Figure 10: Provincial GHG emission reduction effort for 20%/65% share of national reductions and below regional baseline

Sectoral abatement effort will likely not be uniform over time with some acting earlier than others. Notably, the industrial and energy supply sectors would likely provide more emission reductions by 2020, but in 2050 there could more or less be a convergence as the residential, transportation and commercial sectors catch up in response to the higher emission prices. Figure 11 provides the distribution in time of abatement effort by sector. The different responses of the sectors in terms of timing and magnitude point to the need for a flexible climate change policy signal, such as the emission price we have advocated in this Advisory Report.

Figure 11: Sectoral Abatement Effort

Sectoral profitability impacts and possible economic dislocations seem plausible under either a 45% or 65% reduction scenario, even when we assume that the world (and especially the United States) acts in concert to reduce GHG emissions. The extent to which domestic firm output may further decline and profitability effects intensify will be a function of how much product prices rise relative to international competitors. The logic of this assertion is straightforward and starts with the impact of the emission price on product prices. In domestic markets with little international competition, Canadian firms face the same emissions price with impacts differentiated by the relative abatement costs and emission intensities, where higher carbon-intensity firms face higher costs and possibly lower market shares. In this case, the major determinant of the profitability or economic impact will be any reduced demand for the product, for example a reduction in national coal demand as identified in Figure 12 below. For sectors exposed to international competition, either in domestic or international markets, the impact will be more strongly linked to relative emission prices between countries. If all countries more or less act in concert on emission pricing, competitiveness impacts largely disappear. But if countries do not move in concert and Canada imposes deep limits on emissions, there will be more pronounced competitiveness impacts leading to profitability reductions.

Figure 12:  Impacts on production costs and output

Figure 12 traces out some of the possible price and output outcomes under our scenario where Canada acts with the industrialized world on deep reductions. With emission pricing under this scenario, we would expect the domestic energy system to move toward less carbon intensive energy sources. This is indeed observed in our modelling with significant growth in low-emitting sources of electricity (+40% from business-as-usual projections) and large reductions in carbon-intensive refined petroleum products (-50%) and coal (-20%). Figure 13 presents the associated fuel supply and demand under a long-term 65% reduction scenario.  The output of oil and gas remains more or less unaffected in our scenario reflecting the observation that continued global demand for oil will drive energy exports, even under global emission constraints and rising domestic production costs. If coal and petroleum product exports follow this possibility, the output declines we observe in Figure 13 could be reduced. That said, there would then be the associated issue of rising global emissions (or leakage) with more Canadian energy exports.

The reduction in output from industrial sectors, either in response to higher energy prices or as an abatement option, could be small on aggregate. Our modelling suggests decreases in the order of 3% below forecast levels in 2020 and 4% in 2050. Some sectors, like pulp and paper, may invest earlier and experience transitional output reductions that are largely reduced over time. Other sectors such as metals and mineral mining may make investments later in response to higher emission prices. The one exception to this story of a low overall output effect is industrial minerals, which primarily includes cement. This sector could experience large output reductions due to high abatement costs that raise product prices significantly (i.e., 30%), thereby reducing demand.  For the most part, the provincial and national stocks of housing remain stable, with some medium-term reductions in 2020 but a return to BAU forecasts by 2050. The quantity of commercial buildings and the transport sector remain unaffected in terms of size but instead would need to lower their carbon intensity considerably.

Figure 13:  Change in energy mix by sector

*Refined Petroleum ProductsFor the average household, price effects can be expected, with both “pain” and “gain” associated with deep GHG reductions. But these price effects are likely not outside the ongoing energy price swings we have experienced, and thus increased energy costs for households are probably important but not significant:

• Electricity price increases for households could be expected in carbon-intensive provinces, such as Alberta and Ontario, in the order of 50% by 2050. Electricity price effects in other provinces would likely be lower. For space heating and domestic hot water in houses, natural gas costs could increase by about 60% by 2050, which is well below recent price swings. Gasoline prices could roughly double by 2050 from their historic level. To put this in context, Canadian retail gasoline prices in 2005 fluctuated from about $0.80 per litre to $1.20 per litre and then closed the year at about $1.05 per litre.
  
• While many energy costs would increase, there could also be savings for households. The combined effect of building regulations that increase energy efficiency and emission pricing, which increases energy efficiency and demand conservation, is that households could consume considerably less energy. In our assessment, total energy expenditure per household falls 15% despite the increases in price. The cost of these savings is an increase in capital expenditure for energy efficiency actions, but the overall effect is positive with net overall savings for consumers.