6.1 Purpose

The purpose of any carbon pricing implementation strategy is to put in place a carbon pricing policy that meets our environmental targets in the most cost-effective manner, and is adaptable to changing environmental and economic circumstances and opportunities. As discussed in Chapter 3, the carbon pricing policy must send a price signal to the economy that is both certain and credible now, but also responsive and adaptive over the long term. It must be certain and credible in order to change behaviour and drive investment through clear “rules of the game,” yet responsive and adaptive to new economic and environmental circumstances and information.

While policy adaptability and policy certainty are essential elements for any carbon pricing policy, there are trade-offs between the two criteria. If a policy has been designed to be flexible or changeable at some future time, uncertainty as to the future nature of the policy follows. On the other hand, an attempt to fix policy in advance would imply a failure to adapt to new information, such as evolving climate science or the policies of Canada’s trading partners. Effective carbon pricing policy needs to find a balance between adaptability and certainty—it should be adaptable to changing and unknown future circumstances but certain enough to transmit a robust, long-term price signal to the economy upon commencement. Governance institutions and processes are needed to ensure this balance occurs.

While there are various models to govern national carbon pricing policies, the NRTEE believes it is important to identify the principles that should be used in developing institutions for carbon pricing policy, and the desirable characteristics of any proposed governance institutions. These principles can serve as a guide in the transition from the current fragmentation of carbon pricing policies across jurisdictions in Canada toward a unified domestic carbon pricing policy that could in turn link with the US and our other major trading partners.

Five principles for carbon pricing policy governance:

• Cost-Effectiveness—focusing on meeting the environmental goals at the lowest feasible costs

• Inclusiveness—all jurisdictions are implicated in participating in policy design and implementation

• Fairness—recognizing that some regions, industry sectors, and income groups will be impacted more than others

• Transparency—research, data, and information are independently collected, verified, and publicly disseminated

• Communication—regular and public explanation of decisions is provided

6.2 Rules-Based Governance

The long-term nature of climate-change-mitigation policy increases the prospect of policy shifts and turns across successive governments and in response to short-term concerns. This increases uncertainty, not reduces it, and can act as a barrier to needed investment and technological innovation. But the scale and scope of essential transformation to our energy systems to bridge the current climate divide necessitates integrating mechanisms and processes that can build policy consensus and action to meet the deep emission reduction targets we have already set for ourselves.

Indeed, a well-designed institution or process with transparent rules for policy adjustment will increase credibility and foster certainty, thereby reducing investment risk. It sends the signal to firms and individuals that policy changes will occur only under specific conditions, reducing the uncertainty associated with future policy adaptations and the probability of a high-cost policy shift at some unforeseen juncture. Further, a clearly defined process with longer transition periods allows firms and individuals to better anticipate potential policy shifts and plan accordingly. Similarly, a transparent process for policy adjustments can reduce transaction costs associated with this low-carbon transition.

Communicating credibility and commitment is an important objective for effective long-term climate policy. This can be done through policy, regulations, institutions, and processes. It can also be done through legislation. An example is the UK Climate Change Act, which requires the government to set five-year carbon budgets, starting with 2008–2012. Each five-year budget must be consistent with medium- and long-term targets, and is monitored by an independent body of experts. It provides interim or incremental carbon-emission mitigation through the five-year budget cycle, which is updated annually. By linking the specific short-term budgets with a more general planned trajectory for emissions reductions, this approach offers more assurance of longer-term policy credibility without precluding adaptive steps along the way.

A Canadian example is seen in the British Columbia carbon tax. The level of the BC tax is set by legislation, thus establishing short-term certainty, with scheduled rises by $5 per tonne each year, from $10 per tonne in 2008 to $30 per tonne in 2012. The limited time horizon on the schedule allows the stringency to be adjusted after four years. To provide further certainty over the long term, BC has legislated targets for 2020 and 2050 and has also set short-term targets for 2012 and 2016 to guide progress.

6.3 Reviewing Progress

Regular, scheduled reviews of policy are an important part of effective policy adaptation. It allows for stock-taking and assessment. At each period of review, targets, policy stringency, or other policy design elements can be adjusted. Data regarding the performance of the policy should be collected and reported publicly. Key metrics could include, for each region and sector, the price of emissions permits, number of permits traded, tax revenue generated, changes in sector output, emissions intensities, and changes in technology investment. Similarly, the pricing institution should evaluate the impacts of the policy.

An important prerequisite of review periods is therefore regular monitoring of the impacts and effectiveness of the policy. Collecting this data is critical as review periods should be informed by good information; policy evaluation depends on policy monitoring. An important component of this is emissions forecasting. A 2008 report by the NRTEE, entitled GHG Emissions Forecasting: Learning from International Best Practices, offers a review and assessment of this issue from a governance perspective with the following conclusions:

• Use of an independent forecasting agency is preferable to provide more accurate and transparent emission forecasts for consideration by government policy makers, external analysts, and Parliamentarians and to facilitate ongoing audit and evaluation.

• Multi-source emissions forecasting from a group of individual government departments can be accurate, but works best both when centrally coordinated and with independent authority by the central coordinating department or agency to question other departmental forecasts.

• Regular independent reviews, audits and evaluations of government forecasts and forecasting methods by a third-party agency or process helps ensure accuracy of forecasts and that forecasting methodologies are up-to-date and robust.

• Forecasting must be sufficiently resourced and financed by governments to ensure data are up to date and most recent improvements in forecasting methodologies are incorporated for the benefit of policy makers taking decisions based on these forecasts.

• Regular, ongoing evaluation of past forecasts for accuracy and effectiveness is necessary to ensure continuous improvement of government forecasting methodologies and approaches.

• Ensure transparency and clarity with respect to key assumptions and methods.

