Queen’s Policy Review Volume 2, No. 2 (Fall 2011)
Carbon Pricing, Fairness, and Fiscal Federalism: A Cost-Sharing Proposal for Canada
Monica Tang Carleton University, Freie Universität Berlin
ABSTRACT Carbon pricing has been proposed as a mechanism to reduce carbon emissions in the efforts to mitigate the impacts of climate change. However, the potentially uneven distribution of costs between provinces and regions across Canada has stalled progress on the issue. This paper examines the possibility of implementing cost-sharing arrangements and revenue recycling within the Canadian intergovernmental context to address issues of fairness and fiscal capacity and recommends the coupling of ecological tax reforms with adjustments in intergovernmental transfers.
Introduction
The setting is a First Ministers Conference, where the Prime Minister and provincial and territorial ministers have gathered to discuss what Canada’s approach should be for reducing carbon and other greenhouse gas emissions in order to mitigate and adapt to the effects of global climate change. Similar to other intergovernmental discussions on issues such as healthcare or education, the questions of fiscal capacity, distribution, and fairness will likely arise. There may be heated debate about which level of government should be responsible for service provision. There may be pleas for special accommodation or exemption for particular provinces. Past disagreements may be revisited about real or perceived unfair treatment of provinces in previous First Ministers Conferences.
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This scenario, while fictional, is certainly plausible. The challenges with addressing climate change on a national level arise from differing provincial economies, emissions profiles, and fiscal capacities. Addressing the issues of equity and fiscal capacity within the Canadian federation are crucial to the success of a national strategy to address climate change and overcome federal-provincial stalemate. This paper proposes an approach to carbon-pricing that is compatible with Canada’s federalism framework. The principle of fairness in federal-provincial relations will be a central focus in this discussion, as will be considerations of fiscal capacity and revenue distribution. Finally, the paper will discuss how environmental federalism will become increasingly important in intergovernmental discourse and how a national carbon price and its framework can contribute to the development of institutions and processes for environmental federalism.
The Importance of Pricing Carbon on a National Scale
The issue of carbon emissions and climate change is a global public good problem that can be classified as the Tragedy of the Commons. The atmosphere of the planet is the global commons – the cost of carbon emissions has not been borne by emitters and the effects of climate change are worldwide. Greenhouse gas (GHG) emissions have steadily increased by 70 percent from 1970-2004. 1 The net effect of warming has resulted in observed changes with increases in sea levels, decreases in snow and ice extent, higher temperatures in the Northern hemisphere coupled with higher instances of tropical cyclones, as well as placing certain areas under stress of either increased precipitation or drought. 2 Climate change has an environmental, social, and economic impact on Canada, although the estimated effects may vary across regions. Reducing carbon and other GHG emissions will decrease the rate of climate change as well as the magnitude of its impact, which in turn increases the likelihood of successful adaptation and reduces associated adaptation costs. 3 The reduction of carbon emissions is essential to managing climate change in Canada. Currently, carbon emissions can be termed as a negative externality . Carbon emitters and consumers do not pay the full costs of the actions, while the effects of carbon emissions are borne by society. The consumption of carbon-based goods and services has a greater cost to society in the form of environmental damage than what is currently paid by consumers. 4 The carbon content of what Canadians consume in terms of goods and services is therefore not reflected in the prices they pay. This
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distortion of price signals encourages consumption of carbon-based goods and services and results in GHG emissions that cause climate change. Leading public policy research institutions, including the National Roundtable for the Environment and the Economy and the Conference Board of Canada, recommend setting a price for carbon as an effective solution to reducing greenhouse gas emissions. Putting a price on carbon internalizes these current environmental externalities and corrects the current market distortions that encourage carbon emissions. A price in carbon also promotes shifts to non-carbon based alternatives for goods and services. A number of provinces in Canada have put in place a variety of targets and plans for GHG reductions. British Columbia has implemented a consumption-based carbon tax; Alberta has implemented a climate change strategy with a hybrid system involving a tax on the production of carbon and a credit-trading scheme within Alberta. Ontario and Quebec have plans to implement a cap and trade system with a potential harmonization of policy in North America. The initiative of provinces to tackle the issue of climate change is commendable, especially in the absence of overarching federal leadership. However, provincial