An oil pump jack pumps oil in a field near Calgary.Todd Korol/Reuters
Grant Bishop is the Calgary-based founder of KnightFork, which builds data-driven tools for carbon pricing and the energy transition.
Following up on its pledge during last year’s election, the Trudeau government published its proposal for capping greenhouse gases from the oil and gas sector.
Ottawa proposes such a cap under either of two approaches: regulations under the Canadian Environmental Protection Act (CEPA) to create a cap-and-trade system across oil and gas producers; or a higher carbon price and greater stringency for oil and gas facilities under the Greenhouse Gas Pollution Pricing Act (otherwise known as the federal carbon pricing “backstop.”)
When it comes to economic efficiency or constitutional law, either approach is questionable. To minimize economic costs of reducing GHGs, singling out one industry is bad policy. Moreover, picking favourites among industries – and, indeed, imposing higher costs on activities expressly under provincial jurisdiction – may prove unconstitutional.
First, since the objective is to reduce GHGs from across our economy with the lowest economic cost, why cap only one sector? Why not impose cap-and-trade economywide?
Climate change is a real and urgent threat to human civilization that requires rapid and dramatic reductions in our carbon intensity. Canada cannot be a free-rider on what must be global GHG reductions. Canadians should demand any federal government provide credible plans for decarbonizing our economy.
However, the exigent end does not justify any means. Climate policy must be designed to minimize the economic costs for the necessary GHG reductions.
A kilogram of carbon dioxide has the same atmospheric effect whether emitted from a Hamilton steel mill, Saguenay smelter, Vancouver Island pulp plant or the tailpipe of your SUV. Governments face highly imperfect information about the economic value of these different activities.
This underpins the rationale for an economywide carbon price so that every company or household internalizes the environmental cost when undertaking some GHG-emitting activity or investing in new technology. A market-based carbon price ensures that companies and households reduce the lowest-value activities.
For the past decade, I have argued that Canada should adopt a countrywide cap-and-trade system across all sectors and address impacts on industrial competitiveness through border carbon adjustments – that is, rebating levies for exports (as Canada does for the GST) and imposing tariffs on the carbon intensity of imports.
Implementing a cap-and-trade system and border carbon adjustments would certainly be administratively complex, but no more than the proliferating assortment of federal climate initiatives that we have now.
Moreover, establishing a cap-and-trade system for oil and gas alone will demand significant investment in administrative and IT architecture. Why not simply include other emitting industries, including fuel distributors, in such a system?
One answer may be politics. One sympathizes with a federal government struggling to sustain a consensus around carbon pricing, minimize impacts on households and spread out the costs of transitioning to a low-carbon economy over a manageable horizon.
However, the risk of conferring broad federal jurisdiction for greenhouse gases was that a federal government might pick favourites among industries – especially if an industry is concentrated in a region that doesn’t deliver many seats for the governing party.
Indeed, in the Supreme Court’s decision last year affirming the constitutionality of the federal carbon pricing backstop, the dissenting justices worried that regulations for pricing industrial emissions could be used to privilege or penalize different industries.
These justices were especially concerned about the wide discretion for imposing different costs for different industries. Although avoiding this issue when upholding the backstop statute, the court’s majority nonetheless left open that “industrial favouritism” in any regulations could be challenged as unconstitutionally encroaching on provincial jurisdiction.
My own view is that greenhouse gases are a quintessential “national concern” under our Constitution and should fall exclusively within federal jurisdiction. However, I believe the Supreme Court should regard differentiated industry-by-industry standards and carbon prices as intruding on provincial jurisdiction.
Ottawa’s alternative proposal of regulations under CEPA to cap oil-and-gas GHGs also appears constitutionally tenuous. This is because the jurisdiction for CEPA is the federal “criminal” power – which requires a prohibition backed by a penalty.
The cap-and-trade system envisioned in Ottawa’s proposal arguably looks less like “criminal” law than an intricate regime for regulating a specific industry. Affirming a cap-and-trade system as valid “criminal” law would open far-reaching possibilities for federal intrusion onto provincial turf – from standards for professional licences, to building codes to commodity price controls.
Of course, the Supreme Court may not share my view. But the constitutional questions around the proposed oil and gas cap are obvious, and any cap will certainly be challenged by provinces.
Therefore, Ottawa should direct a reference to the Supreme Court to resolve the constitutional questions expediently and truncate paralyzing uncertainty for industry.
Economically and constitutionality, Ottawa must answer why it’s capping one specific sector. If the national concern is greenhouse gases, shouldn’t everyone pay the same carbon price everywhere?
Keep your Opinions sharp and informed. Get the Opinion newsletter. Sign up today.