One of the biggest recent announcements coming from the federal government is its intention to impose a carbon price on all of Canada.
The provinces and industry have been engaged in a wide-ranging, and sometimes heated debate about what kind of carbon pricing is right for our country.
So what should Canada consider as it moves into a nation-wide carbon pricing system? Carol Montreuil, the Canadian Fuels Association’s Vice-President, Eastern Canada, says the focus must be on three key principles:
- Preserving industry competitiveness for a healthy economy
- Transparency for consumers as key contributors
- That the system is balanced, stable and fair
“These key principles are what every government should keep in mind,” said Montreuil. “Carbon pricing shouldn’t come at the expense of Canadian competitiveness. Nor should the cost of carbon be hidden from Canadian consumers. And, carbon from different sources must be treated equitably. ”
First, a quick carbon pricing primer
Experts often debate the pros and cons of a carbon tax versus a cap and trade system, said Montreuil in an article published in the Canadian Fuels’ annual sector review.
A carbon tax establishes a price on greenhouse gas (GHG) emissions so carbon emitters – whether they are companies or consumers – pay for each unit (kilogram, tonne) of their emissions. When consumers fill their vehicles at the pump, the carbon tax is converted to an amount per litre.
A cap and trade program sets an emissions cap, and establishes a fixed number of emissions “allowances” each year. These allowances, each one usually representing one tonne of emissions, are auctioned to the highest bidders and traded on secondary markets to establish a carbon price. Fuel suppliers are required to purchase allowances for the carbon content of the fuels they supply to consumers.
The ultimate purpose of both systems is to put a price on carbon in order to foster a change of behaviour in all carbon consumers throughout the supply chain.
About competition
When implementing a price on carbon, the danger for energy intensive trade-exposed industries – like cement, oil and gas extraction, petroleum refining – is decreasing competitiveness, said Montreuil.
“If I’m facing a carbon cost where I operate my business, and a competitor operating a business in another place doesn’t face the same costs, I have a problem competing and staying in business,” he explained.
“Elevate this problem beyond single businesses to whole industrial sectors like petroleum refining, and significant parts of the industrial base can be put at risk.”
“If competitiveness implications aren’t a top priority when governments consider putting a price on carbon, we could end up closing Canadian businesses, eliminating Canadian jobs and importing goods from places that don’t put a price on carbon. All Canadians are harmed if we lose the economic impact and jobs from businesses that close or move elsewhere.”
Security of supply and leakage
If Canadian refineries close and we rely on imports to meet our gasoline and diesel needs, we also create fuel security of supply risks. “When we put our fuel supply in the hands of others outside of Canada, we won’t be the top priority customer when supply disruptions occur somewhere in the supply chain,” said Montreuil.
Nor will closing Canadian businesses help the environment. As Montreuil explained, a molecule of CO2 is a molecule of CO2, whether it comes from China, the U.S. or Canada. If energy intensive business moves to another country, you have “carbon leakage” – a term that describes production and emissions being shifted to another jurisdiction not regulated with a carbon price.
“In the end, the climate does not benefit. The emissions continue, and the effect on the atmosphere is the same. Meanwhile you have hurt our economy by closing businesses and eliminating jobs.”
Transparency and certainty
Carbon pricing already exists in Canada, in several forms. For example, Quebec has a cap and trade system; B.C. has a carbon tax; Ontario is implementing a cap and trade system like Quebec’s; and Alberta is currently implementing a hybrid model that utilizes elements of cap and trade and a carbon tax.
Transparency is essential to sending an effective price signal – the underpinning rationale behind carbon pricing mechanisms. A carbon tax is fully transparent to consumers. Cap and trade systems can be less transparent. It’s left up to individual fuel suppliers to determine how they communicate the cost/price implications of acquiring their permits.
Regardless, to date, consumers have not been paying a lot of attention, because even with the implementation of carbon pricing in B.C. and Quebec, pump prices have generally fallen since 2013 with the plunge in crude oil prices. The seven cents per litre carbon tax in B.C., and the estimated under five cents per litre impact of cap and trade in Quebec have been more than offset by fuel price trends resulting from lower crude prices.
But with the prospect of a federally imposed national carbon tax of $50 per tonne (approximately 12 cents per litre) by 2022 and anticipated crude price increases over the next five years, consumers across the country will likely soon take notice.
“Transparency is important for consumers, as it empowers them to make decisions based on a clear price signal. For industry, it’s important to know the cost of doing business,” Montreuil concluded.
Putting a visible, fair and predictable price on carbon are crucial elements of successful climate policy, said Montreuil.
Refineries are already doing a lot to reduce emissions; find out what they’re up to.
