SHARING THE BURDEN: CANADIAN GHG EMISSIONS 1

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Paul Boothe and Félix-A. Boudreault Lawrence National Centre for Policy and ManagementIvey Business School at Western University

SHARING THE BURDEN:CANADIAN GHG EMISSIONS

SHARING THE BURDEN: CANADIAN GHG EMISSIONS

© 2016, Lawrence National Centre for Policy and ManagementThe views expressed in this paper are our own and should not be attributed to any other individual or organization. This research was supported, without editorial input, by the Ontario Ministry of Environment and Climate Change. Such support does not indicate endorsement of the contents of the paper by the Government of Ontario. We are grateful to Christopher Frankel for comments on an earlier draft.

SHARING THE BURDEN: CANADIAN GHG EMISSIONS 3

EXECUTIVE SUMMARY

• CanadahasadoptedanambitiousGHGemissionstargetof524milliontonnes(Mt)peryearby2030.Thecurrent(2013)levelofemissionsis726Mt.

• UndertheCanadianConstitution,theresponsibilityforenvironmentalstewardshipissharedbyfederalandprovincialgovernments.

• Themostdifficultissuetoresolveinstructuringanymulti-governmentcollaborationtoreduceGHGemissionsisburdensharing.

• Inthispaper,weoutlinetherationalesforthreealternativeapproachestoburdensharing:Egalitarian(i.e.,basedonequalpercapitasharesofnationalemissions),Historical(i.e.,basedonhistoricalprovincial/territorialsharesofnationalemissions)andEfficiency(i.e.,basedonsharesofemissionsreductionsimpliedbytheapplicationofanationalcarbonpricesufficienttoachieveagiventarget).

• UsingCanada’s2020emissionstargetasanillustration,weshowtheimplicationsofthethreeapproachesandcomparethemtoexistingprovincialtargets.

• Ourillustrationshowsthatwhilerationalesdiffersubstantially,thepracticalimplicationsoftheHistoricalandEfficiencyapproachesarecloselyalignedandroughlyconsistentwiththetargetsofthreeofthefourlargestprovincialemitters:BC,OntarioandQuebec.

• ThisresultsuggeststhatsomecombinationoftheHistoricalandEfficiencyapproachestoburdensharingcouldformthebasisforafederal-provincialcollaborationtomeetCanada’s2030GHGemissionstarget.

PAUL BOOTHE AND FÉLIX-A. BOUDREAULT

SHARING THE BURDEN: CANADIAN GHG EMISSIONS

1. In certain cases, regulatory approaches can complement explicit carbon pricing policies. Examples include vehicle regulations and a ban on coal-fired electricity generation, both of which have high implicit carbon prices.

2. Boothe, Paul and Félix Boudreault. By the Numbers: Canadian GHG Emissions. Lawrence National Centre for Policy and Management: London, ON, 2016. Available at: http://www.ivey.uwo.ca/cmsmedia/2112500/4462-ghg-emissions-report-v03f.pdf

INTRODUCTION

ThereisactuallyalotofconsensusamongpolicymakersonanumberofcriticalissuesrelatedtoclimatechangeandGHGreductions.Forexample,mostwouldagreethattherapidbuild-upofGHGsintheatmosphereisresponsiblefortheclimatechangestheworldisexperiencing.MostwouldalsoagreethathumansinthelastcenturyarelargelyresponsibleforthegrowingconcentrationsofCO2andotherGHGs.Further,mostwouldagreethatarapiddecreaseinGHGemissionsisessentialtolimitingthedamagecausedbyman-madeclimatechange.Finally,thereisagrowingconsensusthataneconomicpolicytoolthatimposesapriceoncarbonemissions,suchasacarbontaxorcap-and-tradesystem,hasthebestchanceoftacklingtheprobleminaneconomically-efficientway.1

Wheretheconsensusbreaksdownisonhowweshouldsharetheburdenofclimatechangeaction.Indeed,burdensharinghasbeenattheheartofthefailureofanumberofinternationalmeetingsonclimatechangeoverthelast20years.However,thelatestUNFCCCmeetinginParisinvolvedanewapproach.Countrieswereaskedtobringwhattheycouldoffertothetable(eventhough,inaggregate,itfallsshortofwhatisneededtolimittheglobaltemperatureriseto1.5-2degreesCelsius),committorigorousmonitoringofemissionreductionefforts,andtoreconveneonaregularbasistostrengthentheambitionofnationalpledges.

