EXECUTIVE SUMMARY In 2009, Canada finds itself facing both new and familiar climate policy challenges. The past several years have seen the emergence of federal and provincial plans to arrest and ultimately reduce greenhouse gas emissions (GHGs) in Canada. A variety of policy instruments have been ventured? from carbon taxes to trading regimes to technology funds to regulations. A deeper understanding by many Canadian interests of the likely scale of the problem and solutions to it is taking root. Yet, the collective result has been perhaps less than anticipated. Carbon emissions remain on a rising path; Canadian businesses and consumers confront the prospect of a fragmented patchwork of federal, provincial, territorial, and regional carbon pricing policies sprouting across the country and continent; and now we are dealing with the onset of a global economic recession more complicated and profound than we have experienced in decades.

Table of contents Messages About the NRTEE Acknowledgements Executive Summary 1 Setting the Stage 2 Carbon Pricing Policy - Goals and Objectives 3 Carbon Pricing Policy - Essential Design Elements 4 Carbon Pricing Policy - The "Road Map" 5 Carbon Pricing Policy - Outcomes and Impacts 6 Carbon Pricing Policy - Governance and Implementation 7 Conclusion and Recommendations Appendix: Glossary Adobe PDF version (2.4 mb)

But with these challenges come opportunities. A new administration in the United States has committed to significant climate policy action domestically and internationally. A growing international consensus to develop a post-2012 framework implicating all emitters is emerging. And, economic recession will ultimately give way to renewed economic growth, giving Canada the opportunity to position itself now for a truly sustainability-oriented recovery based in part on an effective, unified national carbon pricing policy.

The movement toward a low-carbon world is inevitable. But our place in it is not. Like our economy as a whole, Canada?s long-term competitiveness in a low-carbon future will not be served by inter-jurisdictional carbon competition here at home or by allowing protectionist carbon barriers to be raised at our expense abroad. The link between the two is obvious. Engagement internationally needs to be reinforced by harmonized action nationally. Canada?s national environmental and economic interests jointly demand such an approach.

The National Round Table on the Environment and the Economy believes now is the time to press forward on the design of the right climate policy for Canada and Canadians. A year of research and consideration has reinforced our view that it is urgent to act decisively, even in the face of current economic turbulence and evolving climate science. Now is exactly the time to seize the opportunity before us?of preparing for a sustainable economic recovery and actively engaging the US and our other major trading partners. Now is the time to lay the groundwork for a truly effective long-term climate policy framework through a nationally collaborative approach to a unified carbon pricing policy in Canada and an internationally harmonized approach in North America.

This report recommends a unified carbon pricing policy for Canada?a policy aimed at meeting one clear objective: the greatest amount of carbon emission reductions, at the least economic cost. Following more than a year of research and consultation, our report sets out what we believe is the most effective, realistic, and achievable carbon pricing policy for current and anticipated Canadian circumstances.

The scale of transformation to the Canadian energy system to meet the federal government?s 2020 (20% below 2006 levels) and 2050 (65% below 2006 levels) emission reduction targets should not be underestimated. Greenhouse gases are so widely embedded in the energy we use that to significantly reduce emissions will have wide-ranging economic and social implications. Our collective challenge now is to transition the emerging fragmentation of current carbon pricing policies to a unified policy framework across all emissions nationally. The negative consequence of not doing this, and maintaining this fragmentation of differentiated carbon prices across emissions and across jurisdictions, will be significantly higher economic costs, intensified environmental impacts, entrenched barriers that will make it harder to act in the future, and the real risk of not being able to meet Canadian emission reduction targets.

A Carbon Pricing Policy for Canada

The carbon pricing policy proposed in this report has two main goals. First, it seeks to achieve the Government of Canada?s medium- and long-term greenhouse gas emission reduction targets at least cost. Second, it seeks to minimize adverse impacts of achieving these targets on regions, sectors, and consumers.

