Choosing Greenhouse Gas Emission Reduction Policies in Canada Prepared for Don Drummond, TD Bank Financial Group Clare Demerse • Matthew Bramley October 2008 Sustainable Energy Solutions Choosing Greenhouse Gas Emission Reduction Policies in Canada Report Prepared by the Pembina Institute for Don Drummond, TD Bank Financial Group Clare Demerse • Matthew Bramley October 2008 Choosing Greenhouse Gas Emission Reduction Policies in Canada October 2008 Editor: Lee Craig Layout: Roberta Franchuk, Roland Lines Cover Design: Lori Chamberland Cover Photos: David Han (GoTrain), National Renewable Energy Laboratory (solar panel), David Dodge, The Pembina Institute (windmill) ©2008 The Pembina Foundation The Pembina Foundation Box 7558 Drayton Valley, Alberta Canada T7A 1S7 Phone: 780-542-6272 Email: [email protected] Download additional copies of this publication from the Pembina Institute website: www.pembina.org. About the Pembina Institute The Pembina Institute is a national non-profit think tank that advances sustainable energy solutions through research, education, consulting and advocacy. It promotes environmental, social and economic sustainability in the public interest by developing practical solutions for communities, individuals, governments and businesses. The Pembina Institute provides policy research leadership and education on climate change, energy issues, green economics, energy efficiency and conservation, renewable energy, and environmental governance. For more information about the Pembina Institute, visit www.pembina.org or contact [email protected]. About the Pembina Foundation for Environmental Research and Education The Pembina Foundation for Environmental Research and Education is a federally registered charitable organization. The foundation supports innovative environmental research and education initiatives that help people understand the way we produce and consume energy, the impact of energy generation and use on the environment and human communities, and options for more sustainable use of natural resources. The Pembina Foundation contracts the Pembina Institute to deliver on this work. More information about the Pembina Foundation is available at www.pembinafoundation.org or by contacting [email protected]. The Pembina Foundation Choosing Greenhouse Gas Emission Reduction Policies in Canada ii About the Authors Clare Demerse, MJ, researches and analyzes government policies to reduce greenhouse gas pollution. She works with a range of stakeholders and also acts as a spokesperson in the media. Clare has been a policy analyst with the Pembina Institute’s Climate Change Program since March 2006. The program is a centre of expertise on Canadian greenhouse gas reduction policy, with a particular focus on carbon pricing. Clare has worked on Parliament Hill and holds a master’s degree in journalism from Carleton University in Ottawa. Matthew Bramley, PhD, is one of Canada’s best-known advocates for stronger government policies to address climate change. He is the author of numerous reports and articles on climate policy and is frequently cited in the media. Matthew has been Director of the Pembina Institute’s Climate Change Program since 2001. The program is a centre for analysis and research on Canadian greenhouse gas reduction policy, with a particular focus on carbon pricing. Matthew has a PhD in theoretical chemistry from the University of Cambridge. Acknowledgements The Pembina Foundation for Environmental Research and Education (“Pembina Foundation”) has a contractual agreement with the Pembina Institute, to carry out initiatives which are aligned with its environmental research and education objectives. The Pembina Foundation is grateful to TD Bank for its support of this project, carried out by the Pembina Insititute. The authors wish to thank the following expert reviewers for their very useful comments and suggestions. The authors retain full responsibility for the content of the report and any remaining errors and omissions. • Don Dewees, University of Toronto • John Dillon, Canadian Council of Chief Executives • John Drexhage and Aaron Cosbey, International Institute for Sustainable Development • Nic Rivers, Simon Fraser University The Pembina Foundation Choosing Greenhouse Gas Emission Reduction Policies in Canada iii The Pembina Foundation Choosing Greenhouse Gas Emission Reduction Policies in Canada iv Preface There is a growing consensus in Canada that action is required to address climate change. Concerns over economic costs, in aggregate and to certain sectors and regions, have no doubt impeded the implementation of policies. Yet uncertainty over the course of policy poses a cost because businesses have little idea how to factor future environmental policies into their planning. Despite years of debate, there is limited Canadian analysis available on the most efficient policies from environmental and economic perspectives. It is not surprising then that consensus has not been formed on how policy should move forward. Confusion reigns as various factions argue the relative merits of key policy options, such as regulation, cap-and-trade and carbon taxation. TD Bank Financial Group engaged the Pembina Institute to conduct a survey of existing studies and international experience to better understand the state of knowledge of environmental policy, especially as it relates to the economy. The purposes of the study are first to document which policies have been found to be most environmentally and economically efficient and second to identify the gaps in current understanding. The hope is that future research can fill these gaps and enable policy to achieve appropriate environmental objectives with minimal economic cost. Don Drummond Senior Vice President and Chief Economist TD Bank Financial Group The Pembina Foundation Choosing Greenhouse Gas Emission Reduction Policies in Canada v The Pembina Foundation Choosing Greenhouse Gas Emission Reduction Policies in Canada vi Choosing Greenhouse Gas Emission Reduction Policies in Canada Report Prepared by the Pembina Institute for Don Drummond, TD Bank Financial Group Contents Choosing Greenhouse Gas Emission Reduction Policies in Canada........................................ 1 A. Introduction........................................................................................................................... 3 B. Criteria for Policy Evaluation.............................................................................................. 5 List of Policy Evaluation Criteria ..............................................................................................5 Use of Policy Evaluation Criteria .............................................................................................. 7 C. Overview of Policy Options.................................................................................................. 9 Regulations................................................................................................................................. 9 Voluntary Agreements ............................................................................................................... 9 Financial Incentives and Disincentives.................................................................................... 10 Investments in Infrastructure.................................................................................................... 10 Improvement of Government Operations ................................................................................ 10 Indirect GHG Reduction Policies............................................................................................. 11 1. Investments in Technology Development....................................................................... 11 2. Investments in Public Awareness.................................................................................... 11 3. Targets............................................................................................................................. 12 4. Conditional Transfers...................................................................................................... 12 D. Canadian Policy Experience .............................................................................................. 13 Jurisdiction ............................................................................................................................... 13 Canada’s Main Sources of GHG Emissions ............................................................................ 14 The Pembina Foundation Choosing Greenhouse Gas Emission Reduction Policies in Canada vii Canadian Climate Policy Implementation to Date................................................................... 16 E. Policy assessment and Combination: General.................................................................. 18 F. Policy Assessment and Combination: Canada ................................................................. 23 G. Carbon Pricing.................................................................................................................... 33 Revenue Recycling .................................................................................................................. 39 International Competitiveness Concerns.................................................................................. 41 H. Areas for Further Research............................................................................................... 47 Appendix A: