Which Canadian climate policies will have the biggest impact by 2030?

Industrial carbon pricing systems are the single biggest driver of emissions reductions in 2030, and can be even more impactful if design is improved.

Market-based climate policies targeting industrial emissions in Canada are having the biggest impact on climate progress. Reuters photo by Mark Blinch.

This article was published by the Canadian Climate Institute on March 21, 2024.

By Dale Beugin, Anna Kanduth, Dave Sawyer, Rick Smith

Since the 2015 Paris Agreement, Canada’s efforts to combat climate change and reduce emissions have accelerated. Governments across the country have increased their ambition, passed laws to help keep climate progress on track, and implemented and announced a suite of climate policies.

But are those policies actually reducing the emissions causing climate change? We worked with Navius Research to model the effectiveness of Canadian climate policy to date, and their projected impacts on emissions out to 2030.

That analysis concluded that a mix of major climate policies across Canada are reducing emissions today, and market-based policies targeting industrial emissions (which we refer to as large-emitter trading systems) are having the biggest impact.

Since some climate policies are still either in their infancy or just being implemented, we expect a bigger impact on Canada’s emissions if those policies continue out to 2030 and beyond. But that result depends on governments across Canada staying the course on those existing policies that are making a real impact and following through to implement developing and announced policies, while also identifying and addressing counterproductive policy interactions.

There are different ways to assess the impact of climate policies on Canada’s emissions. In this Insight, we tackle the question from two angles. First, we explore how existing climate policies, including federal, provincial, and territorial carbon pricing systems, are already reshaping Canada’s emissions trajectory. Second, we look at the impact of major climate policies between 2025 and 2030 to identify what’s at stake in government decisions moving forward.

CLIMATE POLICIES ARE WORKING, WITH INDUSTRIAL CARBON PRICING LEADING THE PACK

There’s no question that existing (“legislated”) policies are working, while those under development have the potential to do much more (Figure 1). Our recent independent assessment of the federal government’s 2030 Emissions Reduction Plan Progress Report also looked at what would happen if Canada hadn’t implemented any emissions-reducing policies. In this “no climate policy” scenario, emissions would be higher today and rising steadily—reaching 765 megatonnes (Mt) in 2025 and 775 Mt in 2030, or 23 and 41 per cent higher than projected emissions under our legislated policy scenario, respectively.

FIGURE 1: CANADA’S EMISSIONS PATHWAYS ACROSS MULTIPLE POLICY SCENARIOS

This means that policies currently in place—from carbon pricing to the vehicle efficiency standards to support for heat pumps—prevent 226 million tonnes (Mt) of carbon emissions in 2030. That’s equivalent to the current emissions profiles of Quebec and Ontario combined.

In addition, every tonne of emissions reduced lowers long-term climate impacts and damages. The impacts of climate change are driving up the cost of living for Canadians and are a drag on the Canadian economy.

Of these 226 Mt of avoided emissions, our analysis estimates that federal, provincial, and territorial carbon pricing systems play a leading role. Carbon pricing consists of two distinct types of policies.

The first policy is the fuel charge paid by most households and small businesses (often referred to as the “carbon tax”—and accompanied by quarterly rebates). The fuel charge contributes between 8 and 9 per cent (or 19 to 22 Mt).

The second policy focuses on reducing industrial carbon emissions by establishing large-emitter trading systems (LETS). This approach varies by region and includes output-based pricing (such as Alberta’s TIER system), or Ontario’s emissions performance standard. By 2030, these large-emitter trading systems contribute between 23 and 39 per cent (or 53 to 90 Mt) of avoided emissions relative to the no-climate policy baseline. Large-emitter trading systems play a larger role in emissions reductions compared to the fuel charge, in part because they cover a higher share of Canada’s emissions.

