Benefits and Costs of the Regulatory Framework for Air Emissions

Canada’s New Government is the first to regulate both greenhouse gas emissions and air pollutants from industrial emitters, paving the way for a cleaner, healthier environment for Canadians and future generations.

The plan will impose reductions of greenhouse gas emissions beginning in 2010, and steadily becoming more stringent thereafter. The plan will also implement world class national caps on industrial emissions of key air pollutants, as early as 2012, which will bring significant benefits to Canadians in terms of improvements to our health and our natural environment. 

The plan represents a balanced approach, one that provides the time and the tools needed to achieve real and tangible environmental improvements in an economically responsible way. 

Significant Benefits

The plan will have a number of important benefits for human health and welfare in the short to medium term, particularly with the full implementation of the air pollution targets as early as 2012.  The benefits of reduced greenhouse gas emissions will materialize over time as Canada and the world’s other emitters begin to transition to less carbon intensive economies.  

Table 1: Estimated reduced health impacts, 2015

The estimated total health benefits by the year 2015 from the reduced risk of death and illness associated with these air quality improvements are over $6 billion[1]annually.

The health benefits include: reductions in premature mortality, chronic bronchitis cases, hospital admissions, emergency room visits, child acute bronchitis, asthma symptom days, restricted activity days, minor restricted activity days and minor symptom days (Table 1). 

Figure 1: Total Benefits and Per Capita Health Benefits

The distribution of these health benefits will vary across provinces, with per capita benefits highest in central and western Canada (Figure 1). 

In addition to these health benefits, environmental benefits will strengthen our ecosystems and wildlife.  For example, ozone can hamper photosynthesis and increases the vulnerability of plants to pests and other stressors. The regulated targets for air pollution will reduce ozone levels and the associated stress to agricultural plants, resulting in an estimated increase of production valued at about $123 million per year for key agricultural crops in Canada.[2] 

Manageable Costs

Strong environmental regulation to reduce greenhouse gases and air pollutants will inevitably come at a cost – and those costs will be borne, at least in part, by individual Canadians and their families.  However, environmental solutions should be economically responsible.  The new government’s plan achieves this balance.  It will provide industry with the necessary time to adjust and align significant investments, such as those related to carbon capture and storage, with their capital investment cycles, resulting2007-09-05rovide access for Canadian businesses to international credits from recognized instruments such as the Kyoto Protocol’s Clean Development Mechanism. 

Economic analysis performed by Environment Canada indicates that these costs will be manageable relative to total national Gross Domestic Product (GDP), but not inconsequential. Moreover, inclusion of potential economic costs associated with other related initiatives, such as the government’s clean transportation strategy and previously announced program funding, could increase overall costs.  The combined impact of all of these measures could result in an economic impact up to a level not exceeding 0.5% of national GDP in any given year up to 2020.   It should also be noted that there will likely be some year to year variation in GDP impacts reflecting the ebb and flow of industry investments over this period, primarily in the early years of the regulations as industries respond by accelerating investments in more energy efficient, less polluting capital and technologies. 

Figure 2: Change in Energy Prices (National)

At the national level, impacts on energy costs are expected to be most pronounced with respect to electricity, where prices could rise by up to 6% or so by the end of 2020, assuming full pass-through by utilities of any increased production costs (Figure 2). 

In provinces that are heavily dependent on coal-fired electricity generation, however, electricity prices could rise more than this, but the increase would not average more than 10% up to 2020.  National average price changes for natural gas will be significantly less than for electricity, and increases to about 1% over the forecast period.  It is not expected that the regulatory package will have an impact on transportation fuel prices.

The economic costs associated with this plan are real, but manageable.  This is achieved because the regulatory package is designed to provide industry with the necessary time to adjust and align investments, including in new technologies such as carbon capture and storage, while ensuring significant and steadily growing reductions in greenhouse gas and air pollutant emissions.

The benefits of this initiative are equally real, but in many respects, invaluable – cleaner communities and natural spaces, healthier children, fewer premature deaths, more sustainable natural resources, and, for the first time since signing the Kyoto Protocol, meaningful contributions by Canada to the global effort to control greenhouse gas emissions. 

Canada’s New Government is guided by a balanced commitment to environmental protection and economic stewardship. Overall, the new government’s plan presents Canadians with concrete solutions to environmental challenges and meets their expectations for effective and economically responsible government measures to secure a cleaner and healthier environment for themselves and their children. 

Annex 1 - Overview of Economic Modeling Framework used in this Analysis 

The approach used in analyzing the economic consequences of meeting Canada’s Regulatory Framework for Air Emissions is comprised of three major components:

• Business-as-Usual Scenario – The most important assumption is the “business-as-usual’ (BAU) outlook, which projects emissions growth in the absence of additional policy.  The BAU reflects the most recent understanding of oil and gas development and prices, additions to electricity generation capacity and improvements in energy intensity.  The key assumptions in the modeling structure were aligned with the 2006 Canadian Energy Outlook (CEO) from NRCan.  
• Policy package and other assumptions – this includes the required greenhouse gas targets and air pollutant targets by sector, Technology Fund, and international carbon credit trading parameters.
• Modeling Structure – The model structure is comprised of two models: i) ENERGY 2020, a detailed energy-technology model of Canadian energy markets; and ii) The Informetrica Model (TIM), a macro-econometric model of the Canadian economy developed by the Ottawa-based consulting firm Informetrica Ltd. 