A nationally integrated carbon pricing policy is required to meet these goals based on four main elements. At the core is an economy-wide cap-and-trade system to price carbon and provide real market incentives for firms and households in Canada to change their technology choices and behaviour in order to reduce emissions. Complementary regulations and technology policies are then needed to improve the cost-effectiveness of the cap-and-trade system by broadening coverage across all key emission sources, while supporting targeted technology development and deployment. Participation in international emissions markets through trading and credit purchases will help reduce economic costs at home by allowing Canadian firms and consumers access to credible reductions internationally. Finally, a climate governance and implementation strategy is needed to establish new, collaborative institutions and coordinating processes to implement and adapt the carbon pricing policy over time, making sure it sends a clear and certain price signal to industry and consumers, while remaining responsive to new information and situations.

These are our conclusions:

• An economy-wide carbon price signal is the most effective way to achieve the Government of Canada?s medium- and long-term emission reduction targets and reduce cumulative emissions released into the atmosphere.
• That price signal should take the form of an economy-wide cap-and-trade system that unifies carbon prices across all jurisdictions and emissions and prepares us for international linkages with our major trading partners.
• An effective carbon pricing policy needs to find a balance between certainty and adaptability?it should be certain enough to transmit a clear, long-term price signal to the economy upon commencement to encourage technology and change behaviour, yet adaptable to changing circumstances and future learning.
• There is a cost to delay in the form of higher carbon prices later to meet targets, and a cost to maintaining Canada?s current fragmented approach to carbon pricing policies in the form of reduced GDP and higher carbon prices over time.
• Canada?s economy will continue to grow under this policy?it is forecast to be twice as large in 2050 than today?but this will be smaller than if no carbon pricing policy were adopted.
• New federal/provincial/territorial governance mechanisms and processes should be put in place to achieve a harmonized Canadian carbon pricing policy.
• Technology development and deployment, along with the electrification of the energy system, is central to emission reductions and is stimulated through an economy-wide carbon price signal, as well as appropriate public investment in carbon capture and storage and renewable energy.
• Complementary regulations and technology policies in the transportation, buildings, oil and gas, and agricultural sectors are also required to ensure broad-based emissions coverage at an overall lower price, reduce total emissions, and meet government targets.

Guiding Principles for a Canadian Carbon Pricing Policy

Getting started with the right national carbon pricing policy is the first, best step Canada can take to achieve its ambitious medium- and long-term greenhouse gas emission reduction targets. Our research indicates that Canada has the capacity to successfully achieve these targets while maintaining a high standard of living and continued economic well-being. But our research also shows that this transformation will require us, as a country, to take three steps:

First, we need to implement a carbon pricing policy that is both certain and adaptable.
Investors and consumers will have the confidence to change their behaviour if they are certain the policy and prices are real; at the same time, the policy must be responsive to changing information and circumstances to secure our own interests.

Second, we must unify carbon policies and prices here at home. That means transitioning from the current, fragmented patchwork of federal, provincial, territorial, and regional policies to a unified or harmonized carbon pricing policy that covers all emissions in all jurisdictions.

Third, we need to link our carbon pricing policy and trading system with the world next door. Enabling international emissions trading, particularly with our largest trading partner, the United States, will help address competitiveness concerns and manage our costs.

Unify at home; link with abroad; implement with certainty and adaptability. This is the foundation for the specific carbon pricing policy guiding principles we set out below:

• Focus on carbon prices and economic efficiency. With Canadian targets set, an important first principle is to ensure that the policy focuses on economic efficiency so that long-term costs are minimized. This means providing a unified carbon price across emissions and jurisdictions. While adverse impacts on some segments of the economy and society can be expected, these are best dealt with through targeted income support and not through a fundamental dilution of the carbon price signal.
  