InCanada,thesameburdensharingdynamiccomplicatesdiscussionsofclimatechangeactionbetweengovernmentsandsectorsoftheeconomy.Thesediscussionsinvariablyinvolvecompetingnotionsofefficiencyandequity.Inthefirstpaperinthisseries,welaidoutthesimplearithmeticofCanadianGHGemissionsandshowedthegap

betweenexistingpoliciesandthenationaltarget.2Akeyobservationthatemergedwastheenormousdiversityinemissionsacrossprovincesandterritories.

Thediversityisrelated,inpart,totheunevendistributionofresourcessuchasoilandgasreservesandthepotentialforhydroelectricpowergenerationacrossthecountry.ThediversityisaparticularchallengeoftheCanadianfederationthathastestedtheingenuityofCanadianpolicymakersmanytimesover.

Inthispaper,wetacklethesensitiveissueofburdensharing.Webeginbylayingoutsomealternativeapproachestoburdensharingandtheirrationales.UsingCanada’s2020targetasanillustration,wethenshowthepracticalimplicationsofeachapproachandconsiderhowtheymightbeemployedtoformthebasisofaplantomeetCanada’s2030GHGemissionstarget.

ALTERNATIVE APPROACHES TO BURDEN SHARING

Economistsconsideringtheproblemofburdensharingtypicallystructuretheiranalysisalongtwodimensions:efficiencyandequity.Wecanthinkoftheefficiencydimensionasmakingtheeconomicburdentobesharedassmallaspossible.Theequitydimensionisconcernedwiththefairnessoftheparticularburdenassignedtoeachparty.Notsurprisingly,differentnotionsofequityexistandone’spreferrednotionisoftenalignedwithone’sowninterests.Asrepresentativesoftheirvoters,provincialandterritorialleaders’notionsoffairnessarenodifferentinthisrespect.

Thetextbooksolutiontoensuringeconomicefficiencyistoequatethemarginalpriceofcarbon(i.e.,thepriceofthelastunit)acrossregionsandsectors.Thisistoensurethatthecheaperopportunitiesforreductionsareadoptedfirstinordertominimizetheoverallcostofadjustment.Operationalizingthisnotioninpolicyisusuallydonebysettinganeconomy-widecarbonpricethroughataxonemissions,orsettingupanauction-based,economy-wide

SHARING THE BURDEN: CANADIAN GHG EMISSIONS 5

reductionburden:(1)differencesineconomicstructure,(2)differencesinenergysectorstructureandrenewableenergypotential,and(3)differencesbetweenmemberstates’standardsofliving.TheBSAwasrevisedforthe2020commitments,thoughtheprinciplesremainedthesame.Intheend,thisburdensharingapproachresultedinexplicitrecognitionofequitybasedonability-to-payprinciples,usingrelativeGDPpercapitalevelsofmemberstates.Forexample,Bulgariawasassigneda+20percentemissionstargetastheyhadthelowestGDPpercapita,whileIrelandandLuxembourgreceivedthemoststringenttargetwith-12percentgiventheirhighGDPpercapitaatthetime(2008).Ability-to-payequityprincipleswerealsoreflectedintheallocationapproachfortheEUEmissionsTradingScheme(ETS)forindustrialandpower-relatedemissions,where90percentofallowancesweretobeauctionedandtheremainingallowancesweretobedistributedfromcountrieswithhighGDPpercapitatothosecountrieswithlowGDPpercapita.

