Electricity Market Deregulation and CO2 Emissions Reduction: Dancing at Different Tune across Canada and U.S. Border

Canada has ratified the Kyoto Protocol while the United States, its main trading partner, have not. A major concern of Canadian industrial producers is the negative impact on competitiveness of progorams designed to reduce greenhouse gas emissions (GHG). To alleviate this concern, the Government of Canada is proposing an approach that puts a ceiling on the price of emission permits paid by industrial users and that allocate emission permits on the base of output. We analyze how such a scheme would affect electricity production and trade among three Canadian provinces (Ontario, Québec and New Brunswick) and two U.S. regions (New England and New York), which are linked by large interconnections and which exchange electricity on other wholesale markets. We find that the Canadian government approach has almost no effect on electricity production and trade flows; so it is very effective at protecting the competitive position of electricity producers. However it does little to reduce GHG emissions. If we were to unbundle emission permits allocation and production an let the Canadian electricity producers face the permit price ceiling of $15 per tonne of CO2 equivalent, then the effect on electricity production in Canada depends on whether the U.S. regions persue an aggressive or lenient policy with respect to GHG emissions. The overall impact on GHG emissions in the five regions is rather small.