Economic Instruments for Long-term Reductions in Energy-based Carbon Emissions

Executive Summary

A coherent energy strategy will be driven by multiple factors, including climate change. However, while climate change is an important consideration, there is debate about how much weight should be given to climate change issues in energy policy and about the appropriate tools for incorporating them. To aid further understanding of this critical issue, the National Round Table on the Environment and the Economy (NRTEE) launched the Ecological Fiscal Reform (EFR) and Energy Program. The Program has explored a scenario in which economic instruments are used as a key tool to promote long-term reductions in carbon emissions. Our operating assumption is that a long-term reduction in energy-based carbon emissions is among the priorities shaping energy strategy.

The EFR and Energy Program's objective is "to develop and promote fiscal policy that consistently and systematically reduces energy-based carbon emissions in Canada, both in absolute terms and as a ratio of GDP, without increasing other pollutants." The rationale for this focus is twofold:

Fiscal policy is one of the most powerful means at the government's disposal for influencing outcomes in the economy, but it is not typically employed in a consistent and strategic manner to promote objectives that have simultaneous economic and environmental benefits.
The related issues of climate change and energy present substantial challenges and opportunities for Canada, and fiscal policy-employed in a consistent and strategic manner-forms a key (but underutilized)¹ element of the government's response. Although taxation and tax credits have, for example, been used to support wind power production and to promote the expanded use of ethanol as a transportation fuel, these efforts have been piecemeal.

The Program has looked at how economic instruments can be used to support technologies with the potential to reduce energy-based carbon emissions on both the demand and supply sides of the energy equation, and at three different stages of development: mature technologies, emerging technologies and longer-term, new technologies. This analysis was carried out through case studies commissioned by the NRTEE on industrial energy efficiency, emerging renewable power technology and hydrogen energy technology.

It should be noted that, in presenting the findings and recommendations of the Program, we are drawing not only from the specific analysis carried out in the case studies (and their general lessons for the use of economic instruments) but also from the consultation process conducted as part of the Program's work.

What role can economic instruments play in reducing energy-based carbon emissions in Canada over the next quarter century?
What are the constraints that will determine the design and application of such instruments?
How can we undertake a coordinated transition toward a lower carbon emission energy system? The 25-year perspective arose from the NRTEE's conviction that a sole focus on the Kyoto timetable, while necessary to meet our international obligations, would not allow sufficient time for the optimum, orderly development and implementation of mitigation and adjustment strategies. Investment decisions are being made now about capital stock that may last for several decades. Without clear long-term direction with respect to climate change policy, long-lived, carbon-inefficient new stock will continue to be installed, complicating future mitigation efforts. The NRTEE's longer-term horizon allows for fundamental shifts in the energy system. It reflects the advice of bodies such as Natural Resources Canada (NRCan)'s Advisory Board on Energy Science and Technology, which recommended that "to encourage the sustained and sustainable efforts required to meet the threat of climate change, both reduction of emissions and response to its effects, a long term focus on the 2015-2050+ time-frame will be required, including stable and sustainable policies."²