Carbon Pricing Options for Canada

The paper discusses energy links between Canada, the United States, and Mexico and the state of greenhouse gas (GHG) emission-reduction policies. A review of GHG reduction policies reveals fragmented approaches with political stalemates at the national level. Closely integrated North American energy markets are potentially changing in different directions. While Canada is contemplating more diversification of energy trade, the United States is increasingly relying on domestic supply of energy and will soon be a net exporter of energy. The paper argues that carbon pricing needs to be harmonized in conjunction with trade flows and elaborates on how current, fragmented carbon pricing initiatives could be turned into a more harmonized carbon pricing system. It provides arguments in support of a binding absolute emissions cap with limited safety valves and price floors in a North American emissions-trading program. It also discusses lessons learned from the EU GHG emissions-trading system and their implications for the design of North American cap-and-trade regimes.