Taking Stock: Opportunities for Collaborative Climate Action to 2030 Policy Brief 2: The Pan-Canadian Framework on Clean Growth and Climate Change March 2017

Dave Sawyer, EnviroEconomics.org | [email protected] Dr. Chris Bataille, IDDRI & SFU | [email protected] Research supported by Climate Action Network Canada, Environmental Defence, Équiterre and the Pembina Institute

Summary The Pan-Canadian Framework on Clean Growth and Climate Change (PCF) represents a watershed moment in the history of this country’s climate-policy story. In the absence of federal action, over the course of years, provinces and territories developed their own approaches to carbon pricing, which resulted in the policy patchwork we have today. Those tasked with implementing the PCF must now work to align and build upon those regional commitments and programs. They have a solid platform from which to do so: The PCF is multifaceted framework that will help catalyze policy coordination and collaboration across jurisdictions, making it easier for all to reduce emissions while minimizing economic risks. With this, Canada’s policy architecture is largely set. Carbon pricing, performance-based regulations, and innovation policies will change behaviors and drive innovation coast-to-coast for decades to come. Yet, achieving Canada’s 2030 greenhouse gas (GHG) reduction goal is far from a fait accompli. Federal, provincial and territorial policymakers will need to overcome an array of implementation and coordination hurdles to bring home the prize. For this brief, we modeled existing provincial and federal policy, then overlaid the PCF’s main elements. Our analysis suggests that strengthening provincial policies and implementing the PCF could align Canada’s GHGs trajectory with the 2030 climate target. A policy package consisting of tightened performance regulations, an eventual national carbon price floor of $150 per tonne of CO2e ($2016 real) by 2030 and emissions trading imports from the Western Climate Initiative or other global sources could all work together to close the gap to Canada’s 2030 Nationally Determined Contribution (NDC). The country could gain significant efficiencies by enabling domestic allowance trade between large final emitters; doing so would smooth abatement costs between provinces. Our analysis suggests moving from today’s policy patchwork to a system of effectively aligned pan-Canadian carbon policies could reduce cumulative GDP impacts from 0.52 percent of GDP by 2030 to 0.04%. In either case, the economy would still have grown by 39 percent above today’s level. Significantly, we also found that if government could maximize all such efficiencies, it could lower the anticipated 2030 carbon price from $150 to $100 per tonne, while avoiding costs in the order of $23 billion. Land use reductions, while uncertain, would only add to policy success, perhaps reducing Canada’s demand for globally sourced emission reductions that may be needed to keep costs down. Hurdles abound, of course. While elements of the PCF, such as Ottawa’s floor price for carbon, will help align sub-national systems, our modeling suggests that challenges lie ahead. Should governments increase policy ambition within the current patchwork, they may inadvertently increase costs by lockingin siloed provincial policies. This could, in turn, exacerbate competitiveness and household fairness impacts, and ultimately impede further ambition. To avoid such an outcome, policymakers need to find ways to improve cohesion and efficiency by connecting provincial carbon policy silos—especially for large industrial emitters. National and subnational governments will need to govern more collaboratively. This is, of course, what the PCF aims to enable. Policy Brief 2: Opportunities for Collaborative Action

While 2016 delivered new climate policy in virtually every jurisdiction in Canada, without continued and increased coordination across governments, overlap and additional regulatory requirements could jumble market signals, leading to unintended consequences. For this reason, the “big story” of 2017 must be policy cohesion. Governments must tweak the knobs on all the policy instruments now in place to bring the whole carbon-pricing orchestra into tune. This will involve establishing mechanisms to routinely assess performance using carbon budgets and sectoral intensity trends, building out and aligning governance structures to work across jurisdictions, and efficiently ratcheting up ambition. While governments have announced, or implemented policies that increase Canada’s chances of achieving its 2030 NDC, that NDC is on the low side of ambition relative to the mid-century ambition of Canada’s commitment to the Paris Agreement. To align GHG abatement efforts with the NDC and achieve deeper decarbonization by mid-century, cooperative efforts need to continue to broaden and deepen policy signals. As a post script, it is tempting to see events south of the border through a grim lens for climate policy. But let’s not forget that climate policy is more regional and global than we usually recognize. Just a few years back, Canada’s federal inaction overshadowed considerable policy progress in many provinces and territories. Similarly, the real policy innovation in the United States is occurring in the West Coast states, the New England states, and even in red-state electricity systems. Meanwhile, at the global level, China and India have dire air-quality issues and a seemingly insatiable appetite for clean electricity. Given the vast resources flowing to energy R&D, electricitydecarbonization innovation may move far more quickly than we expect. We recommend Canadian governments, businesses, and households prepare to seize a new competitive advantage—one based on our continent-spanning capacity to generate bountiful, cost-effective clean energy and use it to produce decarbonized goods and services for growing global markets.