BURDEN SHARING IN PRACTICE

Noneoftheapproachestoburdensharingweconsiderareimmunetocriticismandgovernmentswithdifferentinterestsarelikelytofavourdifferentones.Nosingleapproachhasarationalesocompellingthatallgovernmentswouldlikelysupportit.Inparticular,provinceswithrelativelyhighemissionspercapitaarelikelytofavourallocationsbasedonhistoricallevels,whilethosewithrelativelylowemissionspercapitaarelikelytofavourallocationsbasedonequalpercapitashares.Assumingthatthefederalgovernment’sinterestistominimizetheoveralleconomicburdenofmeetingthetarget,itspreferredchoicewouldbebasedonacommoncarbonpriceacrossjurisdictions.

capandtradesystemthatallowsthemarkettodetermineacommoncarbonprice.Inthepracticalworldofpolicysuchpoliciesignorethelumpinessofemissionsandthefactthatthecapitalthatproducesemissionsissometimeslonglivedandwillonlybereplacedperiodically.

Incontrast,thereisnosingletextbookapproachtoestablishingequityinallocatingtheemissionsreductionburden.Approachesincludeegalitariannotionsoffairness,i.e.,allcitizenshavingequalclaimsonallowableemissions,orconsiderationofrelativeability-to-pay,asisthecasewithincometaxes,orhistoricalsharesofemissionsperjurisdiction.Eachoftheseapproacheshasweaknesses.EqualpercapitaallocationsignorethedifferentcircumstancesofprovincesandterritorieswithrespecttothestructureandGHG-intensityoftheireconomies.Theability-to-payapproachignoresthefeedbackbetweenemissionreductionsandprovincial-territorialincomelevelsthatmaydifferacrossjurisdictionsorsectors.Historicalsharesignorepastactionstoreduceemissionsandinvestmentdecisionsmadeingoodfaithinpreviousclimatepolicyregimes.

ComplexitiesarisingfromdifferingnotionsofequityarenotuniquetoCanada.Forinstance,theEuropeanUnion(EU)actsasaPartytotheUNFCCCandmakescommitmentsonbehalfofallofEUmembers.TheEUthensharestheburdenamongmembercountries.ForitsKyototarget,theEUcommittedtoreducingitsemissionsby8percentfortheperiod2008-2012from1990levels.ApoliticalBurdenSharingAgreement(BSA)wasthenagreedin1997toensureaccountabilitybyeachmemberstate(PhylipsenandBlok,2013).3

TheEUBSAwasbasedonaso-calledTriptychapproachtoburdensharinginwhichthreemajorfactorsplayedintheallocationoftheemissions

3. Phylipsen, D, and K. Blok (2013). European experiences with burden sharing in climate change. Phylipsen Climate Change Consulting.

SHARING THE BURDEN: CANADIAN GHG EMISSIONS

However,thefactthatdifferentgovernmentshavedifferentrationalesmotivatingtheirapproachtoburdensharingdoesnotmeanthatagreementonhowtoachieveCanada’s2030GHGemissionstargetisimpossible.Inpractice,whatmattersishowmuchtheallocationsbasedontheserationalesdifferandhowmuchtheydifferfromwhatprovinceshavealreadypledgedtodo.

Toinvestigatethepracticalimplicationsofsomeofthedifferentapproaches,webuildontheresultspresentedbyBohringeret.al.(2014)4forCanada’s

2020emissionstargetsetbyPrimeMinisterHarperinCopenhagenin2009.OuranalysisissummarizedinTable1andFigure1.