As illustrated in Chart 1, the analytic process operates by first modeling the policy package in ENERGY 2020.  In this phase of the analysis industrial targets are directly evaluated for their emissions and financial impacts (i.e., private and public investments, energy savings/change in energy mix, permit transactions and emissions reductions).  The estimates of the incremental investments, energy costs and savings, and implied GHG emissions charges become inputs to the TIM model that estimates the GDP, employment, trade, government finance and other measures of economic performance.  The impacts of output, employment and investment changes are fully diffused across energy markets and the economy via a feedback mechanism between the two models.

Chart 1: The Analytic Approach

E2020 is an integrated multi-region, multi-sector North American model that simulates the supply, price and demand for all fuels.  The model’s main outputs include changes in energy use, energy prices, GHG emissions, investment costs and potential cost savings resulting from the policy change.  These results help to identify the direct effects of GHG reduction policies.  The investments and savings, in turn, are inputs to the macro-economic analysis, which assesses the impact of these investments as well as monetary flows on the whole economy.

The Informetrica Model (TIM) examines consumption, investment, production and trade decisions in the whole economy.  This analysis captures not only the interaction among industries, but also the implications for changes in producer prices, relative final prices and income.  It also factors in government fiscal balances, monetary flows, interest and exchange rates.

TIM represents 133 industries at a provincial and territorial level.  It also has an international component to account for exports and imports, which covers approximately 100 commodities. The TIM model allocates the national results by province and territory.  TIM projects the direct impacts on the economy's final demand, output and employment, price formation, and sectoral income that result from various policy approaches.  The projection estimates the effect of climate change policy and related financing assumptions on the national economy.

While very sophisticated analytical tools, no model can fully capture the complicated interactions between and within markets, and between firms and consumers associated with a given policy shock.  However, macroeconomic models can provide directional guidance with respect to the broad economic consequences likely to arise from a policy change, based on the best information available, and within the constraints of the assumptions applied.  Several variations of macroeconomic models exist, and have different strengths and weaknesses.

Annex 2 - Overview of Health and Environment Benefits Evaluation Framework used in this Analysis 

A number of tools have been developed to calculate impacts on the Environment from air pollution. The aim of these tools is to assist in the task of quantifying these impacts to provide information to decision makers on the benefits of policies that reduce air pollution.

VOICCE - Value of Ozone Impacts on Canadian Crops Estimator

The Value of Ozone Impacts on Canadian Crops Estimator (VOICCE) model has been developed to estimate ozone impacts on agriculture. The model works by using various ozone concentration changes within 82 agricultural regions in Canada to calculate the impacts of ozone on the production of 10 crops.

The VOICCE model includes Dose Response Functions (DRF) that relates concentration changes in the level of ozone and changes in the production yield of individual crops.

Based on the production levels in each of the agricultural regions in all 10 provinces the value of decreased output is translated into costs by considering the decrease in revenue to the farmer. The model has the ability to consider price elasticities; however, historic crop commodity prices are used to estimate the impact on farmer revenue for this study.

The crops that are covered in the VOICCE model include spring wheat, winter wheat, canola, soybeans, corn for grain, corn for feed, alfalfa, hay, potatoes and tobacco. These are the crops where there is sufficient scientific study to determine dose response functions (DRF).

Air Quality Benefits Assessment Tool (AQBAT)

The Air Quality Benefits Assessment Tool (AQBAT) is a simulation model tool designed to estimate the human health and welfare benefits or damages associated with changes in Canada’s ambient air quality. The tool is developed in an Excel @Risk environment to assess the impact on the Canadian population of pollutant reduction scenarios.

AQBAT is an open ended (expandable in various ways) Excel VBA application which generates new models, modifies previously generated models, controls all aspects of user inputs, controls the Risk environment and runs simulations, saving and presenting specific inputs, outputs, reports and charts. It enhances the capabilities of the previous Air Quality Valuation Model (AQVM).

Pollutants in AQBAT

AQBAT account for outdoor concentrations of various pollutants that are sampled daily at over 500 sites across Canada by the National Air Pollution Surveillance (NAPS) including:

• carbon monoxide (CO) (ppm)
• nitrogen dioxide (NO₂) (ppb)
• ozone (O₃) (ppb) (all year, May-Sep, Apr-Sep)
• sulphur dioxide (SO₂) (ppb)
• fine particulate matter (PM2.5) (ug/m3) (dichot and teom)
• particulate matter (PM10) (ug/m3) (dichot and teom)

Current AQBAT Health Endpoints

• Acute (short-term) Exposure Mortality
• Acute Respiratory Symptom Days
• Adult Chronic Bronchitis
• Asthma Symptom Days
• Cancer type 1 Cases (AQVM)
• Cancer type 2 Cases (AQVM)
• Cardiac Hospital Admissions
• Child Acute Bronchitis
• Chronic (long-term) Exposure Mortality
• Elderly Cardiac Hospital Admissions
• Emergency Room Visits
• Minor Restricted Activity Days
• Respiratory Hospital Admissions
• Restricted Activity Days

Geographic Area Types (2001 census)

• National (Canada)
• Provinces/Territories (13)
• Census Divisions (CDs)
• Census Agglomeration Areas (CAs)
• Census Metropolitan Areas (CMAs)