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Overview1

The Pan-Canadian Framework on Clean Growth and Climate Change (PCF) represents a watershed moment in the history of this country’s climate-policy story. In the absence of federal action, over the course of years, provinces and territories developed their own approaches to carbon pricing, which resulted in the policy patchwork we have today. It is the job of the PCF to align and build upon those regional commitments and programs. It is multifaceted framework that will help catalyze policy coordination and collaboration across jurisdictions, making it easier for all to reduce emissions while minimizing economic risks. While the PCF is focused on framing new policy that will be implemented to close the gap to Canada’s 2030 climate target, it also includes the governance mechanisms necessary to support collaborative policy action. This is an important development for Canadian climate policy. It signals a new beginning that will lay down the long-term governance structures for governments to jointly take stock of how policies interact and how policy cohesion can sustain policy ambition while keeping costs low. Our previous Policy Brief, released in advance of the PCF, used analysis and modeling to explore a central question to stock taking: “are current policies performing as expected, and can they deliver on our GHG commitments?” We concluded that joint effort across Canadian jurisdictions has improved the country’s odds of meeting its 2030 GHG target and decarbonizing its economy by 2050, as specified in Canada’s MidCentury Strategy, released at COP-22 in Marrakesh. Carbon pricing, performance-based regulations, and innovation policies are all changing the country’s direction on greenhouse gas emissions and driving innovation coast-to-coast. Yet, achieving Canada’s 2030 goal is not a fait accompli; policymakers must first tackle a swath of implementation and coordination challenges. Without additional or more stringent policy measures, GHGs will rise with the economy post2020 and the gap to Canada’s 2030 target will widen—making longer-term decarbonization a costly challenge. With the PCF now acting as a focal point for future collaborative mitigation effort, in this Policy Brief we ask a second question central to stock taking: How can governments improve policy cohesion to increase ambition and control costs? We examine whether policymakers can cost-effectively and expediently scale the major elements of the provincial policies and those contained in the PCF to align Canada’s GHGs with the 2030 target or Canada’s Nationally Determined Contribution (NDC). This Policy Brief also explores how national and sub-national governments can more efficiently deepen GHG reductions by 2030 and beyond. While debate continues over whether Canada should increase its ambition via tax, trade, or regulation, the reality is that all these approaches are now in play—including globally sourced GHG reductions through the Western Climate Initiative (WCI)2. In our view, the notion that provincial programs might be unwound in pursuit of some “unified ideal” is at this point largely an 1

Special thanks to Catherine Abreu, Annie Berube, Louise Comeau, Erin Flanagan and Dale Marshall for comments on successive drafts. James Glave helped with editing. 2 For a description of the WCI, see http://www.wci-inc.org/

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academic exercise that ignores the “poured and cured” foundation of existing policy, as now entrenched by the PCF.3 Unified national policy must grow out of, or be laid atop of, the existing policy patchwork.

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Scaling Up Current Policy and the PCF

This section identifies the provincial and federal carbon policy elements that we scale up in our modelling to assess Canada’s ability to achieve the 2030 NDC and mid-century deeper decarbonization. We disaggregated provincial sectors in our model to increase the stringency of current and developing provincial and federal policy.4 We add the new elements contained in the PCF, scaling up effort to 2030 to explore the economic and GHG outcomes of achieving Canada’s 2030 NDC. Figure 1 below provides an overview of the policies that we include in this analysis. Some of these policies were already contained in our current and developing forecast,5 while others are new under the PCF. Figure 1: Modelled Elements of Pan-Canadian Framework on Climate Change6  Carbon Pricing  Federal price sets price level in all but Ontario and Quebec, where WCI forecast price for tradable emissions allowances (a.k.a. “ITMOs”7) sets effort. Electricity  Coal phase-out. Modeling lags federal schedule slightly.  Natural gas performance standard modelled as intensity standard. ~ Northern diesel power phase-out excluded from modeling. Built Environment  Net-zero-energy ready model building code (new builds). Modeled as announced, available sooner. ~ Retrofit building codes, financing. Indirectly modeled as net-zero building code  Energy efficiency standards for equipment and appliances. Modelled as an intensity standard.