Table1showsthedifferentallocationsofGHGemissionsbyprovinceforthreeapproachestoburdensharing:Egalitarian,HistoricalandEfficiency.5Canada’s2020targetis17percentbelowthebenchmark2005level,representing622MtofCO2,whichtranslatesto19percentbelow768Mt-EnvironmentCanada’sestimateofbusiness-as-usual(BAU)emissionsin2020.6

4. Böhringer, Christoph and Rivers, Nicholas and Rutherford, Thomas F. and Wigle, Randall, Sharing the Burden for Climate Change Mitigation in the Canadian Federation (July 6, 2014). ZenTra Working Paper in Transnational Studies No. 30 / 2014. Available at: SSRN: http://ssrn.com/abstract=2386508 or http://dx.doi.org/10.2139/ssrn.2386508. We are grateful to Nicholas Rivers for giving us access to some unpublished results related to the paper.

5. We omit the Ability-to-Pay approach, since provincial redistribution in Canada is done via the federal Equalization Program. 6. Canada’s Second Biennial Report on Climate Change (February, 2016). Available at: https://www.ec.gc.ca/GES-GHG/default.asp?lang=En&n=02D095CB-1

TABLE 1: DIFFERENT ALLOCATION SCENARIOS FOR 2020

BAU (2020) Targets Egalitarian Historical (2013) Efficiency

Mt Mt % of BAU Allocation(Mt)

Δ withTarget % of BAU Allocation

(Mt)Δ withTarget % of BAU Allocation

(Mt)Δ withTarget % of BAU

NFLD 9 9 98% 9 1 104% 7 -1 82% 8 -1 84%

PEI 2 2 90% 3 1 129% 2 0 77% 2 0 75%

NS 15 18 121% 17 -1 111% 16 -3 104% 11 -7 76%

NB 17 15 87% 13 -1 79% 13 -1 79% 14 -1 81%

QC 85 72 85% 144 72 170% 71 -1 83% 75 3 88%

ON 171 155 90% 240 85 140% 146 -8 86% 151 -4 88%

MB 22 18 80% 22 5 102% 18 1 83% 20 3 92%

SK 75 56 74% 20 -36 26% 64 9 85% 57 1 75%

AB 297 277 93% 71 -206 24% 229 -48 77% 221 -56 75%

BC 72 43 60% 81 38 113% 54 10 75% 62 19 87%

Territories 3 3 104% 2 -1 68% 2 -1 58% 2 -1 75%

Total 768 667 87% 622 -45 81% 622 -45 81% 622 -45 81%

Column 1 2 3 4 5 6 7 8 9 10 11 12

Sources: Authors’ calculations and Environment Canada (2016), Boothe and Boudreault (2016) and Bohringer et.al. (2014).

SHARING THE BURDEN: CANADIAN GHG EMISSIONS 7

aboveitspledge,Albertawhoseallocationis48MtbelowitspledgeandBCwhoseallocationis10Mtaboveitspledge.

Columns10to12correspondtotheEfficiencyapproachtoburdensharing,i.e.,theallocationobtainedusingacommoncarbonpriceacrossthecountry,assuminginter-provincialtransfers.10Lookingatcolumn11weseethatonceagainallocationsarewellalignedwithprovincialpledgeswithtwonotableexceptions.Alberta’sallocationis56MtbelowitspledgeandBC’sallocationis19Mtaboveitspledge.

Aproxymeasurefortheamountofadjustmentnecessaryforeachprovincetomeetitstargetorallocationunderthethreeburdensharingapproachesisgiveninthecolumnsheaded“PercentofBAU”.Thepercentagespresentedincolumns3,6,9and12arenormalizedbytheforecastofprovincialemissionsin2020inabusiness-as-usual(BAU)scenario.

TheCanadianBAUaggregatefor2020isforecasttobe768Mt(column1).Wefocusonthefourlargestemitterswho,inaggregate,representabout80percentoftotalemissions.Lookingfirstattheestimatedadjustmentsrequiredtomeettheirtargets(column3),weseethattheyrangefrom40percentinBCto7percentinAlberta.11Thiscanbeinterpretedasthelevelofeachprovince’sclimatechange‘ambition’inthejargonofGHGreductions.