  
• Move to uniformly apply the carbon price across all emissions. This will make Canadian carbon policy more cost-effective by avoiding sector-specific exclusions for competitiveness or jurisdictional reasons. While there will likely be adverse and perhaps disproportionate impacts on some, the carbon pricing policy should not deliberately omit emissions as a starting point. Otherwise, overall costs will need to rise accordingly by those

  paying to meet the stated targets, which will be viewed as unfair and inequitable. Using revenues generated by the cap-and-trade system through the auctioning of emission permits provides flexibility within the uniform system to address specific economic or societal needs arising from the carbon pricing policy.
  
  

• Contain costs initially and then transition the policy to deliver more certain emission reductions over time. Uncertainties dominate climate policy, including abatement response, cost uncertainties, and most importantly the carbon prices that major competitors will be imposing on their industries. These uncertainties indicate a need for climate policy to initially contain costs as uncertainties are revealed. But with cost containment comes reduced emission reductions that must be balanced against achieving our targets. The carbon price should therefore align with the emissions reduction targets. Ultimately, there is a need to transition the initial cost containment approach to one focusing on getting the emission reductions we need through higher carbon prices over time.
  
  
• Position Canada to participate in international policy frameworks. Given the very high carbon prices required to attain domestic reductions sufficient to hit our long-term targets, a policy that seeks real and verifiable reductions from outside Canada to lower domestic costs makes sense. To implement this, Canada?s carbon pricing policy should be designed to eventually link with major trading partner systems, particularly those of the United States.
  
  
• Develop governance mechanisms to set policy but also to update expectations about future carbon prices. Policy credibility over the long term is required to drive needed technology investment and behavioural change. Creating dedicated governance mechanisms that implement the carbon pricing policy in a transparent and accountable manner is central to maintaining this credibility. This requires a rules-based approach that minimizes political interventionism and future policy backsliding. Monitoring and reporting progress publicly is equally important as part of updating expectations that carbon prices or emission quantity restrictions will need to rise or fall, relative to that progress.

RECOMMENDATIONS

This report serves as a comprehensive and integrated recommendation for developing and implementing a Canadian carbon pricing policy. To reinforce the report?s research, analysis, and conclusions, the NRTEE highlights the following specific recommendations for consideration:

1. Unify carbon policies and prices across emissions and jurisdictions based on three principal policy elements:

• an economy-wide cap-and-trade system transitioned from current and planned federal, provincial, and territorial initiatives;
• complementary regulations and technology policies in the transportation, buildings, oil and gas, and agricultural sectors; and
• international carbon abatement opportunities that are credible, affordable, and sustainable.

2. Ensure the unified Canadian carbon pricing policy can link with current and proposed international systems and, most particularly, with a prospective trading regime likely to emerge in the United States, to ensure compatibility in pricing and action.

3. Use generated revenue from permit auctions first and foremost to invest in the required technologies and innovation needed to meet the Canadian environmental goal of reduced GHG emissions.

4. Transition the current fragmented approach to carbon pricing across jurisdictions and emissions to a unified Canadian carbon pricing regime as soon as possible and no later than 2015.

5. Establish a dedicated carbon pricing governance framework based on adaptive policy principles to develop, implement, and manage the unified carbon pricing regime over time with the following elements:

• Federal/provincial/territorial collaboration through an ongoing forum, which would allow governments to coordinate and harmonize efforts and actions in support of the unified carbon pricing policy, and regularly consult and engage with each other to maintain progress and direction on carbon emissions pricing revenue distribution and climate policy development.
• An expert Carbon Pricing and Revenue Authority with a regulatory mandate to collect auction revenues from emitters, set carbon pricing schedules and compliance rules, establish permit allocation rules based on principles and policy directions set by the federal government, monitor and enforce compliance, implement procedures for monitoring and reporting emissions, and ensure confidence in the long-term robustness of the policy.

• An independent, expert advisory body to provide regular and timely advice to government on interim targets for each compliance period; on the distribution of auction revenue to meet environmental, economic, and social objectives as required; on ongoing evaluation and assessment of the carbon pricing regime; and on any proposed adjustments to the policy and pricing framework for decision makers to consider.