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Federal carbon price walkback? It's less than meets the eye

by Mark Sabourin
EcoLog, 8/3/2018 12:20:00 PM

The federal government’s decision to relax output-based standards for most of industry is not the grand walkback from carbon pricing that headlines have been reporting, according to Jason Dion, lead researcher for Canada’s Ecofiscal Commission.

There has been no change to the $20 per tonne carbon tax that is planned as part of the federal backstop beginning January 1, 2019, Dion explained to EcoLog News. “The incentive to reduce emissions is still there,” he says. “If a company can cut back emissions by a tonne, they’ll save $20 in the first year.”

The federal backstop treats large industrial emitters differently because of competitiveness concerns. Their carbon tax is rebated until their emissions intensity reaches a sector-specific benchmark. It’s the benchmark that’s being changed. For most large emitters, it had been 70% of the sector’s average emissions intensity. Now it will be 80%. For four industry sectors at particular risk, it will be 90%. Once a facility crosses that benchmark, it will be required to remit compliance units acquired on the open market or forgo further carbon tax rebates.

That’s not to suggest it’s a trivial matter, says Dion, and it remains to be determined if the government went too far. The decision follows months of consultation with industry, and though he admits to having no privileged insight into what was said behind closed doors, Dion expects some legitimate economic and environmental concerns were raised.

The international competitive environment has changed dramatically since the initial 70% benchmark was proposed. Corporate tax cuts in the United States (U.S.) have made that market more attractive to investors, and the U.S. president’s mercurial approach to trade has likely added to concerns among the captains of Canadian industry about their ability to compete in the U.S. market.

Tied to those concerns is the real risk of carbon leakage – always an issue when carbon pricing is on the table. If carbon pricing in Canada causes production to shift elsewhere, Canada may see a decline in domestic emissions without impacting global emissions, which is the whole point.

If that happens, the problem can’t be corrected by rolling benchmarks back, says Dion. However, if it’s found that the new benchmarks are not stringent enough, they can be tightened, and a gradual tightening has always been part of the plan.

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