Estimating Power Sector Leakage Risks and Provincial Impacts of Canadian Carbon Pricing

Abstract

Carbon pricing systems have emerged in Canada at provincial and federal levels to reduce CO2 emissions. 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 trade dynamics. Since CO2 emissions are currently unregulated in many U.S. states, there is a concern that this incomplete regulatory coverage will lead to emissions leakage, as electric generation and emissions shift toward these unregulated regions. This paper examines potential power sector emissions leakage and distributional implications across provinces from Canadian carbon pricing. Using an integrated model of electric sector investments and operations with detailed spatial and temporal resolutions, the analysis demonstrates how emissions leakage through trade adjustments can be non-trivial fractions of the intended emissions reductions even in the presence of leakage containment measures. Magnitudes of long-run leakage rates from Canadian carbon pricing depend on market and policy assumptions (e.g., natural gas prices, projected load growth, long-run demand elasticities, timing of future U.S. CO2 policy), ranging from 13% (high gas price scenario with border carbon adjustments) to 76% (lower gas price scenario without antileakage measures), which are higher than reported literature values for national policies. When leakage containment measures are implemented, net emissions and leakage rates decrease, but 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.