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According to the federal government backgrounder that accompanied the announcement, “Provinces and territories will have flexibility in deciding how they implement carbon pricing: they can put a direct price on carbon pollution or they can adopt a cap-and-trade system.” 4 Not explicitly included are the recent federal announcements of an accelerated coal phase-out, regulations to restrict hydrofluorocarbons, and a proposed Low Carbon Fuel Standard. 5 More detail on the policies included can be found in our previous report Taking Stock: Canada’s GHG progress to 2030 and Opportunities for Collaborative Action. 6 Our modeled policies do not represent the full comprehensive suite of PCF measures since some investments or policies cannot be readily modeled or few details currently exist. Examples include transportation modal shifts enabled through investments in public transit; and measures for marine, rail, aviation and off-road vehicles. 7 Internationally Transferred Mitigation Outcomes. Article 6 of the Paris Agreement. Policy Brief 2: Opportunities for Collaborative Action

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Transportation ~

  ~ 

Clean Fuel Standard. Post-process with no integrated modeling to address possible policy overlaps and inefficiencies, which could be significant given multiple policies and provincial fuel mandates. (Estimate based on Navius Research) Heavy-duty vehicle regulations. Modeled as more stringent intensity standard. Light duty vehicle regulations. Modeled as more stringent intensity standard. Zero emissions vehicle strategy. Modeled as stringent vehicle intensity standard Complementary investments not assessed.

Industry ~   

Hydrofluorocarbon (HFC). Post-process, adopting regulatory impact analysis reductions from ECCC of 8 Mt. Oil and Gas Methane regulations. Modelled as announced. Industrial energy efficiency. Phase-out fossil fuel subsidies. Not modeled, but possibly significant.

Forestry, agriculture, and waste  

Landfill gas. Modeled at carbon price. Land use accounting adjustments from UNFCCC accounting. Not assessed.

 International Leadership. Western Climate Initiative Internationally Transferable Mitigation Outcomes (WCI-ITMOs). Canada’s climate policy may be a patchwork quilt, but the various systems and approaches share some common characteristics that could enable increased ambition while keeping costs in check: 

Performance regulations with compliance flexibility are increasingly common—at least for electricity, transportation, and buildings.



Efficient and broad-based carbon pricing of all forms is now our national baseline.



International purchases through the Ontario and Québec cap-and-trade programs serve as a safety valve, helping to contain pan-Canadian compliance costs to achieve Canada’s NDC.

Based on this suite of policies, we develop two scenarios that help test the scalability of current policy and the PCF to meet Canada’s NDC: 

Scenario One: Scale-up current policy, as announced, to NDC. On top of provincial programs, we increase the stringency of federal performance-based regulations and the carbon pricing floor. We align federal and provincial policy stringency with achieving Canada’s NDC target of 523 Mt by 2030. We include WCI GHG trade under the Ontario and Québec cap-and-trade programs through WCI allowance linking (Western Climate Initiative Internationally Transferable Mitigation Outcomes, WCI-ITMOs).



Scenario Two: Canada achieves the NDC alone (no WCI linking). Because we have been modeling economy-wide policies within Canada for some time now, we know that Canada’s marginal costs of abatement rise rapidly with ambition. As such, this scenario isolates the importance of the WCI-ITMOs to achieving the NDC. WCI allowance linking is therefore not

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available in this scenario to contain abatement costs associated with Ontario and Québec achieving their 2030 targets. We do not look at the use of ITMOs beyond the WCI link, but acknowledge a wide array of options could be pursued by Canada to use ITMO’s to support NDC attainment and support global sustainable development efforts. Below we discuss each scenario organized by the three policy elements: regulations, carbon pricing and WCI-ITMOs.

2.1

Tighten Performance-based Regulations to the NDC

The table below summarizes the diverse range of existing regulations that could be be tightened to deliver longer-term emission reductions. The table shows our assumed start year for the regulation, and then the relative change in emission intensity and approximate annual average tightening rates already being implemented (“Continued Policy Trends”). The average annual tightening rates are already quite steep, averaging close to 4% per year. We then tighten these existing regulations in the model to a level consistent with the 2030 NDC (“Tightening for NDC” column in Table 1). These scale-up rates to the NDC are interesting because they don’t represent a significant departure from historical tightening rates. Perhaps more significantly, these rates align with a deep decarbonization trajectory consistent with modeling and analysis we completed in the past. Given the shadow carbon cost of regulations are typically challenging to estimate, it begs the question, “at what cost?” In section 2.3 below we identify the GDP costs of achieving the NDC. The “Tightening for NDC Scale-up” are applied identically in the two scenarios (achieve NDC with and without WCI-ITMOs). Table 1: Emission Intensity Changes for Performance Regulations to Close the NDC