initiatives are not sufficient as a Canadian response to mitigating and managing climate change. The current patchwork also yields inefficiencies in pricing and regulatory regimes and creates inequalities across Canada. While some Canadians pay for their consumption of carbon-based goods and services, others continue to enjoy the same goods and services without paying the true environmental cost. The phenomenon of carbon leakage is also present as firms can currently move production away from provinces with carbon prices or regulations to provinces without them, so that GHG emissions are not actually abated, but simply shifted to another jurisdiction. Finally, the longer a patchwork approach remains in place federal-provincial and interprovincial dynamics become more entrenched and intractable in future climate change discussions. 5 A national approach to pricing carbon is recommended for several reasons. Given the substantive harmonization that is required in order to avoid inefficiencies, an overarching federal presence and leadership is desirable in order to eliminate duplication and to promote coordination and harmonization. 6 Carbon leakage between provinces is also eliminated since carbon emissions cannot be shifted from one jurisdiction to another. The federal government, with its constitutional powers over federal trade and commerce also has the authority to ensure import/export neutrality that is essential for maintaining competitiveness in a national carbon tax
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for domestic and international trade. 7 Pricing carbon can occur through the implementation of a carbon tax, a cap and trade system, or a combination of both. It should be noted that an emissions tax – a cap and trade system where all permits are auctioned off, or a combination of both, could reduce excess carbon emissions and correct the distortions. The use of a carbon tax is recommended for several reasons. The first is that the Canadian intergovernmental fiscal framework is based upon taxation and the application of a tax can be more easily harmonized within the current taxation structure. The second is that a carbon tax is easier to implement than the design of a cap-and-trade system, including the lengthy process of determining and allocating the initial levels of permits. 8 Third, a carbon tax can be readily applied to both smaller and larger polluters, as emissions from large final emitters only account for half of Canada’s emissions. 9 Fourth, price can certainly spur investment from businesses that seek to develop and adopt low carbon technologies. 10 Finally, a carbon tax is transparent about the costs and the distribution of these costs, which is helpful in designing strategies to redress the economic impact on those with low incomes. 11
The Canadian Context and the Importance of Fairness
Canada’s GHG emissions are unevenly distributed between provinces and territories. Canada’s total emissions for 2008 were 734 MT of CO2 equivalents. 12 Eighty-one percent of Canada’s GHG emissions are derived from energy production and consumption, which includes electricity and heat generation, fossil fuel production, and transportation. 13 Canada’s GHG Inventory shows that the provinces of Alberta, Ontario, and Quebec have the highest emissions of 244, 190 and 82 MT CO 2 equivalents. 14 Emissions can be linked to the energy and economic profile of these provinces: an examination of Canada’s GHG Inventory reveals that Alberta’s GHG emissions can be attributed to its primary reliance on coal-based electrical generation and the development of the tar sands, while Ontario’s GHG emissions are attributed to fossil fuel dependent electricity generation and transportation. 15 Economic performance and ability to develop fiscal capacity is also uneven across provinces, but there is a correlation of development of natural resources and economic growth. Ontario, with the size of its economy and its strong manufacturing base, has traditionally been the economic powerhouse of the Canadian federation, even though it has recently been impacted by the economic downturn. Alberta’s development
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and export of oil and gas resources have made it the wealthiest province. Within the past decade, Newfoundland and Labrador’s development of offshore oil and gas resources have also moved the province from a “have- not” to a “have” classification in the Canadian federation. 16 The development of mining and oil and gas in Saskatchewan, another former “have not” province, has poised Saskatchewan to be leading the other provinces in economic growth for 2010 and 2011. 17 Data from Canada’s GHG Inventory suggests that provincial emissions will continue to increase with economic growth. A national carbon tax would have the greatest impact on provinces with the most GHG emissions, particularly on their industry and on the Canadians who live there. Therefore, the implementation of a carbon tax must clearly consider the full costs, the large variations in terms of economic capacity and performance among provinces, provincial politics, and the different provincial economic positions and statuses within the Canadian federation. Previous attempts at a national plan of action for climate change have failed in part due to the inability of federal and provincial governments to collaboratively adopt an approach that addresses the overall cost of reducing GHG emissions and considers the characteristics and challenges of different provinces. Discussions following the Kyoto Protocol saw the emergence of Alberta as a “veto state” that protected its economic interests by delaying the process and weakening the outcomes of federal-provincial discussions on climate change. 