production, alternative fuels, energy efficiency, and fuel-efficient vehicles.
There are challenges, especially surrounding transitional issues for workers and communities. But these challenges can be met by allocating resources to transition, resources that will be available if emission permits are auctioned. The Communications Energy and Paperworkers union, the largest energy union in Canada, has tabled an energy policy that supports Kyoto ratification. The Canadian Federation of Municipalities has overwhelmingly passed a resolution supporting Kyoto ratification. The caveat is that they want transitional issues to be taken seriously.
The federal government can and should move on climate protection by showing the necessary leadership and ratifying the Kyoto Protocol. A majority of Canadians in every province support this action.