Big and Little Feet: A Comparison of Provincial Level Consumption- and Production-Based Emissions Footprints

Abstract

A comprehensive national climate policy needs to provide both producers and consumers with incentives for reducing greenhouse gas emissions. Too often, policy discussions focus on emissions reduction among producers. This limited perspective fails to take into account the complex relationship between emissions production in one region and consumption demands in another. All economic production requires both a producer and a consumer. If no consumer for a good or service exists, then that good or service will not be produced. We understand the producer’s role in generating Canada’s greenhouse gas emissions, but often forget the consumer’s role. In this paper, we explore both the conventional production-based emissions accounting as well as consumption-based accounting, wherein all of the emissions generated in order to produce a final consumption good are allocated to consumers of those goods. Production and consumption are not a simple case of cause and effect. Rather, production emissions diverge strongly across Canadian provinces while consumption emissions tend to be similar. Significant interprovincial and international trade flows in emissions enable this pattern. Recognition of these trade flows provides important insights for the development of Canada’s national climate change strategy. Interprovincial trade flows provide a strong argument in support of Canada’s forthcoming national carbon price. By ensuring the large majority of emissions in Canada are similarly priced – regardless of where they are produced – it minimizes the risk of interprovincial carbon leakage (where companies avoid the carbon price by relocating to a jurisdiction with weaker climate measures) and increases the likelihood that Canadian consumers will face an incentive to adjust their demand of domestically produced carbon intensive goods. Implementation of a national carbon price must make allowances for production sectors with significant international trade flows in emissions, or risk damaging that trade. Higher costs for Canadian producers can have a detrimental effect on competition in these sectors, resulting in less demand for Canadian products domestically and internationally. It can also lead to international carbon leakage. The resultant increase in global greenhouse gas emissions defeats the purpose of enacting stringent regulations in Canada. Striking a balance requires that the federal government create complementary policies that reduce the burden of a national carbon price on trade-exposed Canadian producers while still providing incentives for them to invest in reducing their emissions. In Canadian sectors with minimal trade exposure – i.e., those with emissions that are largely produced and consumed within Canada – it is best to focus complementary policies to a national carbon price on achieving additional emissions reductions. The utilities, personal transportation and residential sectors are all good targets for these types of complementary policies. Another important policy question is how to equitably divide the burden of meeting Canada’s national emissions reduction target across the provinces. This does not lend itself to simple solutions. Some provinces have significant hydroelectric resources, providing them with a non-fossil fuel electricity source that leads to lower emissions. An approach that mandates similar emissions intensities per capita across Canada will be to those provinces’ advantage. However, there is also a historical approach to burden sharing that puts the provinces with lower emissions at a disadvantage. This allows a province like Alberta to have higher emissions levels because it has always had them. The best model for distributing Canada’s emissions reduction target is a hybrid one that all provinces can support without any of them feeling they are at a disadvantage. There is a strong case for granting all provinces an equal right to consumption emissions as a starting point. However, a final emissions allocation must come with the recognition that a province’s consumption is often supported by production emissions outside of that province. Drafting climate policy can be fraught with consequences that come from focusing on one side only of the production/consumption equation. Where consumption drives emissions is as important as where they are produced. A balanced policy that reflects the implications of domestic and international emissions trade flows is the best and fairest way for Canada to contribute to reducing the world’s greenhouse gas emissions.