Reconciling Differences and Coming Together to Act on Climate

Amin Asadollahi answers some questions on carbon pricing in Canada that were raised during last week's First Ministers' Meeting.

By Amin Asadollahi on December 12, 2016

The very nature of Canada’s confederation provides for regional differences that can be resolved through a common desire to build a stronger, more prosperous country. Last Friday's First Ministers' meeting to discuss the Pan-Canadian Framework on Clean Growth and Climate Change was no exception.

Most notably, Saskatchewan refused to support the framework, questioning the merits of carbon pricing; British Columbia supported the framework, but tried to make the case that its carbon tax was higher than prices under a cap-and-trade system; and Manitoba did not sign it, pending a resolution to healthcare funding, but the province supports pricing carbon and taking action on climate change.

Three key questions emerged out of the First Ministers' meeting. 

1)     Would taking action on climate hurt the Canadian economy?

Climate change is already affecting, and will continue to have an impact on, our economy and environment. For example, the Prairie Climate Centre, a collaboration between the University of Winnipeg and the International Institute for Sustainable Development, projected average temperature increases in Regina and Saskatoon of about 2℃ and 4℃ by 2035 and 2065, respectively, as well as more frequent extreme weather events. The cost of increased floods, hurricanes and drought will shock local economies.

Saskatchewan questioned whether pricing carbon could affect Canada's competitiveness. It is important to remember that pricing carbon is the most cost effective approach to reducing emissions and is supported by private sector investors and industry. For example, in 2014, support for pricing carbon by 74 countries and over 1,000 companies resulted in the formation of the Carbon Pricing Leadership Coalition.

The essence of pricing carbon is based on the simple "polluter pays" principle. However, there are other ways of reducing emissions. One way is implementing regulations that are more stringent and with costs that can be passed on to consumers. The other approach is government subsidies, which transfer the cost of pollution away from the polluter to society at large.

Saskatchewan supports carbon capture and storage (CCS), which is an important tool and will likely be necessary over the long term. In the short term, governments and the private sector could invest to reduce costs of new technologies. However, there is a fundamental question about whether costs associated with commercial deployment of new technologies such as CCS should be borne by taxpayers, by the private sector, or both. Even if no government funding were provided, CCS projects would require a price on carbon to remain operational.

A price on carbon could increase the bankability of CCS projects over their lifetime. Perhaps that's not such a bad idea after all?

2)     Does reinvesting carbon revenues result in environmental benefits?

Putting a price on carbon pollution creates conditions for behavioural change that will result in a better environment. However, this is only one side of the coin. Governments generate revenue from pricing carbon pollution that they can return to their citizens, invest in measures to reduce emissions, or both.

By returning the revenues to citizens, those that change their behaviour will stand to benefit—and even receive more money than the carbon tax they pay. It is a strong incentive and it works (British Columbia is a good example of this approach).

Alternatively, by investing the money back in the local economy to reduce emissions, governments can put their province on track to reduce emissions and, subsequently, the impact of the carbon price. By recycling revenues back into the economy, governments can create jobs in clean technology and renewable energy, improve public transportation and diversify their economy. Alberta plans to implement this approach while also returning the money to its citizens.

Either way, real-life experience has demonstrated to us that recycling carbon pricing revenues works.

3)     Can prices between the carbon tax and cap-and-trade systems be compared?

British Columbia has had a revenue-neutral price on carbon since 2008 and has seen its emissions decrease while its economy grew faster than those of the rest of Canada. Its carbon tax has been frozen since 2012 and its government has held a firm position that it will not increase its price on carbon until the rest of the country catches up. It has argued that its price on carbon exceeds Ontario's and Quebec's cap-and-trade price.

Alberta will soon catch up, and likely surpass, British Columbia on carbon pricing policy. It would be delusive to directly compare a price under a carbon tax with that of cap and trade. The latter puts a declining limit on emissions, while British Columbia’s carbon tax does not. Also, the price on carbon under cap and trade is driven by market forces. The strength of a carbon tax is its predictable schedule, which allows industry to make sound longer-term investments. And finally, to meet federal requirements, Ontario and Quebec would need to reduce their cap to meet federal 2030 commitments. The two systems are different with varying requirements.

To compare apples to apples, British Columbia could, however, adopt a cap-and-trade system, and set a declining cap on its emissions. Rather than, once again, deferring a decision on increasing its carbon tax by questioning the comparability of cap and trade and carbon tax, the onus should be on the province to demonstrate how its carbon price (at current levels) would result in emission reductions that would be comparable with federal requirements for a cap-and-trade regime. In fact, since freezing its carbon tax, British Columbia's emissions have begun to rise.

Making Progress by Pricing Carbon

Canada's provincial and territorial governments would benefit from designing their own carbon pricing systems, versus one that is imposed by Ottawa. Provinces and territories can ensure that their pricing regime meets local circumstances and that revenues can be recycled to meet policy objectives.

Resisting carbon pricing on an ideological basis will make a jurisdiction less competitive as the rest of the country progresses. The next few years will be critical in developing robust policies and programs in the implementation of the framework, which are discussed here.

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