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6.3 Implications of Linkages and International Purchases
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Purchasing permits internationally, whether by government or by firms, would reduce the amount of abatement required domestically to comply with the government’s reduction targets. Purchasing international carbon credits might be appealing especially if abatement costs domestically (to reach a given target) significantly exceed the price of international permits. However, if Canada purchased a significant amount of permits internationally, there could be important repercussions on Canada’s terms of trade. For example, purchasing 200 million tonnes of emission permits annually at a cost of $25/tonne CO2e would cost $5 billion annually. Canada’s balance of international trade since 2002 has fluctuated from $48 to $65 billion, so this volume of permit purchases could erode Canada’s trade position by as much as 10 percent, with likely impacts on exchange rates and domestic consumption.78
Analysis of the impact and implications of allowing international purchases to help satisfy Canadian climate change targets requires assumptions about the future prices of those permits and credits. Such assumptions are highly uncertain. For an analysis of impacts using the D-GEEM model, global cost of mitigation estimates from the Intergovernmental Panel on Climate Change were used, which show carbon prices rising from between 20 and 80 US$/tonne CO2e by 2030 to between 30 and 155 US$/tonne CO2e by 205079. To reflect the uncertainty in these projections, three scenarios are conducted in which the international carbon permit price varies from the low end of these forecasts to the high end, assuming a fast and deep pricing policy.
The results of the D-GEEM analysis suggest that investing in international emission permits reduces the negative impact on Canada’s economic output and consumer welfare than would otherwise be the case through domestic action alone. As shown in Table 7, these values reach over $18 billion annually in some scenarios. Despite the high apparent cost of the permits, modeling results suggest that enabling such purchases allows for Canada’s reduction targets to be achieved with a much smaller impact on Canada’s economic output and consumer welfare. For example, at the medium international permit price, impacts on consumer welfare are reduced roughly in half from -3.19% to -1.61% in 2050. Similarly, impacts on gross domestic product are reduced from -4.83% to -2.28%. These impacts are mitigated because the international purchases can help to avoid some of the most costly domestic emission abatement opportunities.
Economic modelling using CIMS supports this analysis. As shown in Table 8 and Figure 15, the analysis suggests that allowing international permit purchases could substantially reduce the costs of abatement for Canada. A scenario that included international permits as an approach to meeting reduction targets could reduce the required carbon price substantially, by 20% or greater. Such reductions could thus improve economic efficiency of a carbon pricing policy by reducing costs, but could also improve the political acceptability of pricing policy. However, relying on more international emission reductions may reduce the role of low-carbon technological investment within Canada, potentially making additional, future domestic reductions more challenging.
