Go Canada!

The border between the United States and Canada runs 5,500 miles across North America and is marked by little more than a narrow clearing of land. The nearly invisible nature of the border is a reflection of several hundred years of common history, language, governance and markets.

But the seemingly narrow divide between the United States and Canada masks many profound differences in how these countries view the world. Nothing demonstrates this more clearly than Canada’s recently announced national program to cut greenhouse gas emissions, bringing it into compliance with the Kyoto Protocol on global warming.

Canada’s path to ratification of the Kyoto Protocol has not been without difficulty. Extractive industries in western Canada have fought government policies, arguing that reducing emissions would be too hard and too expensive. A poll sponsored by the Canadian government in 2004, however, revealed that 82 percent of Canadians—including a solid majority in the Western provinces—support the Kyoto Protocol. Canada recognized the mega-trend toward clean energy and low-carbon economies and—despite its tight economic links with the United States—aligned itself with Japan and the European Union, both of which ratified the Kyoto Protocol and launched aggressive programs to reduce emissions.

Canada’s new plan will reduce greenhouse gases by 270 million metric tons beginning in 2008 (a 33 percent drop from current levels), transform its economy and help its businesses to compete in a global marketplace that will be increasingly carbon-constrained.

The nation's decision to take this route is uniquely admirable, given Canada’s economic ties to the United States, where the George W. Bush administration rejected the Kyoto Protocol and federal caps on emissions. More than 80 percent of Canadian exports are bound for the United States, yet competing American companies will not face the same rules on emissions.

As a result, the Canadian approach relies more on carrots than sticks. Two new federal funds are anticipated to finance emissions reductions on the order of 150 million metric tons. Canada budgeted about $1 billion for the funds, which could double in the coming years. Given the relative size of the U.S. and Canadian economies, an equivalent program in the United States would require $20 to 30 billion annually—far beyond its current levels of federal climate-related activity.

Like the European Union and other Kyoto signatories, Canada will use market-based approaches to maximize investment in emissions reductions. Using an auction approach, the government will provide money to companies bidding for least-cost emissions reduction projects. Canada’s plan also supports the country’s nascent emissions trading initiative—a program designed to build a market among the 700 largest Canadian companies for tradable emissions credits.

What is Canada buying with its money? As a function of cost per metric ton of emissions reduced, it is getting a good price: only about $8 per metric ton, which is cheap compared to the EU price of about $20 per metric ton. These low costs are not surprising: Canada’s energy intensity, and thus its potential for low-cost gains in efficiency, is almost double that of Europe.

But Canada is clearly getting more than only low-cost emissions reductions. It will be developing a new, more efficient, cleaner industrial sector. In fact, the plan suggests savings may be as large as $9 billion a year—a potential return of four times the initial investment. Canada will become a player in the renewable energy markets, both for domestic use and for export, and they will have stimulated new jobs in emerging high-growth technology sectors.

Though the Bush administration may not be persuaded by our neighbor to the north, American businesses will recognize Canadian action as another milestone in the global trend toward carbon-constrained economies.

For example, automakers—including struggling American manufacturers—must now contend with Canada’s tough new efficiency standards designed to reduce tailpipe emissions. Canada’s drive to efficiency matches efforts by California and half-dozen other U.S. states to require carbon-friendly passenger vehicles.

Other trends in North America include standards for renewable power. Seventeen states in the United States now have “renewable portfolio standards” that require electric power companies to use renewable sources such as wind and solar, which do not emit greenhouse gases. These standards cover roughly 40 percent of the country’s electricity supply, including large electricity markets in California, Texas and New York.

For any industry operating in North America, the writing is clearly on the wall: If you want to compete, you need to learn how to be lean on carbon emissions.

Is it only a matter of time before U.S. companies begin calling for Canadian-style controls to bring consistency and coherence to the market? Those of us on the U.S. side of the border look to Canada and hope that the narrow divide is soon bridged with new cooperation and a united effort to combat global warming.

Andrew Aulisi and Jonathan Pershing April 22, 2005
Andrew Aulisi is a senior associate in the Sustainable Enterprise Program at the World Resources Institute. Jonathan Pershing is the director of the Climate and Energy Program at the World Resources Institute.

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