Scientists argue that the accumulation of greenhouse gases (GHG) leads to warmer surface temperatures and may have serious negative consequences for the environment. In terms of damage, where the emissions occur is relatively unimportant. What matters is the global stock of emissions and the net additions to this stock every year. While there is little doubt that climate change is a global problem, international efforts to coordinate a global response have been largely unsuccessful. The Kyoto Protocol, for example, did little more than create a set of emission reduction targets for participating countries to achieve by 2008-2012, leaving countries to decide how to lower emissions and by how much.
The first aim of this research is to contribute to the understanding of the welfare costs associated with alternative climate policies that Canada might pursue to lower its emissions. Federal systems, however, face unique challenges when it comes to climate policy. In a decentralized federation like Canada, the regional implications of any federal policy receive a great deal of attention at the political level. Shared tax bases between federal and provincial governments, a complex system of revenue equalization, and a highly uneven distribution of natural resources make it even more difficult to disentangle the effects of climate policies and determine the likely distribution of costs. A seond aim of our joint work is to investigate the implications of these uniquely federal issues for climate policy.
Climate policies have widespread effects, suggesting a role for computable general equilibrium modelling to capture these effects. A few national CGE models are available (most within the Federal government). These models provide only limited insight into the burden of climate policy at the provincial level and do not account for potential fiscal interactions between the federal and provincial level governments. To address these deficiencies, we develop a regional computable general equilibrium (CGE) model and a microconsistent provincial data set for Canada. Our model relates greenhouse gas emissions to intermediate and final use of fuels as well as fugitive emissions related to oil and gas extraction. Interprovincial and international trade flows and endogenous labour supply decisions are also included.
Our research informs the political and policy debate in Canada and other federal systems on the cost effectiveness of alternative climate policy options and the regional distribution of the welfare burden. Therefore, there should be considerable interest and opportunities to expand our research to include Europe.
While Europe is not a federal state, its decentralized structure makes the Canadian example a useful one when studying climate change policies. One recent extension of our research considers the effects on aggregate emissions, sectoral activity, and regional welfare when some but not all provincial governments decide to “go it alone” and pursue climate policies in an uncoordinated fashion. Important leakages and costs of uncoordinated action are identified. We also use the model to consider the vertical fiscal externalities that arise from different climate policies pursued by the federal government and the role of revenue equalization grants in determining the distribution of welfare burden across provinces.
The basic CGE model and data used in this research are available on the CREAP (Canadian Regional Economic Analysis Project) website http://creap.wlu.ca/ . By mounting the model and data on the CREAP website, a broader audience is able to access the data and models and undertake their own experiments. The Viessmann Centre’s 2007 Annual Conference dealt with the question of “Comparing North American and European Approaches to Climate Change.”