Start Year (intensity is 100%)

Buildings (new) Commercial Vehicles (HDV) Light Duty Vehicles (LDV) Net Zero Housing

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Continued Policy Trends to 20308

Tightening for NDC Scale-up

2030 Intensity vs Start Year of 100%

Annual Tightening

2030 Intensity vs Start Year of 100%

Annual Tightening

2020

66%

-4.4%

66%

-4.4%

2021

78%

-2.5%

68%

-3.8%

2015

51%

-4.3%

48%

-4.7%

Methane Oil and Gas

2018

Methane Landfills

2015

Available 2020 -57% vs 2012 -5% (25% in 2025)

Mandatory 2025 -63% vs 2012

-7%

Carbon Price

These continued policy trends may not exactly match those contained in the PCF.

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2.2

Carbon Price to Achieve the NDC with and without WCI-ITMO’s

With the regulations updated in the model, we then varied a carbon price to achieve the NDC. Consistent with the PCF, we assume the federal floor raises carbon prices in all jurisdictions except Québec and Ontario.9 Instead, the WCI price forecast drives emission reductions in Ontario and Quebec, with WCI allowance imports making up any difference between provincial abatement and their 2030 targets. Domestic offsets and complementary policies, such as Ontario’s Climate Change Action Plan, would reduce the reliance on WCI imports. Absent a full view of the efficacy of these complementary mitigation measures, in our analysis we assume WCI imports fill the entire gap between domestic abatement and the 2030 targets for Ontario and Québec. This assumption clearly overstates the size of the WCI imports and hence external capital flows from allowance transfers. Based on our calculations—which do not include complementary policies in Ontario and Québec (i.e. Ontario’s Climate Change Action Plan or offsets)—government would need to source 68 Mt of WCI imports to close the gap between in-province abatement efforts and the Ontario and Québec provincial targets. The process of reconciling provincial abatement and provincial targets with WCI-ITMOs is often referred to as a “true-up”. Counting the 68 Mt of possible WCI-ITMOs towards Canada’s NDC reduces the burden on the rest of the country to identify and make equivalent reductions. Our analysis suggests that with a package of tightened performance regulations (as discussed in the previous section) and emissions imports from WCI, a federal carbon price floor of $150 per tonne ($2016) in 2030 would close the gap to the NDC. This essentially adds $12 annually on top of the federal floor as announced at $50 in 2022, indexed to inflation. In the second scenario, with tightened performance regulations but without counting WCI-ITMOs towards Canada’s NDC (i.e. only domestic emissions reductions count towards the target), Canada would need to raise its carbon price to $220 per tonne by 2030 to close the gap. In our view, the inclusion of tradable global GHG units (WCI-ITMOs) reduces the overall national cost of achieving Canada’s NDC. In effect, Ontario and Québec’s caps and access to California’s cheaper emissions reductions are doing some heavy lifting for the rest of the country.

2.3

GHG and GDP Outcomes

The question then is, “what do these emission reductions look like with the tightened regulations and the carbon pricing policy?” Figure 2: shows the annual rate of decline in GHGs required to achieve the 2030 target, with and without WCI-ITMOs. As the figure indicates, the use of WCI-ITMOs can reduce significantly the annual rate of domestic abatement required to achieve the NDC.

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We do not explicitly model Nova Scotia’s proposed cap-and-trade system, but instead apply a carbon price, thereby simulating future cap-and-trade outcomes. Policy Brief 2: Opportunities for Collaborative Action

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Figure 2: Annual rate of decline in GHGs with and without WCI-ITMOS

NDC aligned pathway (no WCI-ITMOS)10 NDC aligned pathway (with WCI-ITMOs)

Annual GHG Decline Rate (% annual decline, five year increments) 2016/20 2021/25 2026/30 -2.48% -2.45% -2.04% -2.19%

-1.46%

-0.87%

2030 GHGs (Mt) 523 592

As for GDP, we find that Canada’s economy continues to grow at a healthy clip under both the carbon pricing and tightened regulations scenarios. In our simulation with WCI-TMOs reflecting current policy, Canada’s economy is about 1.39 times larger than current levels (Figure 3): 

With WCI-ITMOs, the 2030 GDP forecast in the simulation is reduced 0.52 percent (or 1.385 times larger over today)



Without WCI-ITMOS, the negative impact on the economy in 2030 doubles, but still, the economy is 1.38 times larger in 2030 than today.

