Subnational Carbon Pricing Policies in British Columbia, Ontario, and Québec: Economic and Political Factors Influencing the Choice of Instruments to Abate Emissions by Timothy Eugene Krupa B.Sc., The University of British Columbia, 2013 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS in THE FACULTY OF GRADUATE AND POSTDOCTORAL STUDIES (Political Science) THE UNIVERSITY OF BRITISH COLUMBIA (Vancouver) April 2015 © Timothy Eugene Krupa, 2015 Abstract While climate change is widely considered to be one of the major challenges facing the planet today, the Government of Canada has yet to apply market-based instruments to abate greenhouse gas emissions. Canadian federalism, however, allows subnational governments to take action on climate policy. The purpose of this research is to understand why Canada’s three most populous provinces – British Columbia, Ontario, and Québec – implemented different carbon pricing policies after committing to a unified policy route under the Western Climate Initiative (WCI) in 2008. Since then, BC adopted a carbon tax; Québec followed through with their WCI commitment and now trades emissions permits with California; and, to date, Ontario has yet to price carbon. This study seeks to explain the carbon pricing instrument of choice (dependent variable) as a function of the political systems and economic structures (independent variables). The first hypothesis is that differences in provincial party systems determined different carbon pricing policies. A two-party system, for example, tends to allow right-of-centre parties to implement carbon pricing more easily, as the BC Liberals maintained support from the business community and limited the hemorrhage of disaffected conservative voters while implementing a robust carbon tax. Right-wing parties in three or multi-party systems pose a greater threat to preventing governing parties from implementing aggressive carbon pricing mechanisms, as observed in Ontario and Québec. Québec’s multi-party system permitted less aggressive action, while Ontario’s three-party situation may have played a role in preventing the ability to implement carbon pricing to date. The second hypothesis considers carbon pricing as a function of the differences in the structures of the provincial economies. BC avoided capital outflow by not trading emissions with jurisdictions that have superior potential to reduce emissions. In Ontario, the previously promised coal phase-out and a unique economic structure, including economic dependence on competitive, trade-exposed, and fragile carbon-intensive industries during a recession, and a shifting taxation landscape, prevented carbon pricing to date. In Québec, the recognized risk of capital outflow did not prevent the selection of cap-and-trade. The economic structures of each province interacted with the party systems to help determine instrument choice. ii Preface This dissertation is an original intellectual product of the author, Tim Krupa. The UBC Behavioural Research Ethics Board approved this study, “Carbon pricing in British Columbia, Ontario, and Québec: Determining instrument choice to control emissions.” The UBC Ethics Certificate number was H14-01613. iii Table of Contents Abstract ........................................................................................................................................... ii Preface............................................................................................................................................ iii Table of Contents ........................................................................................................................... iv List of Tables ...................................................................................................................................v List of Figures ................................................................................................................................ vi Acknowledgments......................................................................................................................... vii Dedication .................................................................................................................................... viii Introduction ......................................................................................................................................1 Emissions Pricing.....................................................................................................................5 The Western Climate Initiative ................................................................................................7 British Columbia Context ........................................................................................................8 Ontario Context ......................................................................................................................10 Québec Context ......................................................................................................................11 Methods..........................................................................................................................................13 Hypothesis One: Party Systems .....................................................................................................15 Hypothesis Two: Economic Structures ..........................................................................................24 Conclusion .....................................................................................................................................37 Addendum ......................................................................................................................................39 References ......................................................................................................................................40 iv List of Tables Table 1: Summary of Party Systems in BC, Ontario, and Québec ...............................................16 Table 2: Total Megatonnes and Proportion of GHGs by Economic Sector in BC, Ontario, and Québec ..........................................................................................................................................25 v List of Figures Figure 1: GHGs by Economic Sector in 2008 ...............................................................................26 Figure 2: GHGs Per Capita from Stationary Combustion ............................................................28 Figure 3: GHGs Per Capita from Industrial Processes .................................................................29 Figure 4: GHGs from Electricity and Heat Generation ................................................................34 vi Acknowledgments Dr. Kathryn Harrison skillfully and graciously supervised this work. Her research and activism consistently inspires the author. The author is also immensely grateful to the interview participants: the Honourable Jean Charest, Mr. Daniel Gagnier, Mr. Gerald Butts, and others who chose to not be identified by name. vii Dedication For my role models: Baba, Grandma, Mom, and Dad. Let’s build a better planet. viii Introduction “Climate change represents a ‘tragedy of the commons’ on a global scale, requiring the cooperation of nations that do not necessarily put the Earth's well-being above their own national interests” (Harrison & Sundstrom, 2010). China and the United States, by far the world’s highest emitting countries, announced a historic climate agreement in November 2014. The United States intends to reduce emissions by 26% to 28% below 2005 levels by 2025, while China will peak carbon dioxide (CO2) emissions and increase non-fossil fuel generation by approximately 2030. As Canada’s largest trading partner, the United States’ position is relevant because the Government of Canada has consistently stated that it will follow the US lead when considering the implementation of climate change policy (Canadian Press, 2009). Meanwhile, the European Union, the world’s third largest emitting jurisdiction, previously set targets to limit greenhouse gas emissions (GHGs) with the help of market-based instruments. In 2014, EU leaders agreed to reduce EU domestic GHGs to at least 40% below the 1990 level by 2030 (European Commission, 2015). Canada, a nation heavily reliant on the extraction, distribution, and combustion of fossil fuels, ranks among the most emissions-intensive nations in the Organization for Economic Co-operation and Development (OECD) (Harrison, 2013b). Although the Government of Canada has failed to apply market-based instruments to abate emissions, federalism has allowed subnational governments to take action. Canadian provinces possess constitutional authority over natural resources and energy production, as well as the authority to pass laws and regulations to control emissions. In a federation as decentralized as Canada’s, “a critical question is to what degree federalism can facilitate or deter policy innovation and diffusion” (Harrison, 2013a), especially given the current climate policy vacuum at the federal level of government. Leaders in North American subnational climate policy tend to 1 have the least carbon-intensive economies, as they strategically deploy market-based instruments on specific sectors through carefully selected instruments (Harrison, 2013a). Taxation and other methods of regulation offer interesting public policy comparisons as they illuminate the heart