A tool commonly used by jurisdictions to motivate behaviours that will reduce greenhouse gas emissions is to apply a price on carbon, either through a carbon tax or an emissions trading system (ETS). This edition of the Business Council’s Environment and Energy Bulletin looks at the defining difference between carbon pricing as it is applied in much of the world and the approach taken in B.C. and the implications for industrial competitiveness and carbon leakage.
A key feature of the Emissions Trading Systems in use in Europe and some other jurisdictions is that they always and without exception provide a measure of protection to trade-exposed industries by exempting some portion of their emissions from paying the full carbon price. For example, while each has its own distinguishing features, under both the California and European Union ETS industry pays a carbon price on only a portion of emissions (25% in the case of California). In contrast, the B.C. carbon tax doesn’t offer protection to the province’s key traded industries.
While there are other jurisdictions that apply a carbon tax, to our knowledge British Columbia is the only one in the world with an aggressive carbon pricing program that provides essentially no support to its traded industries – industries that are export-oriented or that compete with non-taxed imports in the local market. Apart from a couple of exceptions, B.C. industries pay the carbon tax on 100% of their emissions. Even the federal government’s backstop carbon pricing system, which will soon apply to most provinces and territories, offers significant protection to trade-exposed (and energy-intensive) industries similar to ETS.
The discrepancy between B.C.’s approach to carbon pricing and the policies in place in other jurisdictions creates a growing risk of “carbon leakage” in B.C. Trade-exposed B.C. industries that are sensitive to energy costs will increasingly scale back activity in the province and look to shift production to other jurisdictions with no/weaker carbon pricing, or with carbon pricing systems that include features which afford meaningful protection to domestic industries.
The competitiveness of some of B.C.’s major economic drivers and export engines — notably energy, mining, forestry, agri-food, manufacturing, and transportation — is being damaged by the province’s existing carbon pricing system. This is an odd situation, given that many of B.C.’s traded goods are among the least carbon-intensive in the world.
Instead of taking a leadership role in supporting the low-carbon industrial sector, the ultimate result of B.C.’s current carbon policy will be reduced B.C. emissions, as industries move or make investments elsewhere, but not lower global GHG emissions. In fact, to the extent that industrial production migrates from B.C. to jurisdictions with weaker or non-existing carbon pricing systems, global emissions are likely to increase.