6.4 Climate Policy Governance In Canada

Canada’s jurisdictional framework and circumstances add a level of complexity to the implementation and governance of a national unified carbon pricing policy. Currently, various governments are proceeding at varying speeds and stringency to establish and implement some form of carbon pricing policy. With the federal, provincial, and territorial governments all having constitutional authority to implement their own carbon pricing policies, transitioning from the current patchwork approach to a unified, national approach raises some key issues:

• Our research shows that while the transition to a unified carbon price will lead to significantly lower carbon costs overall from the current patchwork, greater costs will be likely borne by some provinces more than others given the carbon intensity of their industries and economy.
  
  
  
• In the movement toward a unified carbon price, there is a risk of a negative legacy of instruments toward harmonization; that is, some pricing instruments currently in place in some provinces might be less effective than those in others, or that will ultimately be proposed nationally.
  
  
  
• While the federal government has clear authority to set the national carbon price and targets, no established intergovernmental mechanism or process exist to bring provinces and territories together to forge a unified policy approach or carbon price.

In the NRTEE’s view, implementing the proposed carbon pricing policy will require a reanimation of federal/provincial/territorial cooperation on climate policy. A unified carbon pricing policy means effectively moving from a focus on equivalency to a focus on standardization in domestic cap-and-trade regimes. Efforts will need to be made to settle on a set of standards that define and underpin carbon as a traded commodity. A movement to standardization with clear milestones will then smooth the transition for businesses and households to a single unified system.

A hierarchy of potential governance structures may be considered as part of the implementation process, based on the transition phase of the Canadian carbon market. These range from the most straightforward—common and shared data collection and dissemination—to a more integrated, harmonized approach involving delegated advice and/or decision-making authority to independent expert bodies. Given the highly technical and political nature of climate policy, there is value in considering the role of independent, expert, or third-party advisory or decision-making bodies to assist governments, Parliament, and legislatures in deciding carbon pricing policy issues. The UK and Australia have recently established bodies to undertake some of these roles. A dedicated institution with the mandate to regularly review and report on carbon pricing policy issues sends an additional signal of certainty and confidence to the market that sudden shifts in pricing approaches will not occur. Establishing a clear method to credibly manage the carbon price over time could send the signal that the policy will be long lasting and that government is committed to its long-term implementation.

A brief description of the three main governance roles is set out below. They may be considered on their own or combined under various models.

• Information role. Independent data collection, monitoring, reporting and evaluation of carbon emissions and pricing patterns to allow for policy adjustments on an ongoing basis. Coupled with a forecasting function setting out a range of possible emission scenarios, this institution could serve to provide annual information to governments, industry, and Canadians on carbon-emission reduction progress. Possible models that could be drawn from include the US Energy Information Administration, Canadian Institute for Health Information, National Energy Board, and Statistics Canada.
  
  
  
• Advisory role. Advise governments on key aspects of the carbon pricing policy, such as carbon budgets, emissions trading, pricing, revenue recycling and distributional considerations, and competitiveness impacts. This could be coupled with the information role set out above. This independent expert advisory body would have influence and third-party credibility that could help governments make difficult decisions. Possible models that could be drawn from include the UK Committee on Climate Change and the BC Climate Action Team.
  
  
  
• Decision-making role. Responsible for making certain decisions in the implementation of the policy, including setting interim targets, carbon budgets, and permit allocation. This could be an independent body or a new federal/provincial/territorial institution to ensure more direct political accountability. A possible model that could be drawn from is Australia’s Carbon Pollution Reduction Scheme regulator.

A notional mapping of roles and responsibilities for a Canadian carbon pricing policy is provided in Table 2 below.

6.5 Moving Forward

The importance of an effective governance regime for Canadian carbon pricing policy cannot be overstated. Beyond the additional cost burden associated with policy fragmentation, a unified domestic carbon pricing policy is a prerequisite to establishing an effective North American trading system. “Getting our own house in order” can only strengthen any overtures to a new US government intent on stronger international climate policy action. Current regional initiatives such as the Western Climate Initiative and the Regional Greenhouse Gas Initiative with their cross-border character could well find themselves integrating into a broader North American system once a pan-Canadian carbon pricing policy is adopted.

Similarly, there is a need for a transparent governance regime to address the regional aspects of Canadian climate policy. The linkage of energy and environment policy objectives in determining climate policy is real. Integrating the two so as to ensure the continued economic contribution to Canadians from the country’s significant energy sector is an important long-term consideration. Moving from the current fragmented approach under federal leadership and with provincial/ territorial collaboration is, however, essential to establishing and implementing a unified carbon pricing policy that will achieve deep emission reductions at the lowest possible costs. A dedicated governance institution or process that can facilitate the transition process will help demonstrate that regional impacts and concerns are being actively considered and addressed.

The key features of an effective governance framework for a Canadian carbon pricing policy include the following:

• A clear and agreed policy road map set out by governments to provide certainty in the short-term through incremental, measurable milestones of a carbon price and establishment of trading systems.

• Specific timelines for progress along the way leading to the 2020 and 2050 medium- and long-term targets by establishing, for example, five-year, rolling carbon budgets to help inform industry, governments, and others on what must be accomplished to meet our goals.

• Regular and independent monitoring, evaluation, and reporting of progress to governments and the public so adjustments can be considered.

• Creation of an expert agency empowered with regulatory and operational decision-making authority over the details and implementation of the auction and trading rules.

• Creation of an appropriate federal/provincial/territorial governance mechanism and process to enhance collaboration and regularly consider progress and direction on carbon pricing and climate policy development.

• Creation of an independent, expert advisory committee to examine and make recommendations to government on key aspects of overall Canadian climate and carbon pricing policy.

• Using the Office of the Auditor General of Canada to independently report on the collection and disbursment of auction revenue.

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