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Canada: Laisser Les Prix du Carbone à Rouler?

Canada has a unique, and many outsiders would argue peculiar, system of government – in many areas the boundaries between Provincial and national government authority are, to say the least, fuzzy. But it works, often very effectively, compared to more elegant constitutional models. On April 13, the Province of Ontario announced that it was adding its 14 million people and 165 MMT of CO2 emissions to the California-Quebec cap & trade market. Together with Quebec’s 8 million people, 60% of Canada’s 36 million people are now part of this market. In effect they have made a treaty with California, and while some say that California may not do that under the U.S. constitution, no one has sued — yet. These exercises in extraterritorial alliance may ultimately add up to something interesting. Add British Columbia’s 5 million people and its carbon tax, Alberta and its “reduce your emissions intensity or pay $15/ton” program, and we’re close to 80% of Canada’s GHGs being subject to some form of explicit carbon pricing, though because of various exemptions (small emitters, some entire sectors) actual emission coverage is much less. All of this happened without the central government or national Parliament. Instead, Ottawa is implementing electricity and other regulations broadly similar in scope to the U.S. EPA proposals, but the last discussion of a national carbon tax died ignominiously in the 2008 Canadian election campaign.

Ottawa’s experience ought to be a salutary lesson to both sides in Washington as the U.S. continues to rely mostly on state – and not federal — regulation to reduce emissions. EPA has more legal, political and administrative problems than can be counted, starting with the fact that no one on either side expects EPA’s power plant rules to survive judicial review. And while the Obama Administration announced that it would be setting standards for methane emissions for oil & gas exploration and production, more than a year has passed without even a proposed rule from EPA; the same is true for the Administration’s promise of revised landfill methane limits. Standards for cars are already set through 2024, and in any event are established, for all practical purposes, by the California Air Resources Board and not EPA. That really leaves only post-2019 standards for trucks (due last month), EPA’s HFC replacement program, and DOE’s equipment and appliance efficiency standards.

Meanwhile, the U.S. states continue to ramp up their efforts. In addition to recognized developments such as Oregon adopting California’s Low Carbon Fuel Standard (and Washington State proposing to do likewise) in  the first 3 months of 2015, the folks who keep track of just one relatively minor area of effort (the Database of State Incentives for Renewables & Efficiency; www.dsireusa.org) recorded more than 60 separate new such state and local programs across 25 states. Most would not survive if subject to rigorous cost benefit review, but that is what happens when the most rational carbon pricing options are taken off the table. Businesses who oppose explicit national carbon pricing have only themselves to blame if worse alternatives flood in.

It is doubtful that the laissez faire constitutional relationships that allowed the Canadian carbon pricing mosaic to emerge can be repeated in the U.S. But the significant loss of national government influence over a key sector of the economy ought to be a warning to business and the Federal government alike south of the border.