Climate Change, Trade, and Competitiveness: Risks and Opportunities in a North American Perspective
Policymakers are faced with the daunting challenge of developing climate policies that reduce greenhouse gas emissions. At the same time, such policies should not put key energy-intensive sectors at a significant competitive disadvantage against major trading partners, who may not adhere to similar low-carbon standards. Given the enormous interdependent economic and energy relationship shared by the United States and Canada, developing a bilateral approach to address climate change deserves serious discussion.
On June 3 and 4 the Canada Institute, in collaboration with the Public Policy Forum, hosted a conference in Ottawa assessing the current state and future prospects of state, regional, and federal climate policy in the United States and Canada. The forum aimed to provide participants with a better understanding of the implications of current and emerging climate policies in both countries. It also gave participants a chance to discuss private sector risk management strategies to adapt to a business environment in a carbon-constrained future.
Assessing Past Failures
From 1988 until 2000, Canada and the United States pretended to address greenhouse gas emissions, argued Mark Jaccard of Simon Fraser University. Jaccard noted that although both governments actively participated in several international summits aimed at addressing rising greenhouse gas emissions during that period, little action was taken to seriously address the issue. From 2001 to the present, said Jaccard, the Canadian government maintained the status quo of appearing concerned, while the United States government simply took the position that it was not going to address rising greenhouse gas emissions. Ironically, the Bush administration's clear stance on the issue may have compelled states to take the lead in reducing emissions, while the Canadian provincial governments continued to wait for action at the federal level, said Jaccard.
John Drexhage of the International Institute for Sustainable Development maintained that Canada and the United States' interdependent economic and energy relationship warrants serious discussion of a bilateral approach to reduce greenhouse gas emissions. He stressed, however, that national efforts to reduce greenhouse gases must heed the warnings of the Intergovernmental Panel on Climate Change (IPCC) and strive to set targets that would not allow for more than a two percent increase in global temperature—the degree point considered to be the threshold for catastrophic climate change by the IPCC.
Moving forward, stressed Drexhage, will require governments to recognize that the promise of developing and implementing low-carbon technology does not offer industry a sufficient market signal to reduce their emissions. Jaccard added that strategies to address climate change must not repeat the mistakes of the past. He said that Canada's failure to reduce greenhouse gas emissions over the past two decades was due in part to an over reliance on energy efficiency information campaigns and the use of subsidies to lower the cost of energy efficient products. Ultimately, said Jaccard, some form of carbon trading system must be implemented for North America to reduce its carbon emissions: "The atmosphere cannot be free."
Leadership at the Sub-National Level
The province of Alberta will continue to work toward reducing emissions at a pace that is in step with its major trading partners, said Ron Hicks, deputy minister of Alberta's Executive Council. Hicks acknowledged that although Alberta's government often takes criticism for not doing enough to reduce its carbon emissions, the province remains the only jurisdiction in Canada to set a price on carbon at $15 per tonne and has aggressively invested in carbon capture and storage and other low carbon technologies in an effort to reduce emissions. While provincial efforts to reduce carbon emissions are important, maintained Hicks, serious gains will not be achieved until an open, transparent national system is in place to address the problem.
While action at the federal level may be required to address climate change, Canadian provinces maintain a large degree of control over environmental policies, something the federal government should keep in mind when negotiating climate policies internationally, said Keith Stewart of World Wildlife Fund-Canada's Climate Change Campaign. He said that Alberta's oil sands remain a highly visible reminder of Canada's total carbon footprint. Though industry officials continue to stress that the oil sands only account for 4 percent of Canada's total emissions, how the country decides to regulate the oil sands will offer a major signal domestically and internationally with respect to Canada's seriousness to finally address carbon emissions, said Stewart.
Commenting on sub-national action south of the border, Franz Litz of the World Resources Institute noted that U.S. emissions continue to increase despite significant efforts among some states to reduce their greenhouse gas emissions. Three regional state agreements, the Regional Greenhouse Gas Initiative, Midwest Cap and Trade, and the Western Climate Initiative, have emerged in the United States to reduce rising emissions. One of the driving forces behind creating these agreements, noted Litz, is the hope among state governments that their particular regional system will influence how federal policies are eventually designed and implemented.
Shifting to a National System
Although efforts to reduce carbon emissions at the sub-national level were highlighted throughout the forum, several panelists and discussants noted that a national system was required to achieve significant emissions reductions and pointed out the consequences of the largely fragmented regional agreements that have surfaced throughout North America. Roger Gibbons of the Canada West Foundation maintained that multiple regional agreements greatly complicate the North American business environment. According to Gibbons, if Canada is to achieve its stated aspiration of becoming a clean energy superpower, the country must consider the creation of a new national energy policy that meets the country's energy needs while lowering emissions.