18 It is likely that as other provinces develop their own fossil fuel production capacities and industries, they may also emerge as veto bodies in future intergovernmental discussions. A national carbon tax and associated climate change strategy can only be successful if these veto provinces could be motivated to participate and have their concerns regarding fairness and cost addressed. Previous rounds of climate change discussions have shown that a cost-sharing arrangement between the federal government and veto provinces, particularly Alberta, is necessary in order to have a national approach. 19 However, in order to develop such a cost-sharing arrangement, it is important to examine the fiscal framework in the context of the Canadian federation and the existing concerns regarding cost and fairness. Federal support to provinces and territories takes place through four major transfers: The Canada Health Transfer, The Canada Social Transfer, Equalization, and Territorial Formula Financing. 20 The federal government also provides direct, targeted support for specific labour and training initiatives. 21 The Canada Health Transfer and the Canada Social Transfer support provinces in delivering in key policy areas such as health care, social assistance and social service, post-secondary education, and child
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care. 22 The Canadian equalization system is entrenched in the Constitution and is the cornerstone of Canadian federalism. 23 The system is “the principal means of achieving horizontal fiscal balance” between provinces. 24 Equalization payments allow for less prosperous provincial governments to provide reasonably comparable levels of service with relatively comparable rates of taxation. 25 The federal government also provides territories with financing based on a territorial formula, although the amounts financed through the equalization system are higher. Perceptions of fairness/unfairness in intergovernmental fiscal transfers within the Canadian federation are central to the dynamics of intergovernmental negotiation. While the concept of “polluter pays” is crucial in the establishment of a price on carbon, the economic and energy structure in Canada as well as the regional differences in GHG emissions require careful thought in the design of a national carbon tax. If poorly designed, a national carbon tax may exacerbate existing tensions within the Canadian federation and generate opposition from veto states. Concerns about distribute justice are also important in environmental public policy, especially in the distribution of social and economic costs and benefits. However, we must understand that correcting “unfairness” may result in all provinces being net recipients, hardly amounting to equalization. This problem stems in part from the perceptions of the definition of fairness, but the research in behavioural economics over the past decade reveals that fairness concerns remain prominent and that “fairness” should be an additional criterion in evaluating the distributional impact of environmental policy. 26 Olof Johansson-Stenman and John Konow, authors of “Fair Air: Environmental Economics and Distributive Justice,” suggest several principles of fairness that characterize actualized distributional preferences which together constitute a more comprehensive and robust definition of fairness: 1) accountability; 2) efficiency; 3) need; and 4) equality. 27 The first principle, accountability, integrates the concepts of proportionality and responsibility and suggests that allocation be in proportion to the variables that can be controlled.28 In the context of climate policy, this implies that those who reduce emissions should benefit proportionately, or conversely, that polluter costs be proportionate to their emissions. 29 The second principle, efficiency, simply calls for maximizing total economic surplus where possible. 30 In economics, there are concerns that equity and efficiency may be at odds, but research in behavioural economics suggests that views of fair allocations reflect the tradeoffs between these competing distributive rules. 31
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The need principle of distributive justice requires the satisfaction of basic needs of all individuals and it refers to allocation of minimums to all individuals. 32 In climate policy, the principle of need is particularly salient in the discussion of the distributional impact on the poor. The fourth concept, equality, is a norm more so than a principle in that is connotes a personal moral norm rather than a generalized and impartial rule. 33 The concept of equality is often invoked in climate policy, especially in the division of responsibilities requiring equal contributions. Research in behavioural economics also suggests that concerns about equality become more important as relationships develop between parties. It follows that attention should be paid to the norm of equality in climate negotiations. Inequality, whether actual or perceived, can stall progress made on climate issues, as seen in Canada. The following proposal for a National Harmonized Carbon Tax has been developed with these principles in mind in order to address issues of fairness and promote cooperation from veto states within the Canadian federation.