IMPLICATIONS OF POLICY DECISIONS MOVING FORWARD

Determining the impact of climate policies implemented to date is one thing. But to understand what’s at stake in the policy choices happening today and going forward, we also worked with Navius Research to estimate the impact of major federal climate policies in the Emissions Reductions Plan between 2025 and 2030. These policies include:

  1. Large emitting trader systems
  2. Fuel charge
  3. Oil and gas emissions cap
  4. 75 per cent methane regulation
  5. Waste methane capture
  6. Clean Fuel Regulations
  7. Investment tax credits
  8. Zero emission vehicle standards

Since policies inherently exist as a package—working together, overlapping, and interacting—isolating a single number of emissions reductions for each policy is challenging. We therefore assessed the impact that each of the analyzed policies could have under two extremes. In the first, the policy is added to a baseline scenario, which does not include the legislated policies we assessed after 2025, namely the large-emitter trading systems, the fuel charge, the clean fuel regulations, and the investment tax credits . This scenario isolates the impacts of the policy without interactions with other ERP policies. In the second, the policy is added to a scenario that includes all other ERP policies. This scenario isolates the impacts of the policy including interactions between ERP policies.

This allows us to estimate the range of incremental emissions reductions attributable to each policy, and demonstrate the implications of policy choices today on future emissions.

Figure 2 depicts the incremental emissions reductions of eight major policies from the Emissions Reduction Plan Progress Report in 2030.

Counterintuitively, the impacts of individual policies are not entirely additive: the combination of multiple policies will lead to fewer emissions reductions than the sum of emissions reductions each policy would deliver in isolation. While individual policies typically have the greatest incremental impact on their own, in practice, governments rely on combinations of policies that interact and overlap. As more policies are necessarily introduced to drive deeper emissions reductions from a given sector or source, the additional contribution of each policy often decreases. The only exception, of the policies we simulated, is the investment tax credits (ITCs), which work better in reducing emissions when paired with other policies.

These ranges highlight policy interactions and the challenges of attributing emissions reductions to individual policies. But notably, even with maximum overlap and interaction, almost all policies are reducing emissions in 2030. Each policy contributes varying levels of incremental emissions reductions, due to differences in their coverage, stringency, implementation timelines, technological availability, and cost, alongside other market drivers. Table 1 summarizes the impact of each policy in Figure 2. Note that the Clean Electricity Regulations are not included in the figure, as the policy does not bind on emissions until 2035.

Critically, this analysis provides a snapshot in 2030 and does not consider the emissions reductions—often significant—expected in 2035 and beyond. Impacts of policies will increase over time: some will only have been in effect for a few years, and others will increase in stringency after 2030—the zero-emission vehicle sales standards are a good example. Emissions reductions from policies will also accelerate over time, given that policies such as vehicle standards and carbon pricing will have the biggest impacts on new, rather than existing equipment. With more time, policies will affect more decisions and have greater impact.

Our analysis shows that, even in comparison to the full suite of Emissions Reduction Plan policies, large emitter trading systems are still the biggest driver of emissions reductions in 2030—contributing between 20 and 48 per cent of incremental emissions reductions in 2030.

Even full implementation of every policy in the Emissions Reduction Plan Progress Report leaves a 42 Mt gap to Canada’s 2030 target. Weakening or backtracking on individual policies could further increase the gap to 2030 as well as reduce fewer emissions in the longer term, creating a need for new or stronger measures to deliver on targets. We’ll return to what else is needed to close this gap in future analyses.

FIXING ADVERSE POLICY INTERACTIONS CAN BRING CANADA CLOSER TO ITS 2030 TARGET

Achieving Canada’s emissions reduction targets requires that governments implement a mix of policy measures—no single policy will get the job done. It’s inevitable that these policies will overlap and interact. However, some interactions are helpful, while others are counterproductive.

There are many examples of helpful policy interactions—where policies work together in ways that are mutually beneficial and improve emissions reduction outcomes. Examples include electrifying home heating while also decarbonizing the grid, or mandating the sale of electric vehicles while also investing in charging infrastructure.

