Peter Boag
President and CEO, Canadian Fuels Association

Three thoughts on Canada’s revolving climate policy door

What a difference a year makes.

With the election of a UCP government in Alberta on April 16, the national consensus on carbon pricing is now officially dead.  In less than twelve months, the federal carbon pricing ‘backstop’ has become the dominant carbon pricing mechanism across the country.  It’s now applicable, either in whole or in part, in PEI, New Brunswick, Ontario, Manitoba, Saskatchewan, Nunavut and the Yukon.

The Ontario experience, following elimination Cap & Trade, suggests that it will likely be imposed on Alberta in 2020 if the new Alberta government follows through with its plan to eliminate the provincial carbon tax and make substantial changes to its large emitter program. This time last year, only a handful of provinces were expected to fall under the obligations of the federal backstop.

This sea-change in the Canadian climate policy landscape highlights three issues for me.

1. The importance of getting the federal backstop right.  Specifically, the Output Based Pricing System (OBPS) as it applies to energy intensive, trade exposed (EITE) sectors like refining.  Businesses that sell commodities (i.e. gasoline, diesel, jet fuel) into open markets are price takers, with little or no ability to pass emission reduction compliance costs on to customers when their competitors don’t face the same compliance costs.  This is the exact situation Canadian refiners face vis-à-vis their American competitors.

The cost imbalance makes Canadian refineries less competitive and vulnerable to closure, creating a high risk of carbon leakage. In other words, we’ll end up importing fuels and exporting jobs, with no reduction in global emissions. Today, five of Canada’s 15 refineries are already obligated under the federal OBPS.  Add Alberta refineries and this number becomes nine, representing 62% of Canadian refinery capacity. It’s now more critical than ever that the federal OBPS requirement for refiners be set at 90% of the current sector average emissions. It’s not a free pass; the compliance costs remain significant, but the competiveness implications and carbon leakage risks remain manageable. 

2. The need for transparency when governments turn to regulatory mechanisms as an alternative to carbon pricing. Whether you are a fan of carbon pricing or not, the explicit price provides transparency on the carbon costs borne by Canadian individuals, families and businesses. This is rarely the case for regulations that impose specific emission reduction actions or technology solutions on emitters, resulting in a ‘hidden’ price or tax, far greater than that of an explicit, transparent carbon price. Take for example, renewable fuel mandates, low carbon fuel standards, or forced electrification of transportation; Research shows that the costs of these approaches can reach hundreds of dollars per tonne of avoided GHG emissions. Governments owe their citizens full transparency on the cost of regulatory alternatives to carbon pricing.  How else can they make informed decisions that contribute to emission reduction. 

3. The impact of policy uncertainty on business investment, economic growth and job creation in Canada.  Putting aside policy preferences, frequent changes in policy direction create uncertainty that is a disincentive to business investment. This is a growing problem in Canada.  At both the federal and provincial level, new governments now show little hesitancy to radically change, or even reverse the policies of their predecessors. Legislation is repealed, regulations substantially changed, approvals rescinded, established approval and permitting processes upended.  A constantly shifting policy landscape with little certainty, or even predictability, isn’t conducive to positive investment decisions involving billions of dollars and long pay back periods.  The result?  Businesses looking to invest in modernizing or expanding existing facilities, or invest in new projects, look elsewhere and pass on Canada.  Canada’s business investment performance has been far from stellar the last few years.  Inward investment is down, outward investment is up. Our revolving policy door isn’t helping.Canadian Fuels Association