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More US inaction on climate change is good for Canada’s economy

With President-elect Trump and the Republicans now controlling all the levers of federal power in the United States, it seems reasonable to expect a significant backsliding on US climate change ambition. Indeed, my twitter feed this morning exploded in one big climate Armageddon with charts of coal stocks rising from the dead, articles on eviscerating the EPA and the impending decapitation of the Clean Power Plan.

In Canada once again, the chorus of competitiveness neurosis is warming up (cue Premier Wall). The difference today, of course, is that the refrain of climate policy doom and gloom seems just a little more plausible and a lot more threatening.

But really, concern over misaligned carbon prices with the US has defined Canadian climate policy for decades. It has pervaded all decisions about acting on climate policy, underscored by loud, local and often justifiable concerns over getting offside with US efforts. Politicians of all stripes have heard the chorus, selecting to use efficient climate policy in the form of carbon pricing paired with mechanisms to reduce competitiveness impacts on the highly traded, emission intensive industries. Through a mix of emission exclusions, free allocations, tax breaks and technology investments, coupled with defined cost exposure, policy within the Canadian federation is now designed to minimize the carbon risk on our big export engines.

US climate action under Obama has lagged for a myriad of reasons, and little was likely to change under a Clinton presidency, at least for the next few years as the Clean Power Plan ground though the courts. However, as of today, expectations of future US climate policy will be heavily discounted. But expectations matter in climate policy, and are at the root of at least 3 reasons why Canada might just benefit from slowing US climate effort.

First, carbon pricing is about technology deployment and innovation. To the extent climate policy within the Canadian federation is driving innovation, Canadian firms are better able to compete in a carbon constrained world. With the US backing away from climate policy, Canadian innovators will be better placed to compete in the US marketplace.

Second, Canadian GHG policies are a hedge against future low carbon transition costs. By delaying ambition, the US is only making it harder and more expensive to reduce emissions later. Suppose there are years of inaction under a Trump presidency. US businesses will discount future carbon costs leading to the deployment of higher emitting equipment. But boilers, buildings and generators are long lived. When, not if, the US decides to move as the world trends towards more ambition, switching out this high emitting capital will be expensive.

Conversely, expectations of credible climate policy in Canada will continue to impact decisions leading to deployed capital with a reduced carbon risk profile. Improved energy productivity due to current GHG policy will most likely give Canadian firms a carbon competitive advantage.

Third, when the US sneezes Canada catches a cold. With less climate policy in the US, the US economy will be marginally larger. The avoided loss in US economic activity will create more income in Canada through trade, making low carbon investments here more affordable. This is not an unambiguous "benefit" given that our own climate policy will raise costs and impact competitiveness. But if the US chooses not to move, the costs of our own climate policy are offset somewhat through avoided income effects in the US.

Of course, the global environment is the big loser with continued US inaction.

But to what extent can we influence Trump climate policy from here in Canada? Likely not much, so why not make the best of a poor situation?

Why not recognize that Canada has established cost-effective climate policy that minimizes competitiveness impacts? Recognize that carbon policy is driving innovation, which will improve our ability to sell more at home and abroad. And finally recognize that climate policy is a long-term affair where action now creates economic opportunities that the doom and economic gloom chorus should also sing about.

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