From the Canadian Energy Centre

By Will Gibson

Study finds legislation’s massive cost outweighs any environmental benefit

The negative economic impact of Canada’s proposed oil and gas emissions cap will be much larger than previously projected, warns a study by the Center for North American Prosperity and Security (CNAPS).

The report concluded that the cost of the emissions cap far exceeds any benefit from emissions reduction within Canada, and it could push global emissions higher instead of lower.

Based on findings this March by the Office of the Parliamentary Budget Officer (PBO), CNAPS pegs the cost of the cap to be up to $289,000 per tonne of reduced emissions.

That’s more than 3,600 times the cost of the $80-per-tonne federal carbon tax eliminated this spring.

The proposed cap has already chilled investment as Canada’s policymakers look to “nation-building” projects to strengthen the economy, said lead author Heather Exner-Pirot.

“Why would any proponent invest in Canada with this hanging over it? That’s why no other country is talking about an emissions cap on its energy sector,” said Exner-Pirot, director of energy, natural resources and environment at the Macdonald-Laurier Institute.

Federal policy has also stifled discussion of these issues, she said. Two of the CNAPS study’s co-authors withdrew their names based on legal advice related to the government’s controversial “anti-greenwashing” legislation.

“Legitimate debate should not be stifled in Canada on this or any government policy,” said Exner-Pirot.

“Canadians deserve open public dialogue, especially on policies of this economic magnitude.”

Carbon leakage

To better understand the impact of the cap, CNAPS researchers expanded the PBO’s estimates to reflect impacts beyond Canada’s borders.

“The problem is something called carbon leakage. We know that while some regions have reduced their emissions, other jurisdictions have increased their emissions,” said Exner-Pirot.

“Western Europe, for example, has de-industrialized but emissions in China are [going up like] a hockey stick, so all it’s done is move factories and plants from Europe to China along with the emissions.”

Similarly, the Canadian oil and gas production cut by the cap will be replaced in global markets by other producers, she said. There is no reason to assume capping oil and gas emissions in Canada will affect global demand.

The federal budget office assumed the legislation would reduce emissions by 7.1 million tonnes. CNAPS researchers applied that exclusively to Canada’s oil sands.

Here’s the catch: on average, oil sands crude is only about 1 to 3 percent more carbon-intensive than the average crude oil used globally (with some facilities emitting less than the global average).

So, instead of the cap reducing world emissions by 7.1 million tonnes, the real cut would be only 1 to 3 percent of that total, or about 71,000 to 213,000 tonnes worldwide.

In that case, using the PBO’s estimate of a $20.5 billion cost for the cap in 2032, the price of carbon is equivalent to $96,000 to $289,000 per tonne.

Economic pain with no environmental gain

Exner-Pirot said doing the same math with Canada’s “conventional” or non-oil sands production makes the situation “absurd.”

That’s because Canadian conventional oil and natural gas have lower emissions intensity than global averages. So reducing that production would actually increase global emissions, resulting in an infinite price per tonne of carbon.

“This proposal creates economic pain with no environmental gain,” said Samantha Dagres, spokesperson for the Montreal Economic Institute.

“By capping emissions here, you are signalling to investors that Canada isn’t interested in investment. Production will move to jurisdictions with poorer environmental standards as well as bad records on human rights.”

There’s growing awareness about the importance of the energy sector to Canada’s prosperity, she said.

“The public has shown a real appetite for Canada to become an energy superpower. That’s why a June poll found 73 per cent of Canadians, including 59 per cent in Quebec, support pipelines.”

Industries need Canadian energy

Dennis Darby, CEO of Canadian Manufacturers & Exporters (CME), warns the cap threatens Canada’s broader economic interests due to its outsized impact beyond the energy sector.

“Our industries run on Canadian energy. Canada should not unnecessarily hamstring itself relative to our competitors in the rest of the world,” said Darby.

CME represents firms responsible for over 80 per cent of Canada’s manufacturing output and 90 per cent of its exports.

Rather than the cap legislation, the Ottawa-based organization wants the federal government to offer incentives for sectors to reduce their emissions.

“We strongly believe in the carrot approach and see the market pushing our members to get cleaner,” said Darby.

From the Fraser Institute

By Jake Fuss

In George Orwell’s classic 1984, he describes a dystopian world dominated by “doublethink”—instances whereby people hold two contradictory beliefs simultaneously while accepting them both. In recent comments about the upcoming October federal budget, Prime Minister Carney unfortunately offered a prime example of doublethink in action.

During a press conference, Carney was critical of his predecessor’s mismanagement of federal finances, specifically unsustainable increases in spending year after year, and stated his 2025 budget will instead focus on “both austerity and investments.” This should strike Canadians as an obvious contradiction. Austerity involves lowering government spending while investing refers to the exact opposite.

Such doublethink may make for good political rhetoric, but it only muddies the waters on the actual direction of fiscal policy in Ottawa. The government can either cut overall spending to try to get a handle on federal finances and reduce the role of Ottawa in the economy, or it can increase spending (but call it “investment”) to continue the spending policies of the Trudeau government. It can’t do both. It must pick a lane when it comes to mutually exclusive policies.

Despite the smoke and mirrors on display during his press junket, the prime minister appears poised to be a bigger spender and borrower than Trudeau. Late last year, the Trudeau government indicated it planned to grow program spending from $504.1 billion in 2025/26 to $547.8 billion by 2028/29.

After becoming the Liberal Party leader earlier this year, Carney delivered a party platform that pledged to increase spending to roughly $533.3 billion this year, well above what the Trudeau government planned last fall, and then to $566.4 billion by 2028/29. Following the election, he then announced plans to significantly increase military spending.

While the prime minister has touted a plan to find “ambitious savings” in the operating budget through a so-called “comprehensive expenditure review,” his government is excluding more than half of all federal spending including transfers to individuals such as Old Age Security and transfers to the provinces for health care and other social programs. Even with the savings anticipated following the review, the Carney government will likely not reduce overall spending but rather simply slow the pace of annual spending increases.

Moreover, the Liberal Party platform shows the government expects to borrow $224.8 billion—$93.4 billion more than Trudeau planned to borrow. And that’s before the new military spending. That’s not austerity—even if Prime Minister Carney truly believes it to be.

Actual austerity would require a decrease in year-over-year expenses, smaller deficits than what the Trudeau government planned, and a path back to a true balanced budget in a reasonable timeframe. Instead, Carney will almost certainly hike overall spending each year, raise the deficits compared to his predecessor, and could even fall short of his tepid goal of balancing the operating budget within three years (which would still involve tens of billions more borrowed in a separate capital budget).

While budgets normally provide clarity on a government’s spending, taxing, and borrowing expect more doublethink from the October budget that will tout the government’s austerity measures while increasing spending and borrowing via “investments.”

Jake Fuss

Director, Fiscal Studies, Fraser Institute