Peter Boag
President & CEO
Canadian Fuels Association
June 13, 2017

Carbon Leakage – a vacuum more than a leak

The announced withdrawal of the United States from the Paris Accord highlights the carbon ‘leakage’ risks from aggressive Canadian GHG reduction policies that don’t take into account the integrated and interdependent nature of the Canadian and US economies.
Carbon leakage occurs when carbon costs in one jurisdiction cause greenhouse gas emitters to move their businesses to another jurisdiction where carbon costs either don’t exist or are lower than in their current location. The result is economic loss in the ‘business losing’ jurisdiction, with no net reduction in global emissions. The emissions (and economic activity and jobs) have just ‘leaked’ from one jurisdiction to another.

The potential for carbon leakage is particularly high when there are few or no other barriers to the flow of goods, services and investment between two jurisdictions with different carbon costs. The Canada-US relationship is now a textbook case for carbon leakage.

Remarkably, many Canadian policy-makers demonstrate that they either don’t understand carbon leakage, don’t believe it, or are choosing to ignore it. The implications of this aren’t pretty. All Canadians stand to lose as businesses, investment, economic opportunity and jobs head south. And none of this loss will contribute to reducing global emissions. In fact, it may increase emissions, since many Canadian businesses are already among the least emitting in the world. 

Those who see only ‘good jobs and a clean growth economy’ as the outcomes of aggressive climate policy blind themselves to the reality of what drives Canada’s economy today and for the foreseeable future, and the critical importance of business and investment competitiveness in North American and global markets.
The benefits we enjoy as a society – the envy of many in other parts of the world – are directly tied to our ability to compete successfully for business and investment. Carbon leakage puts these benefits at risk. Throw in the prospect of US corporate tax reductions, a reduced regulatory burden for US businesses, and increasing taxes/regulation in Canada, and the risks only grow.
It’s essential that climate policy substance and design fully address the issue of carbon leakage. We can still be leaders, but going too far, too fast will, to paraphrase Ross Perot from the 1992 US Presidential Debate, create a ‘giant sucking sound’ of businesses, investment and jobs ‘leaking’ to the US.   

In the wake of the US stepping back on climate change, Canada’s newfound climate leadership opportunity must go hand-in-hand with economic responsibility.