Creating a national plan to reduce carbon emissions is not without significant challenges, argued Michael Martin, Canada's chief negotiator for climate change. Martin said that a successful national plan must carefully select the right mixture of policy instruments and technology, while respecting provincial jurisdiction in the environmental realm. Nevertheless, he said, Canada's recent policy that requires major emitting industries to reduce the intensity of their greenhouse gas emissions by 18 percent by 2010 offers a clear indication of the federal government's commitment to address climate change. He also noted that the federal government will continue to encourage provinces to take action against rising emissions.
Claude Carrière, associate deputy minister of Natural Resources Canada, added that Canada should join international efforts to encourage major emitters, such as China and India, to reduce their emissions. He also noted that Canada must keep a watchful eye on international climate policies that could negatively affect Canada's economy. One prominent example of such a policy is Section 526 of the United States' Energy Security Act, which has the potential to prevent the importation of oil from Alberta's oil sands and other carbon intensive oil refining operations. Since Canada's oil and gas industry are essential to the Canadian economy, anything that negatively affects those sectors "warrants our collective attention," said Carrière.
Staying Competitive in a Low-Carbon Future
There is mounting evidence that trade and climate policies are intersecting more than ever before, said Thomas Brewer of Georgetown University. Evidence of this trend can be found in the European Union's recent attempt to include aviation and shipping emissions under the European Union Greenhouse Gas Emissions Trading Scheme (EU ETS), which includes emissions from non-EU airlines. Both sectors, noted Brewer, had been considered off-limits in negotiations leading to the UNFCC and the Kyoto Protocol.
Brewer stressed that as climate policies continue to be developed, it will be imperative for policymakers not to lose sight of the fact that the implications of such policies will vary between sectors from a competitiveness perspective. Consequently, it may be necessary to negotiate sector specific agreements—as the EU is attempting to achieve in its aviation and shipping sectors—that recognize the unique challenges facing key-energy intensive sectors in a carbon-constrained economy.
Rick Hyndman of the Canadian Association of Petroleum Producers added that there are two primary ways to offset the affects of climate policies on international competitiveness. The first is to harmonize climate policies among major trading partners. The second is to implement offsetting border measures, which are essentially tariffs on imports from countries that do not adhere to the same standard of low-carbon policies. Several panelists noted that such border offsetting measures were included in the Lieberman-Warner Cap and Trade Bill. Although the U.S. Senate failed to pass the bill, it did achieve a far greater level of support in Congress and industry circles than previous climate bills.
John Dillon of the Canadian Council of Chief Executives echoed Hyndman's recommendations, stressing that the harmonization of climate policies in North America would be essential in formulating an effective and sustainable strategy to reduce carbon emissions. Dillon maintained that the North American Competitiveness Council could play a key role in facilitating harmonization policies among Canada, the United States, and Mexico. In the absence of harmonization policies or border offsetting measures, Canada could face significant consequences to its economy. Carl Sonnen of Infometrica reminded participants that Canada is a resource-based economy and efforts to reduce carbon measures that target key energy sectors could be a major blow to the country's economy.
Taking the Next Step
The forum featured keynote presentations from Ian Anderson, a member of the ecoEnergy Carbon Capture and Storage Task Force and Dan Gagnier, chief of staff to Quebec Premier Jean Charest. Anderson said that Canada is in a unique position to become a leader in developing and implementing Carbon Capture and Storage (CCS) on a mass scale. The country has the will of industry and government to develop the technology and also has the benefit of numerous geological formations favorable to potential CCS sites. Nevertheless, for CCS projects to move forward significant government funding is still needed. He also stressed that significant legal and regulatory obstacles still threaten the implementation of CCS on a mass-scale and insisted that public education campaigns regarding the relative safety of CCS will be critical to ensure the technology has a role in Canada's efforts to reduce carbon emissions.
Gagnier stated that addressing the Canadian public's growing concern about climate change will require political leadership. He cited the recent Quebec-Ontario cap and trade agreement as an example of the type of "real political leadership" required to address global warming that has been lacking in Canada. Canadian officials and industry representatives must accept that a North American cap and trade market will eventually become a reality. Successfully lowering carbon emissions will require collaboration among federal and provincial officials, as well as industry, said Gagnier, stressing that reducing carbon emissions is simply too big a task for any one sector to take on its own.
Drafted by Ken Crist, Program Associate, Canada Institute