Putting a price on greenhouse gas cuts

It has taken a big bank to bring some focus to the talk about fighting climate change and Canada's role.
And, on balance, the news is good. Greenhouse gas emissions can be reduced significantly without too much economic damage.
But there will be costs and the burden is going to hit some industries and regions much harder than others. And the changes are going to have to start happening much more quickly.
Governments have been vague on all those details.
So when TD Economics released a report suggesting Alberta and Saskatchewan would take the biggest hit from greenhouse gas reduction efforts, there was a flurry of headlines, hand wringing and criticism from politicians.
The report, commissioned by the TD Bank's economics branch, identified the impact of different levels of carbon emission reductions.
Heading into world climate talks in Copenhagen next month, the Harper government has pledged to reduce emissions to 20 per cent below 2006 levels by 2020. That's the equivalent of three-per-cent below 1990 emission levels. And a big step back from the Kyoto Accord, which called for a 5.2 per cent reduction from 1990 levels by 2012.
B.C. has already committed to a 33-per-cent reduction from 2006 levels by 2020.
And the TD Economics study also looked at much more ambitious cuts that would take emissions to 25 per cent below 1990 levels in the same period. That's the minimum reduction the Intergovernment Panel on Climate Change said is needed from western nations.
The good news is that both targets can be hit without huge overall economic impact.
The bad news is that there will be some hard-hit sectors and regions.
First, the big picture. Meeting the Harper government's target would mean reduced economic growth, but the pain is moderate.
The study's computer model predicts that cutting emissions by 20 per cent would mean overall Canadian economic output would be 1.5 per cent lower in 2020. That's about $20 billion - not chicken feed.
But the reduction would be spread over a decade. Annual national GDP growth would be just under 2.3 per cent instead of 2.4 per cent. Significant, but not wrenching.
This matters because economic growth means, as a rule, more jobs and higher pay. Slower growth means fewer opportunities.
Even meeting the much greater reduction sought by the international panel would mean less than half of one per cent a year in lost economic growth.
Here's where it all gets interesting.
The TD Economics' report assumes the government is going to put a price on carbon emissions, through cap and trade and a carbon tax like the one B.C. has introduced.
Industries that don't produce greenhouse gases will roll along happily. Those that do will face big extra costs.
The report says this would create "a major structural change in the Canadian economy," away from carbon emitting industries, like the oil and gas sector and coal mining. Mining, smelting, trucking and others would also suffer.
And since the oil and gas industry is significant in Alberta, Saskatchewan and B.C., those provinces take the big hit.
While meeting the Harper government's targets would mean 1.5 per cent less economic growth over the next decade, Alberta would be reduced by 8.5 per cent; Saskatchewan 2.8 per cent; and B.C. by 2.5 per cent. (Or about 4.5 per cent, based on the Campbell government's more aggressive commitments.)
That's a significant cost, but not crippling. And it has to be balanced against the costs of doing nothing. If forest fires continue to worsen and droughts bring water shortages and forests grow more slowly as global temperatures rise, the province's economy suffers.
One of the challenges in all this is trust. Things will get more expensive as carbon taxes are implemented, the study assumes. But governments will get a huge windfall in new tax revenue and return it to people. They'll be OK.
The bottom line? Kudos to TD Economics, for bringing clarity to the fuzzy world of climate change.
Footnote: The economic model comes from Marc Jaccard and Associates. Jaccard is a Simon Fraser University professor and deservedly influential analyst, with no political agenda. It is interesting to note the assumptions include significant change, including a 100-per-cent shift to electric heating for new construction in B.C.