A Proposal for a National Harmonized Carbon Tax within the Canadian Federation
The Design of a National Harmonized Carbon Tax
Given the urgency of pricing carbon and the importance of fairness within the Canadian federation, a national harmonized carbon tax with adjustments made to the current formula for intergovernmental transfers is proposed in order to maintain fiscal balance and address issues of fairness. This proposal will not attempt to rewrite federal and provincial taxation systems. It will provide recommendations for the design of a National Harmonized Carbon Tax (NHCT) and broadly outline how distributional issues can be addressed with consideration to the rules of fairness outlined above. The design of a national carbon tax should consider the price, the scope, the use of revenues, and the issue of distribution. 34 In order to be effective, the tax rate of the NHCT should be high enough to encourage reductions in GHG emissions through changes in the behavior of firms and individuals. Estimates of the optimal tax rate would depend upon scientific information but also on the intensity and magnitude of emissions, estimates of the costs of local effects of climate change, as well as economic and technical developments in the future. The tax rate could be determined upon estimates and then adjusted over time with updated information on marginal social damages based on emissions. 35
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While the scope of the tax should cover the majority of emissions produced, there is a tradeoff between the scope of emissions and the administrative and compliance costs. 36 Analysis conducted by Sustainable Prosperity, a policy research institute, recommends that there should be no exemptions in the scope of industrial sectors covered in order to eliminate distortions that incentivize inefficiency. 37 Other jurisdictions that have implemented carbon taxes, including the UK and Scandinavian countries have done so with fairly narrow tax bases and have provided exemptions to certain sectors, which have hindered their maximum effectiveness. 38 A broad scope where the marginal benefits of additional scope are equal to the marginal administrative and compliance costs of additional scope is recommended for the NHCT in order to achieve efficiency. A carbon tax on the production and use of fossil fuels, similar to the model proposed by Jack Mintz and Nancy Olewiler could be the basis for the NHCT. The Mintz-Olewiler tax is based on the federal tax on gasoline and converts it to a $42/tonne of CO 2 which is then extended to heating oil, coal, gas, and includes transportation, electricity generation, and heating. 39 The focus on both the production and consumption of energy based in fossil fuels, covering both upstream production and downstream use, would be consistent with Canada’s main sources of emissions and GHG emissions profile. It would also place the accountability with those responsible for the production and use of energy derived from fossil fuels. This National Harmonized Carbon Tax (NHCT) can be collected once on behalf of the federal and provincial governments similar to the Harmonized Sales Tax. Thomas Courchene and John Allan also highlight the importance of addressing the consumption of carbon-based goods and services through a carbon price. 40 Designing a consumption-oriented tax for carbon-based goods and services would be a complicated and lengthy process because it would involve determining the cumulative amount of emissions and assigning emissions at each stage of production of all these goods and services. However, it is a worthwhile initiative that could be undertaken after the initial carbon taxation framework is established for the production and use of fossil fuels. It may be the next evolutionary stage for a national carbon price since producers and emitters are not bearing the sole burden, but the assignment of the tax will also depend on who demands the products and where the demand originates. 41 The NHCT should also be designed with the aim of export-import neutrality in order to maintain competitiveness for Canadian producers and exporters. 42 Mintz-Olewiler and Courchene-Allan both suggest various mechanisms for border tax adjustments with the important note
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that a national carbon tax should consider its effects and relationships to Canadian exports and international trade in its design and implementation. Courchene and Allan demonstrate in their discussion that border tax adjustments can be implemented in a manner that is legal and compliant with WTO regulations.43 Design mechanisms need to be built into a national carbon tax to ensure that Canadian producers and exporters are not placed at a cost disadvantage for domestic and international trade due to their efforts at reducing GHG emissions.
