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Economy won't crack under the burden of carbon pricing: Ecofiscal Commission

by Mark Sabourin
EcoLog, 11/20/2015 11:49:00 AM

A patchwork of carbon pricing policies will not wreak havoc on the Canadian economy, according to a new report from Canada’s Ecofiscal Commission. Concerns that carbon pricing will be a job-killer are overblown, it says. Few sectors of the economy are likely to be bruised by carbon pricing, and governments will have tools at their disposal to help them adjust to higher carbon costs.

A national patchwork increasingly appears likely. Prime Minister Justin Trudeau has remained firm in his commitment that the provinces and territories will retain the flexibility to design their own policies and programs, with Ottawa offering financial carrots to ensure that a national target is met.

In the report — “Provincial Carbon Pricing and Competitiveness Pressures: Guidelines for Business and Policymakers”, Canada’s Ecofiscal Commission asks what impact carbon pricing will have on industry’s ability to compete across Canada, and with international competitors.

The answer depends on the industry sector and the province in which it operates. Across the Canadian economy, the impact won’t be substantial. According to the report, “even if 85% of Canada’s current annual GHG emissions (roughly 700 Mt) were priced at $30 per tonne, the revenue raised would be less than 1% of Canada’s national income, as measured by its gross domestic product.”

Using carbon cost and trade exposure as yardsticks, the authors say that no more than 5% of the Canadian economy are likely to feel significant pressure from a carbon cost of $30 per tonne, and the affected industries are disproportionately concentrated in Alberta and Saskatchewan. As carbon prices rise, so too does the percentage of the economy under pressure, but it’s a slow climb. Even at $120 per tonne, only 10% of the economy would feel competitive pressure.

That’s because like most highly developed economies, Canada’s is largely based on services and non-traded goods with low carbon intensities. The authors say that most economic research has so far been unable to document a significant impact of carbon pricing on investment and production.

It doesn’t appear to have had a negative impact in British Columbia (B.C.), the jurisdiction with Canada’s highest carbon price.

Replying via e-mail, Dale Beugin, Research Director, Canada’s Ecofiscal Commission, and one of six authors of the report, told EcoLog News: “We have not found evidence that firms have relocated from B.C. as a result of the carbon tax, though answering that question wasn’t the explicit focus of this research. . . . Future work will explore the impacts of the B.C. carbon tax on vulnerable B.C. industries more specifically.”

What B.C.’s carbon tax has done is allow the government to lower income taxes broadly, giving B.C. the lowest marginal corporate tax rate in Canada.

This means that carbon pricing will likely arm policymakers with tools that can be targeted to vulnerable sectors to help them through the transition to a low-carbon economy. Governments should target their support narrowly to sectors where it is needed, say the authors, because everyone affected by carbon pricing will have an incentive to appeal for support.

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