In other words, in our simulations, the highest GDP impact of Canada reaching its NDC would mean the economy still grows by 38% between now and 2030, instead of 39% under a business as usual scenario. Figure 3: Impact on GDP Annual GHG Decline Rate (Five years) 2016/20 2021/25 2026/30 NDC aligned pathway (with ITMOS) NDC aligned pathway (no ITMOs)

Growth in Economy to 2030 (2015 =1)

Change in Size

2.196%

2.241%

2.209%

1.389

-0.52%

2.196%

2.183%

2.162%

1.382

-1.03%

Based on these results, we conclude that Canada now has the foundation of an efficient and effective policy package that can accelerate deep decarbonization: 

Efficient regulations are in place or in development, and are scalable over time. Canada can move to deepen the current rates for new buildings and building technologies, cars and oil and gas methane. If robustly implemented, these will drive results that are close to a high ambition scenario aligned with deeper decarbonization.



Efficient and broad-based carbon pricing can be scaled to reasonable levels in 2030. Policy makers can scale-up provincial systems to achieve our NDC via nationally aligned carbon prices in the range of $150 per tonne by 2030. The federal move to align carbon prices regionally will increase efficiency, better aligning carbon costs, especially if continued post-2022.

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We simulate the NDC benchmark by increasing the ambition of current policy within provinces. The rate of change to 2030 is therefore not uniform. Policy Brief 2: Opportunities for Collaborative Action

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

Cost containment with WCI carbon trading helps. Carbon trading can significantly reduce the cost of the policy, basically halving the GDP impact. In practice, this will drop the carbon price from $220 per tonne to achieve the NDC, to a much more palatable about $150 per tonne.

There are still significant risks. The scale of the decarbonization challenge still looms large. Policy costs rise significantly in lockstep with ambition, even with the most efficient policy in place. Improving policy cohesion and efficiency becomes increasingly important, and creates an imperative for national and subnational policymakers to coordinate policy design, implementation, and ratchet scenarios. In the next section, we identify short-term priorities that can improve policy cohesion and efficiency.

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Opportunities for Collaborative Action

Recognizing policy cohesion and overlap will be an increasing challenge, we identify three policy priorities areas that are either not yet addressed in the PCF or mentioned but could use some additional specificity: 1. Strengthen regulations for transport and buildings: These are mentioned in the PCF. There is a need to keep tightening current regulations at historical rates down to zero for all new construction, and apply retrofits by 2025 to 2040. 2. Ratchet up carbon pricing over time: Keep carbon prices real and ensure they rise with inflation. 3. Create carbon “bridges” between existing policies to increase efficiency: Trading carbon allowances between provinces increases efficiency by allowing provinces and sectors with lower cost abatement opportunities to finance and sell reductions to those with higher costs. Trading within Canada reduces the need for backstopping domestic effort with global reductions (ITMOs). We discuss each of these below in the context of achieving Canada’s NDC. Strengthen regulations for transport and buildings: keep tightening them all at historical rates for new units down to zero by 2025-40. In recent decades, Canada has made great progress with GHG-intensity regulations for transport and buildings. If government were to maintain this rate of improvement through the 2030s, new homes could be net-zero ready starting after 2025, and new personal and light-freight vehicles could be near-zero emissions as early as 2030. Commercial buildings and heavy-freight vehicles would likely need to lag by 5 to 10 years given technical challenges. However, all new heavy freight vehicles and commercial buildings could be net-zero GHG by 2040. Policymakers should continue tightening existing performance-based regulations that mimic the compliance flexibility of carbon pricing. It would not be a stretch to tighten a range of performance regulations from current rates to a level consistent with long-term deep decarbonization as follows: 

All new personal vehicles reach zero emissions by the early 2030s;



Heavy freight vehicles should reach zero emissions by 2040;



Boilers should reach zero emission by 2040;

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

New and retrofit residential buildings should reach net zero by 2025, commercial buildings by 203511; and



Methane regulations applying to all sources should climb to 50 to 60% below current levels.12

