Abstract
Improved information on how carbon pricing policy approaches work and where they are used can improve overall support for carbon pricing strategies and build awareness about their applicability and limitations.
There’s been a lot of talk about gas prices these days. Obviously, the tragic war in the Ukraine does not help matters at all. The costs at the pump range pretty wildly across Canada. Also, there are continuing impacts on air tickets, freight, and general inflation.
So, in this situation with rising prices, it is surprising that most Canadians, according to some recent surveys, don’t know as much as they want to about the Price on Carbon and that they don’t altogether hate the idea of carbon ricing.
There are a couple of turns to this story. Let’s take a bit of a look.
POLICY APPROACHES
Both the “cap and trade” and “carbon tax” are policy approaches used here in Canada to address green hose gas emissions (GHG).
This is not exactly the stuff of old-fashioned price controls. This is all about managing emissions. These policy instruments to address emissions are used all over the world with significant success.
It’s useful to keep in mind the distinction between the two instruments. Cap and trade is an arrangement that controls the quantity of emissions. Carbon Tax is an approach that controls the price of carbon intensive goods
CAP AND TRADE
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Let’s take a look at how a cap and trade approach, sometimes called emissions trading schemes, works. First, a market place is set up and then, from, there a budget for an amount of carbon is distributed to companies in the sector. This is not administratively complex.
The portion of the total budget for the sector can be distributed to individual companies based on prior year emissions levels, performance, or even auctioned off at the beginning of each year
The budget for carbon allowed can be set as a cumulative budget or renewed each year.
The companies in the sector can reduce emissions by innovation or operations efficiencies. Companies that have any excess emissions budgets can trade/sell them these to other players in the sector. So is it that if Company X has room left in its carbon budget, it can sell it to another company, Company Y, which has spent its full carbon budget and needs to emit (and therefore, purchase) more
CAP AND TRADE USED FOR ACID RAIN
A famous cap and trade example is that one used for acid rain back in the day. The sulfur dioxide (SO2) allowance-trading program established through the 1990 Clean Air Act Amendments (CAAA) was the world’s first large-scale pollutant cap-and-trade system.
This was a big success and reduced SO2 emissions to below the original targets. By 2007, annual SO2 emissions had declined below the program’s nine-million-ton goal (a 43% reduction from 1990 levels).
This was achieved despite the increase of electricity generation from coal-fired power plants during the same period.
Some economists prefer cap and trade approach to managing emissions because it requires less intrusion in the marketplace. The market forces are put in motion to ensure a targeted overall reduction in the pollution
CARBON TAX
Let’s take a look at how the other carbon pricing policy works.
A carbon tax is a tax directly on goods/services to make them more expensive. There is some argument that this kind of tax is the best way to represent the true cost of a good in the marketplace where many of the costs to the environment have been externalized to the future or put the rest of society to fix. By raising the price, the carbon tax reflects these hidden costs.
When a price is added to the goods in the form of a tax, there are two impacts. The new higher price reduces demand (by an unknown amount given the other factors at play for consumers). Second, the tax results in new additional government revenue which could be put to other purposes.
WORLD BANK
The World Bank has solid resources on the extent of carbon pricing implementations world-wide. Their information shows that there’s a lot of action in the EU, some parts of the Pacific and in Canada.
The World Bank says that carbon pricing is rapidly expanding worldwide. Many jurisdictions, US included, are discussing models
As an aside, for some good information on Carbon Pricing schemes in the EU visit “planup”
CARBON PRICING IS POPULAR in CANADA
Interestingly, according to multiple recent surveys, carbon pricing arrangements are popular in Canada.
(2018) a “Most people (78%) are supportive or open to the idea of a carbon price” although, they add, it’s not their first choice – they’d prefer to see subsidies and new technology. Most (57%) think it will have a positive impact on the Canadian economy
But a very curious thing is… the survey also found that they are not fully aware of what it is, technically speaking.
CARBON PRICING IN CANADA
As of 2021, Canada has 14 carbon pricing schemes in place and these There are examples of BOTH carbon tax as well as cap and trade
The carbon tax appears as a surcharge on fuels and these are active in almost every province and territory. (Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, the Northwest Territories, Nunavut, Ontario, Prince Edward Island, Saskatchewan, and the Yukon all have a carbon tax.)
Cap and trade (and the related baseline and credit schemes) are most often applied to industrial emitters.
They either set a Baseline and credit systems, including performance standards and output-based pricing systems or work by setting a ‘cap’ on the total amount of emissions that can be released within a given jurisdiction.
Almost all Canadian provinces and territories have some kind of cap and trade scheme in place. (Quebec and Nova Scotia, Alberta, Manitoba, New Brunswick, Newfoundland and Labrador, Nunavut, Ontario, PEI, Saskatchewan, and the Yukon Territory all have a cap and trade or baseline and credit systems for industrial emissions.)
CAP AND TRADE ACROSS BORDERS
There is an interesting thing where cap and trade programs can be made to work across borders – in an administratively easy way.
The Climate Finance textbook says, “[Cap-and-Trade] can promote broad international participation… [and] facilitates international harmonization and cooperation on climate policy, thereby reducing the costs of limiting emissions on a global basis….”. That is from Nathaniel o. Keohane in “Climate Finance”That is exactly what is going on between Quebec and California. The Quebec Cap and Trade Program (CaT) is linked with California’s CaT () through the Western Climate Initiative. This means that CaT participants in Quebec and California can trade emission credits with each other.”
This previously included Ontario’s CaT, BUT it was cancelled by the current Ontario conservative government
CARBON PRICING WORKS
And the facts are in… It works!!!! Well, to clarify just a little, it works “pretty okay”.
A study from World Economic Forum showed that carbon pricing works. It showed that emissions grew less in the jurisdictions with a price on carbon than without a price on carbon.
Perhaps, this is more promising in the future as more jurisdictions climb on board to participate in sector-wide international cap and trade arrangements.
Put it in the category of one of those things that is essential – but by itself is insufficient.
CANADA – CARBON PRICING
Carbon pricing works to lower emissions. There is an opportunity here to use these financial incentive approaches creatively to focus business and consumers in the right direction when it comes to the transition from fossil fuels.
Canada, as we know, presents a special problem. As one of the worst polluters in the world per capita, there is definitely a place for carbon pricing financial policy schemes. Since we don’t seem to hate it – I bet we’ll see more of it in the coming years.
NOTES
https://ecofiscal.ca/wp-content/uploads/2018/04/Ecosfiscal_Polling_February2018_FINAL_RELEASE.pdf
https://www.energyhub.org/carbon-pricing/#federal
Nathaniel o. Keohane, Cap and Trade is Preferable to a Carbon Tax, in Climate Finance: Regulatory Strategies for Climate Change and Global Development, New York University, 2009
https://www.planup.eu/en/about –
https://www.weforum.org/agenda/2020/09/carbon-pricing-study-emissions-global-warming-climate-change/
https://assets.2ser.com/wp-content/uploads/2021/04/02214038/shutterstock_1387517006-scaled.jpg
https://plana.earth/academy/benefits-monitoring-carbon-emissions-for-business/
https://kureselkalkinmahedefleri.files.wordpress.com/2020/09/brinkcarbonpricing.png?w=1024
