With Trump Now in Office, Canada Needs to Build a Carbon Wall

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Former Canadian Prime Minister Pierre Trudeau once said that living next to the United States is like “sleeping with an elephant,” with Canada having to pay attention to every “twitch and grunt.” With the ascension of Donald Trump to the White House, that elephant just rolled over. Is anyone paying attention?

Take climate policy, for example. Canada cannot by itself make a measurable impact on the global climate. No one, not even Liberals, disputes this. So why is our new Prime Minister determined to “go it alone” on climate?

In a nutshell, it’s because of this vague sense we have up here that it’s the “right thing” to do. Indeed, we take pride in the fact that Canada can always be counted on to punch above our weight when the world needs us. We have an excellent international reputation as a result, and that is something of which we remain proud.

But it’s not enough anymore to merely do the right thing. We also have to do things right. Norwegians like to say that good climate policy shouldn’t increase poverty and should be designed in a way that prevents “carbon leaks” — or when an emissions reduction policy simply forces a relocation of emissions to another country, not an absolute reduction of them.

Norway paid attention to industrial policy and their trading partners while implementing climate policy. On the other hand, Sweden chose to go it alone in 1990, and suffered an economic crisis as a result.

With the election of Trump, the United States — Canada’s most important trading partner — just pulled a U-turn on climate and free trade. Should we worry about the elephant rolling over or should we stay the course? What is the goal of Canadian climate policy? How do we do things right?

Canada’s economy is 70 percent reliant on trade, while trade represents less than 30 percent of America’s GDP. The Canadian GDP uses 14 megajoules of energy per US dollar of GDP, while the American economy uses only 9.3 MJ. Based on these economic facts, how does a production-based tax on energy that increases costs for Canadian energy producers meet the test of not increasing poverty or creating pathways for carbon leaks? With a Trump presidency, the margin between Canada being an international nice guy and an American patsy is exceedingly thin.

So the question is: How can Canada live up to our international reputation of doing the right thing without handing the United States thousands of our jobs and possibly making the planet worse off in the process?

Glaringly, there is no comprehensive environmental study of Canada’s new environmental policies. It’s just assumed, since it is an environmental policy with good intentions, it must be good for the environment. But good intentions do not guarantee good outcomes. The much discussed precautionary principle surely dictates that we invest in both comprehensive economic and environmental study of carbon leaks before Canada goes it alone on carbon pricing.

Canada already produces resources with a lower carbon footprint than our international competitors, including the U.S. A production-based carbon tax will mean the most carbon-efficient production is shut down first.

One solution we should consider: Building a “carbon wall” of consumption-based carbon accounting and taxes to stop our production and emissions from leaking to Trump’s new America. The wall will have a big, beautiful door for legal imports that pay a carbon tax.

Production based taxes in Canada are based on the Kyoto Accord, this makes producers responsible for emissions. It’s beneficial to the United States (which never even ratified the thing) and Europe, which are net importers of energy-intensive goods. It also suits the developing world, which is largely exempt from the toughest provisions of Kyoto. In fact, one of the only countries disadvantaged by the regime is Canada, which is a net exporter of energy intensive goods. Yet at the same time, Canada wants to unilaterally adopt carbon pricing.

A consumption-based carbon tax would put Canadian exports and U.S. imports on equal footing. This will create a carbon wall to stop production, jobs and carbon emissions from leaking to countries, such as the United States, that don’t price carbon. And here’s the best part: Unlike Mexico, we won’t have to pay for this wall — because jobs and tax revenue will stay in Canada. In fact, the Americans will pay for it.

People have forgotten that Canada already had this debate under the Mulroney government. The Manufacturers and Sales Tax was a production tax on Canadian producers. It was unfair and distortionary. Mulroney replaced the MST with the GST (consumption based goods and services tax) so Canadian production could compete on a level playing field. We successfully went it alone on a national sales tax because it was consumption-based and did not disadvantage Canadian producers.

A production-based tax like the MST would shut down a lot of Canadian production. If the planet is indeed in trouble, does it make sense that less Canada is a solution? Wouldn’t the planet need even more Canada and Canadian resources produced with Canadian values and regulatory practices? Sometimes, going it alone is not leadership. Sometimes, like Sweden in the 1990s, you just end up alone.