Taken together, in our simulations these strengthened regulations deliver an additional 14.7 Mt of GHG reductions in 2030. Ratchet up carbon pricing over time: keep carbon prices real, indexed to inflation. Indexing carbon prices to inflation, like pensions, is a simple yet effective move to maintain a long-term price signal. Without this indexing, the price signal falls over time; for example, a $50 per tonne price in 2022 equals a $38 price in 2030.13 In our simulation, maintaining the real value of the $50 per tonne through indexing to 2030 suggests that an additional 13 Mt of reductions can be achieved in 2030, which is equal to a 93 Mt cumulative reduction by 2030. Figure 4: shows the impact of a simple indexing of the carbon price to inflation. Provinces with fixed carbon prices should index their policies immediately—as should the federal government with its floor price. Government must also expand its carbon price coverage to all combustion, process, and fugitive emissions, or apply equivalent non-pricing policy such as the proposed methane regulations. The federal government has earmarked a program review in 2022; government should consider expanding coverage of the federal floor price at that time. In total, indexing the currently announced federal carbon price floor to inflation could deliver 13 Mt of GHG reductions in 2030. Create bridges between existing policies to increase efficiency: Carbon trading at home reduces costs and reduces the need for global GHG imports. Government can significantly improve policy efficiency and efficacy by linking allowance trading for large emitters with output-based allocations. Other types of linking, such as domestic offset trading as envisioned by Ontario’s offset credit proposal, or trading of renewable electricity certificates, could also help. Our simulations suggest that the $150 per tonne carbon price to achieve Canada’s NDC can be reduced to less than $100 with domestic allowance trade for large industrial emitters across the country. This represents a 36% reduction in the carbon price necessary to achieve Canada’s 2030 target. The overall improvement in economic efficiency is significant, with the GDP impact of just 0.04% below the current reference case forecast, compared to 0.52% for scaling up current fragmented provincial policy to the NDC. This savings translates into avoided potential GDP effects of $23.5 billion ($2016 real) in 2030.

11

Commercial buildings lag residential due to the unique natural of commercial buildings, making it more technically challenging to ratchet down regulations. 12 We have not included the November 26, 2016 proposed Regulations Amending the Ozone-depleting Substances and Halocarbon Alternatives Regulations. The baseline HFC forecast of CO2e is 6 Mt in 2013 climbing to 22 by 2030, with reductions of 15% by 2019, 35% by 2024, 70% by 2030 and 85% by 2036. 13 While the WCI floor price is indexed to inflation, the carbon price in B.C. is not. Policy Brief 2: Opportunities for Collaborative Action

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Figure 4: Keep carbon prices real, index to inflation

Our simulations suggest that with domestic allowance trade for large final emitters, carbon prices must rise from announced levels in 2022 of $50 per tonne to $96, or at a rate of about 8.5% a year, indexed to inflation. Clearly, with a more unified domestic policy architecture, global tradeable units become less important to hit the 2030 target. This would keep capital within Canada and drive innovation at home. Of course, some provinces may be net importers, while others will be net exporters. Governments can then choose to either rely on global tradable units to reduce domestic effort for NDC compliance, or increase ambition below our NDC to improve global innovation and/or meet sustainable development goals. From a governance perspective, trading systems targeting large industrial emitters are already in place or under development in Alberta, Ontario and Québec. Newfoundland and Labrador has a system under development (Bill 34), modeled on Alberta’s Specified Gas Emitter Regulation (SGER), while Saskatchewan in 2009 released a draft regulation (Bill 95) that looked much like SGER. British Columbia has enabled “tradable units” under its Greenhouse Gas Industrial Reporting and Control Act, including enabling SGERtype provisions for large emitters. Finally, Nova Scotia recently proposed a cap-and-trade system. Monitoring, reporting and verification systems would need to align to provide assurance that tradeable units represent real emission reductions.

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The Next Big Thing: Shifting Focus to Climate Governance

What’s next for Canadian climate policy? In our view, government must prioritize to regularly scheduled reviews. As outlined in the PCF, priorities include federal, provincial and territorial coordination on implementation and stock-taking, annual reports to First Ministers, expert analysis and advice to inform PCF actions on an ongoing basis, and FPT review of carbon pricing. Such coordinated efforts will allow the country to assess the efficacy of Figure 5: Progress to Canada’s NDC existing measures and identify opportunities to coordinate and increase ambition. Of course, the PCF commitments on reporting and oversight are a big deal The pace, scope, and scale of recently announced policy is by any reasonable measure impressive. If federal and provincial governments work quickly and effectively to implement these measures, Canada is potentially on an emissions trajectory just 29 Mt shy of its 2030 target (Figure 5).14 If governments add in currently untapped potential of land-use sinks (assuming they are real and verifiable), they could plausibly shrink the gap even further. This possible outcome was frankly unimaginable just one year ago, when the gap to Canada’s 2030 target relative to current forecast looked politically insurmountable. In 2015, when the 2030 target was announced by the previous federal government, the gap looked closer to 130 Mt and the 2030 NDC target looked like another climate plan too far. Yet climate policy is a fickle beast, and while we are witnessing some very smart and good programs, at least two implementation hurdles lie ahead: 1. The challenge of overlap. In this challenge, policy is applied on top of policy in a double dose, lowering effectiveness and efficiency. (We address this in our analysis.) Here, the proposed Low Carbon Fuel Standard is the poster child; provincial fuel content mandates, including low carbon fuel standards, vehicle regulations, and carbon pricing will all try to squeeze out the same emissions. For us, this raises flags over what policy will dominate, and how fuel suppliers and consumers will respond to overlapping signals.