TurningtotheamountofadjustmentneededundertheEgalitarianapproach(column6),theallowableemissionlevelsin2020rangefrom170percentinQuebecto24percentinAlbertarelativetoBAU.UnderthisapproachQuebec,OntarioandBCare

Columns2and3correspondtoemissiontargetspledgedbytheindividualprovinces.7Weseethattheysumto667Mt–45MtmorethanthenationaltargetsetinCopenhagen.Thus,evenifeveryprovinceachievedtheirtargetlevelofemissionsin2020(which,givencurrentprogress,isnotlikely),8Canadawouldbesubstantiallyoveritsnationalpledgeof622Mt.

Columns4to6presenttheallocationsimpliedbytheEgalitarianapproachtoburdensharing,i.e.,thedistributionofthereductionburdeninproportiontoeachprovince’spopulation.Byconstruction,allocationssumtothenational2020target.Column5comparestheallocationwiththeprovincialtargets.WeseethatfortheAtlanticProvincesandtheTerritories,percapitasharesandprovincialtargetsarewellaligned.ThepledgesofQuebec,OntarioandBCaresubstantiallylowerthantheirpercapitashareswhilethepledgesofSaskatchewanandAlbertaaresubstantiallyhigherthantheirpercapitashares.Inotherwords,undertheEgalitarianapproach,Quebec,OntarioandBCwouldreceivefarmoreemissionsallowancesthanwouldbeneededtomeettheirtargetswhileAlbertaandSaskatchewanwouldreceivesubstantiallyfewerthanneededtomeettheirtargets.

Columns7to9correspondtotheHistoricalapproachtoburdensharing.Inthisapproach,sharesofthenationaltargetareallocatedbasedonahistoricalstandard.Inourillustration,weusethemostrecentlyavailabledata(2013)publishedbyEnvironmentCanada.9Fromcolumn8weseethat,withsomenotableexceptions,historicalallocationsandprovincialpledgesarewellaligned.TheoutliersareOntario,whoseallocationis8Mtbelowitspledge,Saskatchewanwhoseallocationis9Mt

7. Manitoba does not have a 2020 target so its 2012 target of 6% below 1990 is used as a proxy.8. Boothe, Paul and Félix Boudreault. By the Numbers: Canadian GHG Emissions. Lawrence National Centre for Policy and Management:

London, ON, 2016. Available at: http://www.ivey.uwo.ca/cmsmedia/2112500/4462-ghg-emissions-report-v03f.pdf9. Canada’s Second Biennial Report on Climate Change (February, 2016). Available at: https://www.ec.gc.ca/GES-GHG/default.

asp?lang=En&n=02D095CB-110. Bohringer et.al. (2014) estimate a common permit price of roughly $50/t CO2e to achieve Canada’s Copenhagen target.

Unpublished data was provided by Nicholas Rivers to the authors in order to compile column 12.11. We calculate the level of ambition as 100 minus the ‘percent of BAU’.

SHARING THE BURDEN: CANADIAN GHG EMISSIONS

allocatedemissionsthataregreaterthantheirestimatedBAUemissions.Incontrast,Albertahasanallocationthatis76percentlessthanitsestimatedBAUemissions.Inaggregate,Canada’s2020targetrequiresareductionof19percentfromBAU.

LookingnextattheamountofadjustmentrequiredbythefourlargestemittersundertheHistoricalapproach(column9),weseethatallowableemissionlevelsin2020rangefrom86percentinOntarioto75percentinBC.Inthiscase,therequiredadjustmentsaregroupedquitecloselyrelativetotheEgalitarianapproach.

Finally,weturntotheamountofadjustmentneededbythefourlargestemittersundertheEfficiencyapproachtoburdensharing(column12).12Withthisapproach,allowableemissionlevelsin2020rangefrom88percentinOntarioandQuebecto75

percentinAB.OnceagaintherequiredadjustmentsaregroupedquitecloselyrelativetotheEgalitarianapproach,althoughAlbertaandBCswitchplaceswhencomparedwiththeHistoricalapproach.

