Environmental Markets in Canada 2013: Insights from Sustainable Prosperity’s Annual Survey

We all participate in markets every day – usually as buyers, sometimes as sellers, often as observers. There are markets for just about everything – for goods, for services, and even for less tangible things like knowledge. However, one way that we’re not used to thinking about markets is as a policy tool for environmentally sustainable development.

Canadians have the benefit of having a vast environment that we enjoy and from which we can extract natural resources. In order to ensure we don’t degrade or exploit our environment in a way that is not sustainable, we have the option of creating environmental markets that place a value on protecting nature – or a cost on degrading it.

For example, consider environmental markets for water. When the prices we see in markets are based on the real costs of freshwater extraction (such as in the Saskatchewan Water Security Agency’s water use payments), the previously invisible costs of shortages for downstream users are made visible. When water use allocations can be traded, water has a far greater chance of being used where it has the most value, reducing waste in areas like Alberta’s arid South Saskatchewan River Basin. Similarly, putting a price on releases of pollution into a body of freshwater encourages polluters to reduce their emissions and gives them a financial incentive to find new technologies. Consumers’ and producers’ behaviors change, the economy shifts and the environment benefits—all without rigid bureaucratically mandated regulations typical of command and control policies for environmental protection. Markets, and the prices we see in them, can often be an efficient, effective, self-adjusting alternative to regulations designed and enforced by a bureaucracy.

While markets like this have been working around the world for years, they are still used infrequently in Canada. A new study by Sustainable Prosperity (SP), Environmental Markets in Canada: 2013, estimates the value of environmental markets in Canada for 2012 to be between $406 million and $625 million annually. This represents no discernible growth from last year’s inaugural survey.

So, why care about something that is fairly small and has not grown over the past year?

The answer is short – because although what seems to be much ado about nothing is actually much ado about the possibility of something big. Even if the numbers are small, the signs are pointing to a much bigger number in the future.

Yes, Canadian markets for greenhouse gases, air pollution (and air pollution reductions), water rationing, water pollution, and biodiversity and habitat protection are thin in Canada right now. But this could change very quickly.

Take for example the case of Quebec’s new greenhouse gas emissions cap-and-trade system, one of the environmental markets featured in the report. The first of its kind in Canada, Quebec’s emissions market is the result of regulation that place fines on large emitters in Quebec who don’t have enough emission allowances or credits to cover their emissions. Those allowances can be bought from a government-run auction, or from other emitters, with some allowances given away in the first year. The system had its first auction of emissions permits in December 2013, so is not included in the 2012 value of environmental markets, but the first auction alone was valued at $11 million. With quarterly auctions planned (the second one is this week) and increasing prices expected, the Government of Quebec expects this market alone could grow to a cumulative value of $2.4 billion from 2013-2020.

But that’s not all — the newly released federal Heavy-duty Vehicle and Engine Greenhouse Gas Emission Regulations allow for trading among firms; environmental markets may feature in the anticipated review of the federal Species at Risk Act; Alberta released its new Alberta Wetland Policy in September 2013, containing provisions that some have interpreted as similar to a biodiversity offset system; and British Columbia’s proposed new Water Sustainability Act included potential expansion of licenses for water use, including both ground water and surface water use. Looking forward, Canada may be about to see a growth in both the number and aggregate value of environmental markets in Canada.

Overall, climate change policies are expected to be the main driver of the next wave of environmental markets in Canada. This would especially be the case if pending federal policy to address the oil and gas sector’s greenhouse gas emissions sent market signals to oil and gas producers rather than using rigid regulations to determine the best way for them to reduce their emissions. Getting these markets in place is the simplest and most effective way for Canada to achieve a very challenging environmental goal — the fading national commitment to a greenhouse gas reduction target of 17% below 2005 levels by 2020.

For 2013, SP struggled to even collect accurate data on the value of environmental markets in Canada. However, the evolution of these new and existing regulations and policies, and any environmental markets they create, may one day be something we use so prevalently that we think of them as just another market. SP intends to continue to survey these markets annually.

Canada has long recognized the power of markets to build a strong economy. When we start taking advantage of their huge potential to ensure our economic activity is environmentally sustainable, we will see a growth in economic activity that strengthens rather than harms the environment, and that builds rather than squanders our natural capital for future generations.