14

Note that the recent pipeline announcements and possible LNG facilities are already baked into our GHG reference case. Because we calibrated to National Energy Board oil and natural gas price forecasts, our model responds by supplying more oil and gas development and the associated infrastructure to get product to markets. Policy Brief 2: Opportunities for Collaborative Action

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2. The challenge of the 1.5°C Paris target. While announced federal and provincial policies increase the likelihood of Canada nailing its 2030 NDC, emission reductions should accelerate post-2030 if Canada is to do its fair share relative to the mid-century ambition of the Paris Agreement. In Figure 6, we offer some alternate GHG pathways to explore current emission pathways to Canada’s 2030 NDC and various deep decarbonization trajectories thereafter. While attainment of the NDC represents significant progress, we find it does not neatly align with a high-ambition pathway consistent with the Paris Agreement. Despite important effort to date, more ambition will be needed to hit the 2030 NDC and then align GHGs with deeper decarbonization by mid-century. Recent policy efforts must not only be implemented as promised, but sustained and strengthened to 2030 and beyond.

Figure 6: Canada’s NDC and Deep Decarbonization

So, what is the path forward for implementing the PCF? To ensure an orderly and costeffective decarbonization, governments will need to align fragmented policy within the federation, then tighten it at a predictable rate. The current federal and subnational GHG policy architecture is scalable to the ambition implied by the NDC through cooperative efforts. But to realign GHG abatement effort with the NDC and drive deeper decarbonization by mid-century, cooperative efforts need to continue to broaden and deepen policy signals. Our analysis suggests that by aligning patchwork of carbon policies, governments could reduce economic impacts from 0.52% to 0.04% of GDP and slash the carbon price from $150 to $100—avoiding costs to the tune of $23 billion. Avoiding competitiveness losses and minimizing impacts on Canadians’ pocketbooks will smooth the transition to a deeply decarbonized society. Policy cohesion is likely to be the big story of 2017. While 2016 delivered a new climate policy framework via the PCF, without continued and increased coordination across governments, the mix of federal, provincial and territorial measures could jumble signals and lead to unintended consequences. Governments must now figure out how best to streamline current policy measures to align policy signals across Canada’s diverse energy suppliers and users. This will require establishing mechanisms to routinely assess performance using carbon budgets and sectoral intensity trends, building out and aligning governance structures to work across jurisdictions, and planning to efficiently ratchet up pan-Canadian climate ambition.

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ANNEX A: Modelling Canada’s GHG Policy Patchwork

The current and developing policies (pre-PCF with federal price floor) scenario: 

For British Columbia, we model the economy-wide carbon tax at a flat rate of $30 to 2030 in today’s dollars, which effectively means it is falling in real terms. We apply this rate to new LNG facilities that come online starting in 2019 (consistent with the NEB, 2016) but recognize an intensity standard similar to Alberta’s Specified Gas Emitter Regulation would apply under the Greenhouse Gas Industrial Reporting and Control Act (GGIRCA). We therefore may underestimate the GHG reductions from the new 0.5 Mt of LNG GHGs in our Reference Case (specific to the facilities, not upstream emissions).15 Municipal solid waste reductions are also included. Significant upstream process formation gas (CO2) and methane emissions are associated with LNG production, but these are not covered under existing policy. Further, we update the BC Low Carbon Fuel Standard (under Climate Leadership Plan), resulting in a 50% increase over current or ~1.2 Mt. Land use not assessed.