Revenue Recycling and Achieving Double and Triple Dividends
The next key issue associated with a carbon price is the use of revenues. Economists have argued that carbon taxes, like all other environmental taxes, create a “double dividend” because they 1) discourage environmentally damaging activities and 2) reduce the distortionary costs of the tax system by reducing taxes in other areas. 44 The first dividend is associated with environment-related welfare changes, such as reductions in GHG emissions. The second dividend is associated with non-environmental benefits, which can include social and economic benefits associated with revenue distribution. 45 It should be noted, however, that the revenue from a carbon tax should not be used to redistribute all types of income and wealth, but rather to correct the distortions by offsetting within the overall tax system. 46 This form of redistribution is known as revenue recycling and can be used to offset a variety of taxes, such as labor or income taxes. 47 Shifting the source of revenues from other federal taxes, such as income or labour taxes, to carbon taxes, is a method of revenue recycling that can achieve a second dividend in the double dividend hypothesis. In countries that have implemented the carbon tax, namely Sweden and Finland, governments have recycled revenues through reductions in income and business taxes with the overall goal of improving economic performance. 48 The economic impact of a carbon tax on low-income individuals and households requires reconciling revenue recycling with the principle of need in the rules of fairness. 49 Economic analysis and modeling suggest that governments can address distributional concerns about the impact of carbon taxes through a careful “menu of tax reductions”. These are specifically targeted towards low-income individuals and households and can be distributionally neutral or even slightly progressive. 50 Revenue recycling can also promote a low-carbon path for economic development. Revenues may fund research, development, and
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deployment of renewable energy or clean technology. This can produce a triple dividend as it minimizes reliance on fossil fuel development to drive economic growth and deploys alternative energy sources and low-carbon technologies. Revenue recycling through federal fiscal transfers for targeted training and employment programs can also focus on facilitating this transition. Evidence of this exists in the European Union as revenue from carbon taxes and the auctioned allowances from the European Credits Trading System (ECTS) have funded research and development in energy efficiency as well as renewable energy and clean technology. 51 The modeled macroeconomic effects include growth in GDP, employment, and private consumption. 52
Adjusting Revenue and Cost-Sharing Arrangements in Intergovernmental Transfers to Achieve Fairness and Stimulate a Low-Carbon Path for Development
It is possible to achieve double and triple dividends in the Canadian context, especially if intergovernmental transfers are adjusted with the implementation of an NHCT. The existing intergovernmental fiscal transfers, such as the Canada Health Transfer (CHT), the Canada Social Transfer (CST), and the tax point system offer a venue for cost- and revenue-sharing arrangements between the federal government and the provinces. Revenues from a carbon tax could be calculated into the overall formula for fiscal transfers and shared with the provinces in a manner agreed upon between the federal government and the provinces. Keeping in mind the rules of fairness outlined earlier, the government could correct fiscal imbalances, mitigate the impact of the NHCT on the poor, as well as promote low-carbon economic development. The question of what to do with NHCT revenues is a particularly important one. Whether the tax should be revenue neutral, either nationally or regionally, will depend upon the fiscal circumstances of federal and provincial governments. Absolute revenue neutrality should not be the primary objective that influences the design of the carbon tax, but it can be an option activated upon the collection of tax revenues and an examination of the circumstances. Locking in the objective of absolute revenue neutrality can remove flexibility from federal and provincial governments. However, it is important that a significant portion of the revenues from the national carbon tax be recycled in order to reduce horizontal fiscal imbalances, correct other distortions, and address issues of fairness. Remaining consistent with the principles of accountability and the
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“polluter pays,” while ensuring that fiscal arrangements do not negate the intended effects of the carbon tax, revenues from carbon abatement should not be recycled back to the emitters. 53 This is also consistent with principle of efficiency, as eliminating distortions from inadvertent subsidies of fossil fuels promotes better functioning markets and environmental performance. Harrison recommends that the system to refund revenues should be independent of the carbon tax. 54 The amount paid by individual households and businesses should not equal the refunded amount. 55 The choice of an appropriate fiscal transfer instrument ensures that in addressing the economic impacts of the NHCT, we are not negating the intended effects of the NHCT. One approach would be to provide increased support to those provinces contributing the highest amounts to the NHCT for the payment of other provincial expenditures. This ensures that some provinces do not have a substantially more difficult burden in terms of having decreased revenues from industries impacted by the NHCT while still having to pay for other provincial services, such as health care. These transfers can be earmarked so that provincial governments are not directly transferring them to polluting industries. The federal government can recycle a portion of the NHCT revenues by increasing CHT and the CST transfers. This facilitates provincial service delivery in health care and other government social services. Currently, the CHT levels are set in legislation up to 2013- 14 with 6 percent annual increases as part of an automatic escalator. CHT transfer payments are made on an equal per capita basis and include both cash and tax point transfers. 56 CST levels supporting post-secondary education are also calculated on an equal per-capita basis. 57 As such, they would support residents in all provinces equally, regardless of the size of the province. Using the CHT to recycle NHCT revenues can promote equality in health and education spending and correct fiscal imbalance among provinces in terms of provincial expenditures. This revenue-sharing arrangement may be more acceptable to those provinces that would bear a greater share of the costs of the NHCT. However, it can be updated along with the scheduled re-negotiations for the CHT and CST. Over time, federal and provincial governments can renegotiate how NHCT revenues are redistributed and used through the system of fiscal transfers. The federal and provincial governments can also directly recycle NHCT revenues through tax reforms and reductions targeted towards low- income individuals and households that may be the most vulnerable to the economic impacts of the NHCT. This can take the form of a carefully designed and coordinated transfer of tax points, all the while meeting the need criteria in the fairness rules.
