The Cost of Bill C-288 to Canadian Families and Business

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F. Scenario Overview

This section describes the core scenario evaluated as part of this analysis. A description of the economic model used to evaluate this scenario is presented in Annex II.9

As described above, a strong policy would be required for Canada to meet its Kyoto target in such a short time frame. In theory, the approach could involve a number of elements, including taxes, regulations and trading. Practically, however, introducing new direct GHG regulations would not be possible as new regulations generally require several years to develop and implement. While existing regulations (e.g. Energy Efficiency Regulations) could be made more stringent, they would have minimal effect in the short term.

It is likely that Canada would have to rely to some extent on international trading of credits for Kyoto compliance (e.g. CERs, or AAUs). However, international trading has its own constraints that would need to be addressed in the overall policy. For one, there is widespread hesitancy to purchase excess AAUs given the "hot air" risk (EU countries are expected to generate very few, if any, excess AAUs for sale internationally that would represent real GHG reductions). Furthermore, as noted above, it seems that at best there will be approximately 85 Mt of project-based credits available worldwide in each year of the Kyoto first commitment period which could conceivably be purchased by Canadian business.10 In theory, this could equal roughly 30% of the annual emissions reductions Canada would need to make. In reality, it is unlikely that Canada would be able to purchase all available credits, as Japan and several EU states will also be in the CDM/JI marketplace.

Based on these considerations, the following scenario has been assumed to be the most reasonable and administratively practical way for Canada to meet its Kyoto targets. An economic modeling analysis was conducted to generate an overview of the major implications for Canada's economy:

Electricity producers would see the charge applied to the coal, oil or natural gas consumed in their facilities, while consumers would see the charge applied to the gasoline they buy at the pumps, as well as to their heating fuel bills.

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9 The modeling structure includes a detailed energy-technology model that interacts with a macroeconomic model of the Canadian economy.

10 CDM Pipeline, United Nations Environment Programme (UNEP) Risoe Centre on Energy, Climate and Sustainable Development.

11 The carbon tax rate is set at a level that will raise the cost of consumption of fossil fuels to a point high enough to induce accelerated adoption of available energy efficiency technologies, to the limited degree possible in the short term, and changes in economic output such that 75% of Canada's Kyoto target emissions reductions over the Kyoto period are met through domestic action. The other 25% is assumed to be made through international credit purchases.

12 Point Carbon, CDM & JIMonitor, March 21, 2007.

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