Climate change and the limits of Canadian sovereignty

2008-08-20

in Canada, Economics, Law, Politics, The environment

Thesis: Canada is free to enact more stringent climate policies than the United States, but not free to enact less stringent ones.

Argument:

  1. As long as little is being done in the United States, American corporations are not concerned about being made uncompetitive with foreign firms because of climate change policies.
  2. If the United States did adopt a serious climate policy (a national cap-and-trade plan with auctioning, perhaps, or a carbon tax), those firms would suddenly be very concerned about losing business to firms not thus restrained. This is especially true in sectors with high emissions per dollar’s worth of output. This includes heavy industry, the petroleum sector, and so forth.
  3. These firms will lobby the American government to pressure its trading partners to adopt comparable policies.
  4. These firms will find many supporters in Congress who think similarly. Politicians will also be fearful of domestic job losses and the relocation of production to foreign jurisdictions with less stringent rules.
  5. In the case of Canada, legal vehicles through which this might occur include the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO). Potentially, other agreements pertaining to transboundary pollution might play a role.
  6. If taking a legal route fails or is not desired, it is always possible for the US to put enormous trade pressure on Canada. 85% of Canadian exports go to the United States and even illegal trade blocking moves by the US can be so painful as to force a surrender (as with softwood lumber).
  7. No Canadian government will be willing to sacrifice access to the American market, even if avoiding it requires a considerable loss of face.

As such, there seems to be a decent change that if a new administration in the United States adopts a relatively strong national climate change mitigation policy, some version of the events above will lead to the introduction of a comparable regime in Canada. Of course, the ability of even an Obama presidency with Gore as a climate czar to get emission regulations through Congress cannot be taken for granted, largely on account of the short-term interests of the selfsame corporations mentioned above.

Comments? Counter-arguments?

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{ 7 comments… read them below or add one }

. August 20, 2008 at 11:14 am

The doomed fate of climate change legislation
In either an Obama or McCain adminstration, climate legislation will be back-burnered

Just months ago there was a palpable sense of optimism that no matter who is elected president this November that the U.S. would soon embark on serious climate change legislation. I think recent events have shown that the chances of that happening are slim to none.

Sarah August 20, 2008 at 2:52 pm

I don’t know if I buy it because a) all sorts of arguments can be made for exceptionalism, and b) US business benefits from Canadian products, including a lot of raw materials extraction that isn’t especially mobile.
For instance, do the Americans really have an interest in shutting down the tar sands production? If not (and the energy security arguments would say not) then they might not the cost to skyrocket, even if a similar carbon tax regime were applied in the US. Similarly, a carbon tax would likely clobber the mining industries, but the American national interest might lie in continuing to buy cheap raw materials rather than in encouraging Canada to make the extraction more expensive.
At minimum, the Americans might be happy for there to be a ton of loopholes in any carbon tax applied in Canada (or similar policy designed to increase the cost of CO2 intensive processes) provided that those loophoples accord with their current perception of their national interest.

R.K. August 20, 2008 at 3:34 pm

Sovereignty doesn’t mean you can do anything painlessly. Canada can establish whatever climate change policy it likes, though it should be aware that this will have an effect on its economic and political relationships with other states.

“These firms will lobby the American government to pressure its trading partners to adopt comparable policies.’

I suspect the most pressure will be exterted on the governments of states that make things that American firms also make. As pointed out above, American corporations still have a huge interest in cheap access to raw materials.

. August 20, 2008 at 6:00 pm

The best example of [Obama’s pro-market] approach, however, may be his climate policy. By last year, Democrats in Congress essentially agreed that to reduce greenhouse-gas emissions, the government should place a nationwide cap on these emissions and then issue tradable permits giving companies the right to produce them (thus the term “cap and trade”). Most Congressional bills envisioned giving away many of the permits to power companies. Economists, by and large, considered this giveaway to be the worst part of the plan. It would require Congress to decide how many free permits each company should get and would set off a frenzy of corporate lobbying.

The alternative was to auction off the permits — to let the market set their value. “If you don’t auction 100 percent of the permits,” Goolsbee told me, “this could be one of the biggest pieces of corporate welfare ever.” With Congress making the decisions, the power companies with the best political connections might get the permits. With a full auction, the permits would end up with companies willing to make the highest bids. Presumably, these would be the most efficient companies, the ones able to produce the most energy (and profits) for a given amount of greenhouse-gas pollution.

The auctions would have another big advantage too. They would raise billions of dollars for the government, money that could then be returned to taxpayers to offset the higher energy prices created by the emissions cap.

It seems likely that a President Obama would sign a cap-and-trade bill even if it did give away some permits. But candidate Obama has at least moved the debate toward a more pro-market solution.

Milan August 20, 2008 at 11:08 pm

The raw materials argument is a strong counterpoint.

As for sovereignty not meaning unlimited license to act in any way without consequence, the point is obvious but well taken.

A stronger thesis would be: “A Canadian government would find it far easier to maintain a climate policy stronger than the one in the United States than it would in maintaining a weaker one.”

. August 25, 2008 at 11:50 am

Inside WCI: Federal pre-emption
What happens with a new president?
Posted by Eric de Place (Guest Contributor) at 7:51 PM on 22 Aug 2008

You can’t talk about regional cap-and-trade very long before someone brings up the subject of pre-emption. What happens if the federal government creates a national cap-and-trade program? Would the regional programs disappear? And if so, why bother working on them?

First, let’s get one thing straight: no one knows what will happen.

Seriously. No one has any idea. And that includes me.

No matter how confidently anybody expresses an opinion on pre-emption, you can rest assured that it’s just speculation. And that uncertainty is precisely why it’s so important to work on regional programs like WCI: regional cap-and-trade is what we’ve got. There’s simply no guarantee we’ll have a federal alternative soon.

. September 22, 2008 at 6:55 pm

Indeed if the Green Shitt fails then I, as someone who favors a carbon tax with offsets on personal and corporate income taxes, must concede that the policy will not be picked up politically for a long time.

In other words, politicians of every stripe will be unwilling to take the political risks involved. It will therefore be like private delivery of health services paid for publicly, something permitted under the Canada Health Act but deemed political suicide by politicians everywhere.

We will therefore settle for a series of rather ineffectual but feel-good policies such as the Conservatives “eco” ones — energy efficiency etc — and intensity targets from which companies can and will escape by paying into a technology fund which will bring benefits perhaps many years from now.

When and if the Americans establish a cap-and-trade system, as Mr. Obama and Mr. McCain have endorsed, we will seek to negotiate joining the U.S. system to make it a North American one.

Similarly, should the Americans adopt tougher vehicle emission standards than those proposed by the Harper government, we will toughen ours.

In other words, the Americans will save us from our own policy incoherence. We are certainly going to miss Mr. Harper’s target of a 20-per-cent reduction in greenhouse gas emissions by 2020 based on a 2006 base line.

Every outside group that I am aware of from bank economists to the Sierra Club has said so.

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