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To achieve the third dividend, government can recycle revenues from carbon pricing to encourage low-carbon economic development. The federal government could either recycle the tax revenues into research and development of renewable energy and low-carbon technologies, or into federal programs promoting energy efficiency, such as the popular suite of EcoEnergy programs. Targeted revenue recycling through tax credits for clean technology and renewable energy industries can also make these industries more competitive in Canada and internationally. The federal government can also share a portion of the revenues with provinces to promote the development and deployment of regionally appropriate carbon abatement technologies (eg. carbon capture and storage in Alberta and Saskatchewan). Finally, federal fiscal transfers can include funds to promote training and skills development. 58 Future transfers of this kind can support job training, education, and skills development to facilitate the transition to an economy less dependent on fossil fuels. Over time, revenue recycling that promotes low-carbon economic development may incentivize energy and resource efficiency as well as create new industries and jobs. There are varying estimates of revenue amounts raised through a national carbon tax. While such an estimate will not be attempted here, a high enough carbon price that would encourage reductions in GHG emissions also provides fiscal flexibility in addressing issues of fairness. If the tax rates set for the NHCT provide sufficient incentives, then both the revenues of the NHCT and Canada’s GHG emissions should progressively decrease. Intergovernmental fiscal transfers can be adjusted by renegotiating the CHT, CST, and the equalization formula as provinces adapt to a carbon price. In Norway and Finland, GHG emissions were lower after the introduction of carbon taxes than under the “business as usual” scenario in the absence of carbon taxes. 59 Given Canada’s steadily increasing GHG emissions, a well-designed NHCT can at least facilitate the stabilization of these emissions, and even encourage reductions in GHG emissions while generating revenues necessary for fiscal flexibility.
Carbon Pricing and the Future of Environmental Federalism
The previous challenges Canada has faced as a federation in solving environmental problems, including climate change, point to the need for stronger intergovernmental institutions for addressing environmental challenges on a national scale. The framework for fiscal federalism is well- established while in comparison, “political and institutional machinery on environmental federalism is weak or non-existent” (Courchene and Allan, 2010). 60 The Canadian Council of Ministers of the Environment meets
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yearly to address environmental issues, usually addressed on an issue-by- issue basis during First Ministers Conferences. In the current Canadian political landscape, environmental and fiscal issues are still largely seen as discrete and separate. The proposal for a National Harmonized Carbon Tax is only feasible if an intergovernmental infrastructure is in place. Ottawa and the provinces need to take immediate steps to address this gap in intergovernmental relations by establishing the infrastructure through a national and coordinated approach. 61 This is necessary to ensure fairness in dealings between the federal government and provinces or among provinces. Permanent intergovernmental institutions are needed if carbon pricing is complemented with a suite of other coordinated policies to reduce GHG emissions on a national scale and adapt to the effects of climate change. A starting point could be the establishment of a national institutional body that would model the impacts and effects of the NHCT in order to set a carbon tax that is adjustable over time. This body could work closely with Finance and Environment Canada as well as with its provincial counterparts. Additional capacity may be required, but having a national institution designing the NHCT serves as a foundation for ecological tax reform in Canada. Thomas Courchene has identified the term environmental federalism as one of increasing importance in the discourse on federalism. Building the intergovernmental institutions and capacity immediately gives the federal and provincial governments the opportunity to shape a national direction to address climate change and price carbon before the dynamics of uncoordinated and possibly even conflicting approaches to climate change become too entrenched and difficult to retract. Canada needs the intergovernmental infrastructure to effectively address climate change and other environmental issues requiring a national response.
