Patrick Grady
Proposed Liberal Kyoto Half Measure is Half-Baked
March 21, 2007

In a White Paper released last week entitled Balancing Our Carbon Budget: A New Approach for Large Industrial Emitters, Liberal Leader Stéphane Dion has proposed an ambitious plan to reduce greenhouse gas (GHG) emissions that goes far beyond what the Government proposes to do through its Clean Air Act. The Liberal proposal would establish an absolute emissions cap for 2008 at the Kyoto target of 6-per-cent below 1990 levels for the three largest industrial emitting sectors of electricity generation, upstream oil and gas, and energy intensive industries, leaving other sectors unconstrained. These account for roughly half of GHG emissions.

The Liberal plan would allocate this cap amongst the Large Final Emitters (LFE) in these three covered sectors as an annual carbon budget. It would set a price of $20 per tonne of excess carbon equivalent (growing to $30 in 2011) to be deposited in a Green Investment Account, which could be used to subsidize green projects to reduce carbon emissions to an amount of $10 per tonne per year over a designated period. In addition, a carbon emission trading scheme would be established and firms would be eligible to invest in green international projects.

The basic premise behind this proposal is that adhering to the Kyoto Protocol makes sense for Canada. Its big advantage from a political point of view is that it seemingly puts all of costs of compliance on the LFEs and, at least in the first instance, not on the voter. However, even granting that the science behind Kyoto, which attributes global warming to GHG emissions, is correct (some doubts still exist in the scientific community even after Al Gore’s Academy-Award-Winning documentary An Inconvenient Truth), it would still create big problems for the economy that are being ignored by Canadian wannabe Greens.

The Canadian economy has grown since 1990 – not shrunk by 6 per cent – because of investment and a growing labour force, fueled by a high level of immigration. And even though GHG emission intensities have declined sharply, overall emissions for LFEs are expected to increase to a level a third higher than the Kyoto target if nothing is done.

Forcing LFEs to comply with Kyoto would have undercut the competitive position of Canadian industry vis à vis two of our most important trading partners the United States and China who are not incurring the costs of meeting Kyoto targets. And Canadian industry has already suffered a deterioration in its competitive position because of an appreciation of the Canadian dollar of over a third from its low due to booming prices for oil and other commodities.

How much would it reduce GHG emissions if Canadian production is cut back because of higher costs while U.S. or Chinese production is stepped up to fill the gap? Are those goods, particularly the ones made in China where coal is the main fuel, likely to have less associated GHG emissions? And don’t Chinese goods already have a large enough share of our market?

The rules of the international trading system need to be fundamentally rethought before Canada should seriously consider imposing tighter GHG emissions on its producers than those of its trading partners. Only if Canada could levy green tariffs on imported goods not meeting GHG emissions standards would it be possible to design a system that would ensure that the decisions of Canadian consumers would actually result in the desired GHG emissions. If efforts were made to do this now, Canada would soon find itself defending its actions against the complaints of our trading partners before the World Trade Organization.

Alternatively, there is the other half of the GHG emissions left out of the Liberal White Paper, namely those by Canadian consumers, governments and businesses other than LFEs. A real serious proposal for the reduction of GHG emissions would impose taxes on Canadian final demand based on its relative GHG intensity, which would be reduced over time in step with decreases in GHG intensity. This would be a market-based type of solution that would provide an incentive to purchase less of those goods and services associated with GHG emissions regardless of where they were produced. Foreign produced goods and services would be taxed at the level of final consumption at the same rates as domestically produced goods and services, putting foreign and domestically produced goods and services on an equal footing.

Today in Canada everybody is understandably concerned about global warming and wants to do something to stop it. The problem is that nobody knows exactly what will work and most of all nobody wants to pay anything. That makes it very tempting for political parties of all stripes to come up with easy feel-good solutions that seem to do something, but that don’t really get to the heart of the issue.

Most fundamentally, there is still the open question of whether the global community will actually be able to get its act together enough and in time to prevent climate change. As the scientists on the Intergovernmental Panel on Climate Change who are behind the Kyoto Protocol would be the first to admit, the Kyoto Protocol, by itself, is nothing more than a tiny baby step in what they think is the right direction. If, as appears increasingly likely with continued population growth and increasing industrialization, the world community fumbles the ball on this one and the climate change turns out to be irreversible, our best strategy may be to spend the mega-bucks we would quixotically blow seeking to comply with Kyoto in adapting to environmental realities beyond our control.