Figure1givesagraphicaldepictionofhowtargetsandburdensharingallocationscompareacrossprovinces.Focusingagainonthefourlargestemitters,weseethattheEgalitarianapproachistheclearoutlierwhencomparedbothwithprovincialtargetsandwiththeHistoricalandEfficiencyapproaches.InthecasesofBC,OntarioandQuebec,thetargetsandHistoricalandEfficiencyapproachesarerelativelyclose,althoughBC’stargetisrelativelymoreambitiousthanitsallocationunderthetwoburdensharingapproaches.Albertaistheoutlier,largelybecauseofthelackofambitioninthe2020targetsetbyitspreviousgovernment.

12. This approach assumes carbon trading between provinces to achieve a uniform price across the country.

FIGURE 1 – DIFFERENT ALLOCATION SCENARIOS FOR 2020

300

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100

50

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25

20

15

10

5

0

GH

G (

Mt

CO

2e)

QC ON SK AB BC NFLD PEI NS NB MB Territories

NFLD PEI NS NB MB Territories

Targets Egalitarian Historical(2013) Efficiency

SHARING THE BURDEN: CANADIAN GHG EMISSIONS 9

CanadianpolicymakerswillhavetotacklethesensitivequestionofburdensharingifanyrealprogressistobemadeinmeetingCanada’s2030emissionstargetsetinParis.Inthispaperwelookedattherationalesforthreeapproachestoburdensharing:Egalitarian,HistoricalandEfficiency.Allthreeapproacheshaveflawsandnoonecanbesaidtoconceptuallydominatetheothers.WethenlookedatthepracticalimplicationsofthethreeapproachesforCanada,usingCanada’s2020emissionstargetandprovincialemissionspledgesasanillustration.

WhiletheEgalitarianapproachisaclearoutlier,theresultsfromtheHistoricalandEfficiencyapproachesaresimilarandalignwellwiththepledgesfromthreeofthefourlargestemitters.TheexceptionisAlberta,largelybecauseofthelackofambitioninthetargetsetbyitspreviousgovernment.

ThefactthattheHistoricalandEfficiencyapproachesyieldsimilarresults,despitehavingverydifferentrationalesisbothinterestingand

promising.Itsuggeststhatalackofagreementontheprinciplesunderlyingburdensharingmaynotbeaninsurmountableobstacletoprogress.If“whereyoustanddependsonwhereyousit”wewouldexpectthatBC,OntarioandQuebecwouldallprefertheEgalitarianapproach.YettheyallmadesignificantlymoreambitiouspledgesforGHGreductionsby2020.WiththeheavyburdenimpliedbytheEgalitarianapproach,AlbertaismuchmorelikelytosupportaHistoricalorEfficiencyapproach.Thissuggeststhatifconsensusistoemerge,itwillmostlikelybebasedonsomecombinationoftheHistoricalandEfficiencyapproachestoburdensharing.

Thehardworkofnegotiatingafederal-provincialcollaborationonmeetingCanada’s2030GHGemissionstargetisjustbeginning.Itisencouragingthatwhiletheconceptualunderpinningsofsomekeyapproachestoburdensharingdiffersubstantially,thepracticalimplicationsdonot.

CONCLUSIONS

SHARING THE BURDEN: CANADIAN GHG EMISSIONS

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Lawrence National Centre for Policy and Management

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Unit logo examples

Unit full signature examples

PMS 3308PMS 268

PMS 3308PMS 268 Lawrence National Centre

for Policy and Management

CMYK

100% K

Cool Grey 9

Reverse Reference

Reverse Version

Light GreyPMS Cool Grey 7

C 0M 0 Y 0K 47

Warm GreyPMS 416

C 28M 185 Y 29K 51

Light Warm GreyPMS 414

C 13M 8 Y 17K 26

SandPMS 4525

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