U.S. climate legislation poses risks for Canada

“U.S. climate change legislation is unlikely to pass in 2010, and the prospects for a global climate breakthrough in Copenhagen next month are dim,” said Gary Hufbauer, co-author of U.S. Climate Legislation Implications and Prospects: Challenges for Canada, published by the Conference Board’s International Trade and Investment Centre. The publication provides a perspective from a U.S. expert on the implications of proposed legislation for Canada.

“We now have an idea of the future direction of U.S. policy, especially now that President Obama has announced that he is going to offer fixed targets for U.S. emission cuts in Copenhagen. The mechanisms envisaged in future U.S. federal and state legislation would affect numerous Canadian industries, and pose challenges to Alberta’s oil sands.”

Elements of the emerging U.S. legislation that would have repercussions for Canada include:

• a highly complex emissions cap-and-trade system with many industries given “free allowances”;

• punitive measures against U.S. trading partners that do not undertake similar climate action;

• renewable energy standards for electricity generation that could exclude Canadian hydro power (though Environmental Protection Agency emissions caps for electricity generators could encourage increased hydro exports);

• temporary prohibition against states running their own cap-and-trade programs — this could affect Canadian provinces that are members of the Western Climate Initiative;

• low-carbon fuel standards at the state level — most prominently in California — that could negatively affect Canada’s oil sands projects; and

• rebates extended to US firms in excess of their emission abatement costs that could lower the price of US goods relative to Canadian ones.

China — not Canada — is likely the intended target of punitive border measures. But if the proposed legislation eventually passes, and if Canada does not adopt similar measures, Canada’s energy-intensive industries could face carbon tariffs at the U.S. border.

In this circumstance, a number of Canadian industries might have to buy emissions permits at the U.S. border if Canada is seen to have climate policies that are less stringent than the United States. The most important in terms of trade value are: paper, petrochemicals, plastic materials, iron and steel, aluminum, and other non-ferrous metals. The report notes that some of the proposed U.S. measures could be challenged under World Trade Organization rules.

The Canadian government announced recently that it will delay its own climate policy until the shape of U.S. and global agreements become clearer.