The Mark 2010

Climate policy is increasingly about economics and new energy technologies. What will Canada's place be in the green economy?

Even before the incredible build-up in expectation that surrounded the Copenhagen climate change summit, we knew a couple of things: first, the Canadian government has essentially abdicated its policy role on the issue to the U.S. Congress, and second, under Barack Obama, the U.S. is taking a much more active role in addressing climate change.

While the summit failed to yield any real breakthrough, this does not mean an end to American engagement on the issue. It does mean, however, that the U.S. is facing some new choices. For Canada, the lessons the U.S. take away from Copenhagen and how they proceed as a result will have long-term implications for our environmental and economic policy.

One clear take away from Copenhagen for the Obama administration is the increasing willingness of China to flex its political and economic muscle. The news stories about “China wrecking the deal” and “China snubbing Obama,” whether fair or not, are taking hold as the prevailing narrative. This makes Congressional action on climate change very difficult.

Congressional initiative was always predicated on the major developing country emitters (namely China) committing themselves to action. In the wake of Copenhagen, Obama will have a very difficult time convincing Congress that China is “playing ball.” This doesn’t mean that U.S. action on climate change will never happen, but it does suggest that any future legislation will be even more unapologetic in its pursuit of American national interests.

Two scenarios are likely. The first is an acceleration of the “technology race” approach to addressing the issue. The second is an increasing willingness to use trade policy to ensure that economic interests are protected.

In fact, addressing climate change is increasingly being re-framed for Americans as an all-out competition with the Chinese for the economy of the future. Thomas Friedman and other opinion makers have pointed to the massive commitment by China and other countries to developing and commercializing low-carbon, clean energy technology, and how that imperils American economic interests. President Obama, in remarks made on January 8, said “I don’t want America to lose that competition. I don’t want the industries that yield the jobs of tomorrow to be built overseas. I don’t want the technology that will transform the way we use energy to be invented abroad.”

The White House and Congress are of a single mind in believing that focusing public and private resources on the large-scale development and deployment of new energy technologies is a strategic American interest. This addresses concerns over dependence on foreign oil and Chinese supremacy in clean technology. So it is very likely that even more public resources will be made available to support U.S. technology in this area, and that action on complementary regulatory policies like national renewable portfolio standards or feed-in-tariffs will become a priority.

Because this is now seen as a competition, the protection of American advantages will be foremost on the agenda. And given that access to the massive American marketplace is still the most powerful economic incentive the U.S. wields internationally, look for talk of border “adjustments” to punish imports coming into the U.S. from jurisdictions that do not meet American climate policy expectations.

So, more money for development and deployment of low-carbon technology, with carbon tariffs at the U.S. border – What does this mean for Canada?

In the short term, it is a mixed blessing. Certainly Canadian companies that have technology to sell will benefit (although “Buy American” legislation is always a possibility). But given the poor support provided to such companies in our country and the draw of the American marketplace being what it is, the long-term effect is likely to be a further siphoning of whatever Canadian R&D and innovation in clean technology exists into the U.S.

For an increasing number of Canadian carbon innovators and entrepreneurs, the lure of the American market is powerful enough as it is. A free-spending public purse (public grants in the U.S. already pay for up to 30 per cent of new manufacturing capacity for low-carbon technology) and the risk of ending up on the wrong side of a carbon tariff wall will make that choice all the more attractive.

For Canada, it’s a familiar pattern: a technology-led economic transformation prompts Canadian innovation and entrepreneurship; Canadian successes find homes and markets elsewhere; and the long-term benefits of the transformation – in the form of employment and return on investment – accrue elsewhere. If the economy of the future is to be a low-carbon one, this will cost us dearly.

To avoid this, the Canadian government needs to undertake a vast new regulatory and fiscal program for low-carbon technology that is built around a price for carbon delivered either through a carbon tax or a robust national cap-and-trade system. The carbon price would serve the dual economic purpose of providing a long-term incentive in the economy for investors and entrepreneurs, and creating an ongoing domestic demand for the goods and services that are generated.

On the policy side, it would provide another double dividend by helping to create the fiscal space necessary for the government to invest in low-carbon technologies and encourage private investment, as well as making our exports to the U.S. tariff-proof.

Climate policy is now about the “new economy.” For Canada to be on the right side of this issue, both in terms of benefiting from the technology race and avoiding punitive trade instruments, the time is now to define our commitment to the economy of the future.

This article does not necessarily represent the views and positions of Sustainable Prosperity or of its Steering Committee members.