Trump’s energy policies may threaten Canadian business

As president-elect Donald Trump prepares to assume office, it’s clear that major changes are in store for American climate and energy policy.

As president-elect Donald Trump prepares to assume office, it’s clear that major changes are in store for American climate and energy policy. And those changes will impact Canada.

Trump’s cabinet appointments, in conjunction with the Republican Party’s platform in the 2016 election, leave little doubt that the United States will adopt an approach to environmental and energy issues that differs markedly from the one embraced by the outgoing administration of Barack Obama.

With Trump at the helm, the U.S. may explicitly repudiate the greenhouse gas reduction targets that America accepted as part of the 2015 Paris climate change agreement. Obama’s ambitious Clean Power Plan, which aims to accelerate the de-carbonization of electricity generation, is likely to be delayed, shelved or struck down by the U.S. Supreme Court. Trump has pledged to boost U.S. oil and gas production and encourage stepped-up exploration activity on federal lands and offshore. He has also signalled that he will approve the Keystone Pipeline project that Obama pointedly rejected. Finally, there is now zero chance that the U.S. will implement any kind of national carbon pricing policy over the next several years.

All of this poses a dilemma for Canadian policy-makers, who have been striving to fashion a pan-Canadian strategy to address climate change, notably by putting a price on carbon and other greenhouse gas emissions.

While some Canadian politicians claim we can set our climate and energy policies without paying attention to what the United States does, they are fooling themselves. It’s long been recognized, in Ottawa and the provincial capitals, that Canada’s economic interests are best served by working in tandem with the U.S. on climate change and energy security. Trump’s arrival in the White House doesn’t invalidate that logic.

A recent agreement reached by Ottawa and eight provinces (Manitoba and Saskatchewan refused to sign) would establish a minimum nationwide carbon price of $10 per tonne in 2018, rising to $50 per tonne by 2022. In principle, a national system of carbon pricing makes sense – and it’s certainly preferable to the existing hodgepodge of provincial carbon levies and regulatory requirements. But it will be challenging to implement all of the new pan-Canadian framework given the policy preferences of the Trump administration.

Imagine that Canada moves to an across-the-board carbon tax equal to $50 per tonne of emissions by 2022, while the effective national carbon price in the U.S. remains where it is, near zero. This would result in roughly a $20-billion to $25-billion jump in annual energy costs for Canadians, while Americans face no similar increase.

Governments in Canada can be expected to return some of the carbon-related tax revenue to households and businesses, via offsetting tax reductions and other measures. Still, in this scenario, business investment in the energy industry, as well as in segments of the manufacturing sector, would almost certainly drain out of Canada into the U.S. to take advantage of appreciably lower energy costs there – both for primary energy (crude oil, natural gas, and coal) and for fossil fuels used as inputs in some parts of manufacturing (e.g., refining, chemicals, plastics, etc.).

With higher energy and fossil fuel input costs, Canada would lose ground. The Americans would have a competitive advantage in most traded-goods industries, including energy, mining, materials, forest products, agri-food, vehicle manufacturing, metal fabrication, chemicals and petrochemicals, and cement, to name a few. Transportation costs would also be higher in Canada because of escalating carbon-based taxes on petroleum – thus penalizing Canadian industries that need to ship to market.

Moreover, Trump’s intention to dramatically slash business taxes would compound the competitive advantage enjoyed by the U.S. thanks to relatively cheap energy.

It’s true that putting a price on carbon is the most efficient way to foster reductions in fossil fuel use, and therefore in greenhouse gas emissions. And relatively small-scale carbon levies are unlikely to produce large economic effects, especially if the resulting revenues are recycled through other tax cuts and incentives.

But marching to a $50 Canada-wide carbon price while the U.S. stands pat risks diminishing the competitive vitality of a number of industries that account for the bulk of Canadian exports and play a significant role in sustaining regional economies across the country.

The message for Canadian policy-makers is clear: yes to carbon pricing but tread carefully.

Jock Finlayson is executive vice-president of the Business Council of British Columbia.

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