For Alberta, we model the June 2015 update to the Specified Gas Emitter Regulations (SGER), with a tightening of the intensity limit and rise in price in 2018 from $30. Municipal solid waste regulations are also modeled. Further, we model the announced Climate Leadership Plan, including: an output-based intensity standard moving forward for large point source emissions; an aligned carbon tax on liquid fuels and natural gas, starting at $30 in 2018, not indexed to inflation; an orderly coal power phase-out by 2030 and a renewable power requirement 5,000 MW via competitive process, by 2030; and a methane regulation to achieve a 45% reduction from a fixed target in 2005 in upstream oil and gas by 2025 (we assign a starting target of 25% in 2020 rising to 45% in 2025 below 2005). The impact of this policy is to reduce GHGs in 2025 more than 45% below the forecast given the reductions are fixed to 2005, and emissions growth is occurring. This fixed historical target effectively acts like a hard cap on emissions growth from methane. The 100 Mt emissions limit on oil sands does not bind in our analysis because we have included advanced oil sands technologies that reduce emissions intensity in the order of 2% per year, including solvent extraction and direct contact steam generation (i.e. oxy-combustion of pet coke slurry to extract bitumen, where most of the CO2 binds to the underground bitumen source matrix). Municipal solid waste regulations are also modeled.

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For Saskatchewan we include the Boundary Dam GHG CCS project and a 50% renewable capacity standard in electricity by 2030. Municipal solid waste reductions are also included. .

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For Manitoba, we have no policies in the current scenario, with the coal heating ban likely having a negligible impact on GHGs. Municipal solid waste reductions are included.

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For Ontario, we include the Cap and Trade Regulation, with about 82% coverage and the same carbon price trajectory as indicated below for Quebec. A true-up to the provincial target with WCI imports is enabled to the extent there is a gap between domestic abatement with the WCI carbon price and the

15

Based on an earlier NEB forecast, the model predicts roughly 2 BCF/day of BC LNG starting in 2019. The current NEB 2016 forecast is 2.3 BCF/day, starting a more slowly and rising to 0.3 higher than our current forecast.

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2020 and 2030 targets (-15% and -37% below 1990 levels).16 We also include the coal phase-out in the baseline projection. Ontario’s municipal solid waste regulations are also included. 

For Québec, we model the WCI program, assuming coverage of about 85% of total GHGs and a carbon price rising from a real $21 per tonne CO2e Canadian in 2020 to $45 in 2030 (real $2016). This WCI price reflects public forecasts of the WCI carbon price made by CaliforniaCarbon, using an historical average Canada-US exchange rate of 1.17. We true-up to the provincial targets with WCI imports or domestic offsets when domestic reductions from regulated entities are insufficient to meet Quebec’s 2020 or 2030 targets (-20% and -37.5% below 1990). Municipal solid waste reductions are also included.

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For the Atlantic region, we model Nova Scotia’s cap on electricity to 2030 under its Greenhouse Gas Emissions Regulations, with no other policies for the other provinces. Municipal solid waste reductions are included. Nova Scotia’s proposed cap and trade system is modelled under the PCF scenario with the federal carbon price floor.

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Federal policies include the light and heavy duty vehicle regulations which we simulate to decline to 2025, as per the regulations, and then flat line to 2030. We also simulate the federal coal -fired generation regulations which, by requiring the emissions intensity of a typical natural gas generation facility, effectively bans new coal plants and requires shutting down aging plants after 50 years of useful life (unless equipped with CCS, which is more expensive than natural gas generation). We have included all residential, commercial and institutional building codes and appliance efficiency policies. Heavy Duty Vehicle Regulations. By 2027, a ~16% improvement over 2021 or 2.5% pa, then flat to 2030. We also add in a national oil and gas methane regulation like that contemplated by the United States, but extend its coverage to all fugitives, most importantly NG formation gas.17 Using Alberta’s regulation as a template, we assume a 25% reduction in oil and gas methane and other fugitives by 2020 from a fixed target of 2012, culminating in reductions greater than 45% by 2025 from the baseline forecast given growth in emissions. This policy is particularly important in British Columbia, where fugitive CO2 formation gas from shale production for LNG is not covered under the current carbon tax or provincial intensity regulation. Federal Price Floor. In provinces with a carbon price now, the federal floor only binds when it exceeds the current carbon price. 

AB and BC, 2021; SK, MB and Atlantic see price increases in 2018.

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QC and ON exempt given caps aligned to 2030 federal NDC.

16

This assumption is likely valid in the short-term where Ontario in its proposed cap and trade regulation has aligned its cap decline factor to its 2020 target. The same applies to Quebec. This assumption is less certain however to 2030. 17 Tri-lateral methane announcement. “Prime Minister of Canada (PMC). June 29 2016. Leaders’ Statement on a North American Climate, Clean Energy, and Environment Partnership.”

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