Effect of carbon pricing on the competitiveness of industries

With carbon pricing, while there is an expectation of negative impact on industries' competitiveness, it is projected to be limited to some industries and, thus, would result in a small overall negative impact on Canadian GDP1,2. Trade competitiveness depends on several factors such as exchange rates, labour costs, taxation and the rate of technological innovation suggesting that their effect on competitiveness would be significantly more than that of carbon pricing.3 Industries that are not emissions-intensive and not trade-exposed (non-EITE), such as the service, some light manufacturing industries, construction, wholesale retail trade, pulp and paper will face limited negative impact on competitiveness.1 Some industries are expected to be positively impacted such as electricity generation, office machinery and equipment.1

 

However, emissions-intensive and trade-exposed (EITE) industries such as industrial non-ferrous smelting are expected to face significant competitiveness impacts.1 Other examples of impacted industries include natural gas, refined petroleum and crude oil sectors. However, most of Canada's economic output is from industries which have less than 2% energy costs. And, those that have energy costs that are more than 5% contribute 12% of all economic output.1

Import sectors are likely to be less impacted than export sectors. While exports such as coal, natural gas, other mineral mining are expected to be negatively impacted by carbon pricing, these represent a smaller fraction of exports compared to exports such as agriculture and metal smelting, which will see increased exports. Among imports, coal, natural gas and other mineral mining are expected to negatively impacted, but they represent a small fraction of the overall imports, compared to importing relating to metal smelting and other manufacturing which will experience positive impacts or will be unaffected.1

 

Nonetheless, under some carbon pricing policies, industries that could be exposed to competitiveness impacts could continue to grow, but at a slower pace compared to other industries. Furthermore, it is unlikely that Canada's trading partners would not implement carbon pricing at some point suggesting any impact to be limited. In the short term, the initial low carbon prices are unlikely to have significant impact. Hence, competitiveness concerns may need to be addressed in the medium term only.1

 

Competitiveness of Ontario industries

In Ontario, emissions-intensive trade-exposed (EITE) industries contribute 15% to the province's economy.4 Four sectors have been identified as likely EITE industries, including iron and steel, basic chemicals, lime, and cement. As a result, one per cent of Ontario’s total GDP would be at risk with a Western Climate Initiative cap and trade carbon pricing (see http://pricecarbonnow.org/cap-and-trade), or about 5.9% of the goods producing GDP.4

 

Emissions-intensive trade-exposed industries relative to GDP in Ontario

 

Source: Carbon Exposed or Carbon Advantaged? Thinking About Competitiveness in Carbon-Constrained Markets.4

 

Impact of carbon pricing on different Ontario sectors’ production levels

In Ontario, with a $40/tonne CO2e carbon pricing, the average production levels are expected to decrease by 0.22% compared to business as usual.4 However, a large number of sectors are expected to outperform. These include services, construction, agriculture and forestry, food, other manufacturing, pulp and paper, fabricated metal products, electronics, vehicles and parts, hydro and nuclear, and renewable energy. Hydro and nuclear and renewable electricity would see 12% and 58% increases in production levels. Most significant decreases in productivity are expected in fossil electricity, cement and lime, and petroleum.4

 

Impact of carbon pricing on different Ontario sectors’ ability to earn

In all, in terms of gross output, 90% of the economy displays an improved ability to earn. Many sectors including chemicals, paper, other manufacturing, metals, agriculture and forestry, fossil electricity, petroleum, hydro and nuclear, and renewable energy will show a positive ability to earn (as measured by change in sector GDP) with carbon pricing.4 The latter two sectors are expected to have 21% and 69% increases in GDP with carbon pricing. Cement, mining, services, and construction will have a decreased ability to earn with carbon pricing compared to business as usual.4

 

Impact of carbon pricing on different Ontario sectors’ ability to compete in North America

With carbon pricing, 88% of goods traded sector would have an improved ability to compete in North America.4 These sectors include food, mining, chemicals, vehicles and parts, electronics, pulp and paper and electricity. The sectors that would have a decreased ability to compete are cement and lime, petroleum products, and metals (see Price Carbon Now's infographic below on Ontario industries' competitiveness under a cap and trade based on Dave Sawyer's analysis in 2013).4

 

(Download copy of this infographic)

 

In November 2015, the Ecofiscal Commission released a report on industrial competitiveness with carbon pricing. It suggested that most of Ontario's manufacutring is "not exposed to competitiveness pressures." Only a few sectors (steel, chemicals, fertilizer and refining) , which make up less than 1% of provinical GDP but emit one-quarter of the province's emisisons, are exposed to competitiveness pressures.

