Ideally, carbon pricing should be economically efficient, low cost, socially benign and administratively simple. In Canada it is none of these
The news last week that the Trudeau government has introduced into the House of Commons a motion to declare a “climate emergency” in Canada may draw even more attention to its policy governing carbon-dioxide pricing and taxation. To proponents, carbon dioxide pricing is economically efficient, low in cost, socially benign and administratively simple.
In Canada, however, the carbon-pricing regimes that have been implemented by the federal and provincial governments have none of these advantages.
Canada’s carbon-pricing framework allows each province and territory to decide how it will implement carbon pricing, while at the same time setting certain minimum conditions. Jurisdictions may use either carbon taxes or emissions trading (cap and trade) systems, and for larger emitters, they may employ output-based pricing systems (OBPS). An OBPS imposes fees on firms that do not meet prescribed levels of emissions intensity in their production processes.
The framework requires that the effective tax, levy or emissions-trading price rise from $10 per tonne of carbon dioxide equivalent in 2018 by $10 per tonne per year until it reaches $50 per tonne in 2022. The systems must include revenue recycling; that is, a system to return a portion of the revenues received from carbon pricing directly to the public. If a province or territory does not meet these conditions, the federal government will impose a “backstop” system in that jurisdiction. So far, the backstop regime will apply in New Brunswick, Ontario, Manitoba, Saskatchewan and probably Alberta, now that a new provincial government there has rolled back the previous government’s carbon-tax regime.
The Canadian system departs from the theoretically ideal models embraced by economists. Notably, the rates of the carbon levies and taxes bear no relationship to the notional social costs they are intended to represent. These might be based on estimates of the present-day value of avoiding adverse climate effects decades hence; no one, however, really knows what this is. Alternatives might be the price level needed to achieve a specific emission-reduction target or the current price of internationally traded carbon-dioxide permits. Instead, the rates chosen are entirely political.
Again theoretically, carbon pricing serves as a simpler, less intrusive, policy approach compared to the administrative measures that governments might use to reduce emissions. In Canada, however, carbon dioxide pricing has simply been added to the over 600 existing federal, provincial and territorial programs and regulations. There is no inventory of these programs and no way to assess their effectiveness or cost-effectiveness.
We cannot yet know the full effects on consumers and industry. We do know that the rates of the levies and permit prices will vary considerably across Canada. They will be highest in the provinces in which the backstop regime applies, but considerably lower (at least initially) in Quebec, whose emissions-trading system is integrated with that of the state of California. In addition, Newfoundland, Nova Scotia and Prince Edward Island have negotiated separate deals with the federal government; under these arrangements, the coverage, or application, of the carbon dioxide taxes will be narrower and the federal tax increases may be offset by lower provincial taxes.
The taxes are meant to work by raising the costs for consumers and businesses that are more reliant on fossil-fuel energy sources. This is supposed to discourage demand and, ultimately, eliminate those activities. The industries now reliant on oil, natural gas and coal with few alternatives will bear the brunt of these added costs. By design, therefore, the carbon dioxide pricing regime will harm the economies of Alberta and Saskatchewan and ultimately those of all regions reliant on energy-intensive industries like mining, steel, cement, petrochemicals and metal fabrication. [….]
Robert Lyman is retired energy economist who spent 30 years as an adviser and senior manager in the federal public service. His paper, “Carbon Taxation — The Canadian Experience” is being published by the Global Warming Policy Foundation on Wednesday.