Status: Published
Citation: Bistline, J., Merrick, J., and Niemeyer, V. (2020). “Estimating Power Sector Leakage Risks and Provincial Impacts of Canadian Carbon Pricing.” Environmental and Resource Economics.
Carbon pricing has emerging in Canada at federal and provincial levels. However, cross-border electricity trade with the U.S. is already extensive, and although Canada is currently a net exporter, policy changes could alter these dynamics. Since CO2 emissions are unregulated in many U.S. states, there are concerns that this incomplete coverage may lead to emissions leakage, where policy-induced shifts in electricity generation and emissions to unregulated regions can lower policy effectiveness. This analysis investigates potential electric sector emissions leakage from Canadian carbon pricing and distributional impacts across provinces. Using an integrated model of electric sector investments and dispatch across the U.S. and Canada, model results suggest that emissions leakage through trade adjustments can be a non-trivial fraction of the intended reductions even with leakage containment measures in place. Magnitudes of long-run leakage from Canadian carbon pricing vary based on market and policy assumptions such as natural gas prices, projected load growth, long-run demand elasticities, and timing of future U.S. CO2 policy. Leakage rates range from 13% (high gas price scenario with border carbon adjustments) to 76% (lower gas price scenario without antileakage measures). When leakage containment measures are in place, net emissions and leakage rates decrease, while gross emissions in Canada and policy costs increase. Leakage persists in alternate scenarios with constrained transmission expansion, higher natural gas prices, lower load growth, higher price elasticities of demand, and U.S. adoption of carbon pricing, but leakage rates decrease under these conditions.
Link to Journal Publication: Environmental and Resource Economics.