Conclusions
More than a decade after the Kyoto Protocol, Canada has made limited progress in addressing climate change, in part due to the failure to come to an agreement between the federal and provincial governments. The necessary pricing of carbon on a national scale is dependent upon having the intergovernmental infrastructure to carry out the function. It will require an arrangement between Ottawa and over-burdened provinces to share costs and revenues in a way that addresses issues of fairness within the Canadian federation. This paper discussed the possible parameters for such a cost-sharing arrangement, with considerations for the political and
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economic dynamics between the federal and provincial governments. It also highlighted the need for more research into the emerging area of environmental federalism, particularly to explore the question of how to situate national ecological tax reforms within the fiscal frameworks of the federation. An effective climate change strategy with carbon pricing at its core requires significant and committed engagement from federal and provincial leaders, and future First Ministers Conferences may find the topic of GHG emissions reductions as a priority item on the agenda. Given the urgency of climate change, it is important for Canada to address the federal- provincial dynamics with a national approach sooner rather than later. If Canada waits too long, the current path to a patchwork of climate change policies in the country can be difficult to interrupt. A sophisticated proposal of ecological tax reforms coupled with adjustments in intergovernmental fiscal transfers may offer the solution that breaks the federal-provincial stalemate on climate change.
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NOTES
1 Intergovernmental Panel on Climate Change (IPCC), IPCC 4 th Assessment Report: Climate Change 200 7 ( Geneva: IPCC, 2007), 36. 2 IPCC, 30. 3 Natural Resources Canada, From Impacts to Adaptation: Canada in a Changing Climate (Ottawa: Natural Resources Canada, 2007 ). 4 David Suzuki Foundation (Prepared by Mark Jaccard and Associates), Pricing Carbon, Saving Green: A carbon price to lower emissions, taxes and barriers to green technology (Vancouver: David Suzuki Foundation, 2008), 5. 5 Thomas Courchene, background document for a Canada 2020 address, Climate Change, Competitiveness, and Environmental Federalism , (Ottawa: National Press Club, 2008), 15. 6 Courchene, 13. 7 Courchene, 13. 8 Kathryn Harrison. “The Comparative Politics of Carbon Taxation”, Annual Review of Law and Social Science 6 (2010), 507-529. 9 Harrison (2010). 10 Harrison (2010). 11 Harrison, (2010). 12 Environment Canada. Canada’s GHG Inventory: A Summary of Trends, 2010,
19 D. Macdonald, (2009).
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20 Finance Canada (2010). 21 Finance Canada (2010). 22 Finance Canada. Federal Transfers to Provinces and Territories, 2011,
41 Allan and Courchene (2010). 42 Allan and Courchene (2010). 43 Allan and Courchene (2010). 44 Lawrence Goulder. “Environmental Taxation and the Double Dividend: A Reader’s Guide”, International Tax and Public Finance 2 (1995): 158. 45 Eduardo Giminez, and Miguel Rodriguez. “Reevaluating the first and second dividends of environmental tax reforms”, Energy Policy 38 (2010): 6655 46 Metcalf and Weisbach (2009). 47 Andrea Baranzini, Jose Goldemberg, and Stefan Speck. 2000. “A future for carbon
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taxes”, Ecological Economics no. 32 (2000) 3:400 48 Harrison (2010). 49 Johansson-Stenman and Konow (2010). 50 Gilbert Metcalf. “A Distributional Analysis of Green Tax Reforms”, National Tax Journal 52 (1999) 4:655-68 51 European Commission. “Written statement by Directorate General for the Environment for the European Commission for the Hearing by the Select Committee on Energy Independence and Global Warming of the US House of Representatives” (Washington D.C.: European Commission, 2008). 52 European Commission (2008). 53 Courchene, 14. 54 Harrison (2010). 55 Harrison (2010). 56 Finance Canada (2010). 57 Finance Canada (2010). 58 Finance Canada (2010). 59 Jean-Phillippe Barde. “Green Tax Reforms in OECD Countries: An Overview”, Journal of Business Administration and Policy Analysis (1999): 681. 60 Allan and Courchene (2010). 61 Allan and Courchene (2010).
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