 

 

In all...

In Ontario, while the government needs to be concerned about the impact on competitiveness, it was suggested that it conduct an independent evaluation to identify most impacted industries, and determine the extent of the impact. These industries could be given time to adjust to a carbon pricing program, but should be expected to make emissions reduction over time.5 It is also suggested that the focus should not be large industrial energy users i.e. potential emissions-intensive trade-exposed industries in Ontario since this ignores the majority (85%) of the economy.4 A large number of Ontario sectors are expected to outperform the average loss in production from the province (-0.22%) in a carbon pricing scenario, and most sectors – representing 90% of the economy – are predicted to expand output under carbon pricing. Also, many sectors will have an improved ability to earn, while a few including cement and mining may see a decreased ability to earn in the face of carbon pricing. Furthermore, most Ontario industry sectors will have an improved ability to compete in Ontario and North America with carbon pricing.4

 

Effect of a $40/tonne CO2 on competitiveness of Ontario's industries

Source: Carbon Exposed or Carbon Advantaged? Thinking About Competitiveness in Carbon-Constrained Markets4

 

Effect of a $40/tonne CO2 on Ontario's industries' ability to produce

 

Source: Carbon Exposed or Carbon Advantaged? Thinking About Competitiveness in Carbon-Constrained Markets4

 

 

Other policy remedies for select negative impact on some industries

Border tax adjustments on incoming goods from jurisdictions that are subjected to no or lower carbon prices are often offered as a solution to address potential loss of industries' competitiveness. However, when border tax adjustments are broadly applied, it leads to increase in prices that impact both consumers and producers. This may exacerbate the negative impact on competitiveness.1 Other policy approaches such as output-based allocations/exemptions, where emissions-intensive and trade exposed industries are allowed some allocations or exemptions have been offered as better options.6–8 However, this may reduce the overall impact of carbon pricing on emissions reduction.9 And, for some affected industries such as oil and coal, the fixed nature of natural capital in these industries i.e. limited ability to move operations to another jurisdiction suggests that emissions leakage is unlikely to be an issue.2

 

References

1.      National Round Table on the Environment and the Economy. Achieving 2050: A Carbon Pricing Policy for Canada – Technical Report. (Ottawa, 2008). at http://collectionscanada.gc.ca/webarchives2/20130322143407/http://nrtee-...

2.      Sustainable Prosperity. The competitiveness of a trading nation. (Sustainable Prosperity, 2011). at http://sustainableprosperity.ca/article1041

3.      Boyce, J. & Riddle, M. Cap and Dividend: How to Curb Global Warming While Protecting the Incomes Of American Families. PERI Work. Pap. (2007). at http://scholarworks.umass.edu/peri_workingpapers/108

4.      Sawyer, D. Sustainable Prosperity | Carbon Exposed or Carbon Advantaged? Thinking About Competitiveness in Carbon-Constrained Markets. (2013). at http://www.sustainableprosperity.ca/dl949&display

5.      Sustainable Prosperity. Sustainable Prosperity Submission. Consultation on Greenhouse Gas Emissions Reductions Program Design 2013 (Ontario). (Sustainable Prosperity, 2013). at http://www.sustainableprosperity.ca/dl984&display

6.      Horne, M. & Partington, P. J. Carbon pricing approaches in oil and gas producing jurisdictions. (The Pembina Institute, 2013). at http://www.pembina.org/pub/2414

7.      Bramley, M., Sadik, P. & Marsh, D. Climate Leadership, Economic Prosperity. (Pembina Institute and the David Suzuki Foundation, 2009) at http://www.pembina.org/reports/climate-leadership-report-en.pdf

8.      Rivers, N. Impacts of climate policy on the competitiveness of Canadian industry: How big and how to mitigate? Energy Econ. 32, 1092–1104 (2010).

9.      Lin, B. & Li, X. The effect of carbon tax on per capita CO2 emissions. Energy Policy 39, 5137–5146 (2011).