Ottawa tinkers with carbon tax regulation to better protect 4 Canadian sectors from foreign competitors not subject to carbon pricing…nothing to see here, folks

Critics of carbon pricing have got themselves into a bit of a contradiction with their reactions to Ottawa’s minor adjustment Wednesday of the federal carbon tax: they claim it hurts industry “competitiveness,” but then scream foul when the government tinkers with the program to address those very competitiveness issues. Unfortunately for Canadians, the anti-carbon tax politicians and industry groups are distorting sound economics for political gain.

Jason Kenney, leader, United Conservative Party.

For instance, here’s Alberta UCP leader Jason Kenney, who has promised to kill the province-wide carbon tax if he becomes premier next spring, making political hay on Twitter: “Nice of PM Trudeau to admit his carbon tax hurts industrial competitiveness. Yet Trudeau Libs & NDP accomplices persist in pushing carbon taxes on everyday families, raising cost of gas, home heating & even groceries. How about an average family’s ability to compete & thrive?”

And here’s Tim McMillan, CEO of the Canadian Association of Petroleum Producers, pretending that someone other than economists have designed Canadian carbon tax regulations: ““Until we make economics a fundamental part of our climate policy, we are going to struggle to get investment in Canada,” as reported by Postmedia.

Economist Trevor Tombe summed up most economists’ reaction to McMillan’s comment in this tweet: “… but… that’s exactly what … oh, forget it… < turns twitter off >”

The CAPP response is particularly disengenious.

Canada’s biggest upstream trade organization released a climate policy study just last month that harped on the need to protect “Energy Intense, Trade Exposed” industries like oil and gas, which was not affected by yesterday’s changes.

The mechanism to protect EITE sectors is called “output-based allocations,” or OBAs as they are commonly referred to. This is what Ottawa tinkered with, not the carbon tax itself.

“This is not a softening of the carbon price. The price, and coverage of the carbon tax remains totally unchanged,” University of Calgary economist Kent Fellows explained in an email.

Tim McMillan, Canadian Association of Petroleum Producers.

Here’s how the system works, courtesy of the Environment and Climate Change Canada’s technical backgrounder:  “…industrial facilities in the system will face a carbon price on the portion of their emissions that are above a limit, which will be determined based on relevant output-based standards (emissions per unit of output).”

So, the government sets an emissions threshold, but it only applies the carbon tax to a percentage of a company’s emissions.

That percentage was initially set at 70 per cent, meaning 30 per cent of emissions were taxed.

Ottawa’s changes raised the threshold to 90 per cent, meaning the tax will paid on only 10 per cent of emissions.

Why did the federal government increase the subsidy rate for those four industries?

Economists modelled how the system would work in a variety of industries in two phases. After finishing the second phase, the data said that the four industries are vulnerable to competition from jurisdictions like the United States that don’t price carbon.

Raising the threshold to 90 per cent applies just enough extra cost to encourage companies to innovate and reduce emissions, while ensuring they can compete against imported goods.

“This is another way of saying, it protects the competitiveness of Canadian firms (subject to a carbon tax) that end up competing with non-Canadian firms (which are not subject to a carbon tax). Basically, it focuses the attention of firms on the intensity channel while letting them compete internationally,” is how Prof. Fellows explains it.

What policymakers want to avoid is “carbon leakage,” which can happen if Canadian products are taxed too stringently and then are pushed out of the market by cheaper foreign goods upon which no carbon tax was applied.

Prof. Kent Fellows, School of Public Policy.

In other words, this is exactly the type of protection CAPP is calling for. (as an aside, the Alberta Carbon Competitiveness Incentive Regulation is designed almost exactly like the federal system, the OBA subsidies are actually more generous, and CAPP is still dissatisfied, suggesting that the only option acceptable to Canada’s oil and gas producers is the Donald Trump/Rick Perry model: technology innovation supported by government but no regulation or carbon pricing)

And why are McMillan and Kenney are publically carping about an improvement to the federal carbon policy anyway?

In the case of McMillan, far and away the majority of Canada’s oil and gas production occurs in Alberta, where the CCIR is an effective and elegantly designed policy, according to the economists interviewed by Energi News.

What more does CAPP want? We don’t know because it has thus far declined to explain the detailed changes it would like to see.

In the case of Kenney, shouldn’t he approve of Ottawa doing more detailed economic modeling, then adjusting regulations to better position industry to compete against other countries?

This seems like pretty good policymaking. The many economists commenting on social media yesterday certainly think so.

As Fellows wryly observes, “I think this story has been misinterpreted,” which he partly blames on poor communications by Ottawa.

But let’s put the other part of the blame on intensely partisan politicians like Kenney and self-interested industry representatives like McMillan who are torquing the announcement to score cheap points in their quest to water down Canadian climate policy until it looks like it was crafted by the Trump Administration.

Which is to say, nothing.