However, sometimes combining policies leads to interactions that must be accounted for and reconciled. In previous Institute analysis, for example, we identify the potential for unhelpful interactions between the large-emitter trading systems (LETS) and several other policies because they can create a surplus of carbon credits in the LETS. In many LETS systems (i.e., output-based pricing systems), emitters pay for emissions above emissions-intensity thresholds, and generate credits when their emissions fall below the threshold. Investment tax credits for carbon capture and storage, for example, make it easier for firms to reduce emissions and thus increase the supply (and decrease the demand) for emissions credits in LETS. The result is lower credit prices and lower the incentives for industry to reduce emissions under the LETS.

The solution to interaction problems isn’t to strip away overlapping policies, which have their own economic and emissions reductions benefits. LETS inherently cover a broad range of emissions, so their overlap with other policies is expected. Instead, the goal is to ensure that they work well with other policies as complements. That means accounting for interactions and increasing the stringency of existing policies to ensure that interaction effects aren’t creating an oversupply in credits, undermining effectiveness.

In particular, our analysis finds that a few changes to LETS can minimize the negative impact of policy interactions and drive an additional 15 Mt of emissions reductions by 2030 using Canada’s current suite of climate policies. One of the most impactful fixes is to set stricter performance standards in large-emitter trading systems.

Beyond delivering additional emissions reductions, strengthening LETS is also important for other reasons. In particular, when designed effectively, LETS can protect the competitiveness of industries while also maintaining the incentives to lower emissions. With jurisdictions around the world either implementing or exploring border carbon adjustments that could apply tariffs to Canadian exports—including the European Union and the United States—maintaining and strengthening a country-wide industrial carbon price will be especially critical to safeguarding the international competitiveness of Canadian industries.

LARGE EMITTER TRADING SYSTEMS ARE CENTRAL TO CANADA’S CLIMATE POLICY SUCCESS

The evidence is clear. Canadian climate policies are already working, and will continue to drive deep emissions reductions into the future—assuming they are maintained or strengthened.

Without policies implemented to date, emissions would be higher today and rising quickly—to a staggering 775 Mt in 2030. That’s 226 Mt higher than projected emissions under our legislated policy scenario, 296 Mt higher than our scenario where governments finalize developing and announced policies, 43 Mt higher than Canada’s emissions in 2005, and 335 Mt higher than Canada’s 2030 target.

Simply put, in a world in which federal, provincial, and territorial governments had not taken action on climate change, Canada’s emissions would be heading in the wrong direction, and fast.

Yet our analysis shows that if governments follow through and implement planned policies—such as the oil and gas emissions cap and the suite of investment tax credits—while also addressing some unhelpful policy interactions with the LETS, emissions will decline to 36 per cent below 2005 levels by 2030—within reach of Canada’s 2030 target.

While the full suite of policies are working to reduce emissions, LETS stand out as especially important for Canada’s climate policy success. They are the largest contributor to emissions reductions in 2030 and are essential to protecting the competitiveness of Canadian industries.

LETS can have an even greater impact. Governments should continue to strengthen the systems by tightening emissions-intensity performance thresholds  and addressing unhelpful policy interactions with other key climate policies. Doing so can shore up expected emissions reductions and deliver additional ones that bring Canada closer to its 2030 target.

Future emissions reductions, however, are not guaranteed without effective and continuing policy implementation. The decisions governments make today will ultimately determine how close Canada gets to the 2030 target, and how well-positioned the country is to meet future targets and remain competitive in a rapidly decarbonizing world.

While the 2030 target is a critical benchmark for Canada’s climate progress, longer-term emissions reductions are also important. Many of the policies discussed—from zero-emission vehicle regulations to investment tax credits—will have growing impact in the longer term that are not quantified in this analysis but that should also inform governments’ cost-benefit analysis.

Critically, backtracking on policies that are making an impact or failing to implement planned policies without credible alternatives will set back Canada’s emissions reduction progress. Most importantly, real, sustained momentum requires regular in-depth analysis on policy implementation and impact, with transparent reporting on the government’s progress.

 

 

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