Under the Kyoto Protocol, Canada undertook in December, 1997, to reduce its emissions of greenhouse gases by the period 2008-2012 to 6% below the level in 1990. That does not sound too daunting until you add in that, from 1990 to 1999, emissions had already risen 15%. Environment Canada estimates that, on the basis of current policy, emissions would have to be cut to 19% of what they would otherwise be by 2010. Few would likely disagree that little analysis supported Canada's undertaking in 1997. There certainly was no clear view of an appropriate policy course. Hence, there was little idea what meeting the emissions objective would mean to economic performance. During the past four years, the federal government, in conjunction with the provinces and various individuals, businesses and organizations, has done a great deal of work on the policy options and their economic impacts. But little of this has yet made its way into the broad public domain. As a result, the prospect of a decision on ratification of the Kyoto Protocol this year is fraying a lot of nerves. The uncertainty is leading to the deferral or abandonment of projects because the probable rates of return simply cannot be accurately calculated.
The federal government has also given a commitment not to ratify until there have been comprehensive consultations. But it is difficult to see how this can be reconciled with a decision this year. Three decision-date possibilities are: the G8 Summit in Kananaskis, Alta., in late June; the late August Earth Summit in Johannesburg, South Africa; and the late October climate change convention in New Delhi, India. The government could do a great deal to defuse the recent tensions over the protocol by giving a categorical assurance that ratification could not possibly be contemplated in time for the first two events. Even the third appears shaky.
For consultations to be meaningful, the government must clearly articulate its proposed policy approach and provide estimates of the economic impacts. It is not ready to do that at this moment. A great deal of policy design issues still need to be sorted out, including sectoral regulatory targets, incentives or penalties, domestic and international emissions trading programs. Other factors include the U.S. decision not ratify the protocol, and the proposed large transfer of income to Russia and developing countries. Let us assume that a proposed policy package could be completed by the end of March. But then the economic modellers would have to be put back to work to estimate the economic impact. Maybe they could complete their work by May.
In November, 2000, the Analysis and Modelling Group of the National Climate Change Process produced a report on the economic and environmental implications for Canada of the Kyoto Protocol. Due to the wide, even wild, range of assumptions, they came up with an estimate that the protocol would lower Canada's real GDP 0% to 3% over the longer term. Casting aside the extreme assumptions and silly policy approaches, their results can more realistically be narrowed to between 1% and 2%. A survey of studies reported in a 2001 Industry Canada report shows a range of up to 2.3% real GDP losses.
Most recently, Environment Minister David Anderson referred to a loss of 0.5% of GDP, while Alberta's Environment Minister spoke of losses between 1.5% and 2.5%, or between $23-billion and $40-billion worth of nominal GDP in 2010. No details on assumptions and models appear to be available for Mr. Anderson's figures, while the Alberta estimates draw on work from the Analysis and Modelling Groups.
All of the economic impact estimates may sound small. But consider that a 2.5% loss in real output is the equivalent of every Canadian losing 1 1/4 weeks of annual pay, whereas the loss at 0.5% is about one-quarter of a week. Clearly there is a great deal at stake for both the economy and the environment.
If a report on the economic implications could be released by May, then consultations could begin in earnest by June. That would, no doubt, push much of the exercise back into the fall. Time should be allocated for the House of Commons Standing Committee on Finance to examine the issue. As well, the National Roundtable on the Environment and the Economy could bring a great deal to the debate by bringing environment and economic experts together to examine the government's proposal and estimated impacts.
Given these steps, ratification by early September cannot be on. In fact, any time in 2002 seems a stretch. As well, if Canada is insistent upon obtaining credit for clean energy exports, it doesn't make a lot of sense to ratify first and then ask for the credit. That too should be worked out before ratification. We leave it to others to worry about agenda overload in the fall, with the Romanow health report and the innovation strategy summits scheduled for that time.
In conclusion, we shouldn't be thinking about artificial deadlines. The government should release its preferred policy approach and estimates of the economic impacts as quickly as possible. Then everyone else can start their models and a meaningful debate can be engaged. Don Drummond is senior vice-president and chief economist, TD Bank Financial Group.
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