Carbon pricing, the cost applied to carbon pollution in order to mitigate greenhouse gas emissions (GHG’s), has become quite the buzz phrase. In the last few years especially, “cap-and-trade schemes” and “carbon taxes” have inched their way up the North American political-economic agenda.
Climate change is considered one of the greatest market failures, as it imposes significant costs and risks on future generations who will suffer the consequences of human-induced environmental degradation.
Placing a price on carbon can play a key role in enhancing innovation and transitioning to a prosperous, low-carbon global economy. Some economists, however, fear that carbon pricing schemes come with their own ramifications. For instance, a carbon tax may simply drive the shift of industrial production to countries with no or lower carbon taxes, thereby creating ‘pollution havens’.
Other difficulties include determining the proper amount of such a tax, factoring in administration costs, and avoiding potential tax evasion. Nevertheless, most eco-economists agree that a carbon tax is the just the rigorous approach we need to successfully transition to a low-carbon future.
An alternative to carbon taxing is a cap-and-trade scheme – a system in which government places a firm limit, or “cap”, on the overall level of carbon pollution from industry and reduces that cap after subsequent years as to reach a set pollution target. Compared to a carbon tax, a cap-and-trade system provides less certainty about the price of emissions (which is set by the emissions trading market), but in turn it can allow for better prediction and planning in the overall amount of emissions reductions that will result
Both approaches put a price on carbon, create market-based incentives for emissions reductions and innovation, and can generate revenue to be recycled back into the economy.
In Canada, B.C. has become a front-runner, implementing a carbon tax in 2008. The province charges $30 per tonne of carbon (an equivalent of about 7 cents per litre of gas). “Revenue-neutral” by law, the policy requires equivalent cuts to other taxes, which has amounted in cuts of $760-million to income taxes and other taxes to offset carbon tax revenue. B.C. now has the lowest personal income tax rate in Canada (with additional cuts benefiting low-income and rural residents) and one of the lowest corporate tax rates in North America. At the same time, it’s been highly effective in tackling the root cause of carbon pollution: the burning of fossil fuels. Since the tax was integrated, fuel use in B.C. has dropped by 16 per cent!
Québec on the other hand, opted in for a cap-and-trade approach in 2013 by implementing GHG allowances. In 2014, the province officially linked its system with California’s as part of the Western Climate Initiative (WCI), becoming one of the pioneers of the largest carbon market in North America. Revenue generated by the carbon market is allocated to the Green Fund and reinvested in full for the implementation of their Climate Change Action Plan, whose measures will help reduce GHG emissions, adapt to the impacts of climate change and accelerate the switch to a low-carbon economy.
Ontario has announced that it will join Québec with its long-awaited cap-and-trade regime set to begin in January 2017. However, there is a lot to consider. Many are concerned that the proposed $15 per tonne of CO2 is an insufficient market signal – especially compared to B.C.’s $30 per tonne rate.
The second worry is how Ontario’s cap-and-trade revenue will be put to use. While some prefer revenue neutrality (such as in B.C.), others argue that revenues should be allocated to build green, low-carbon infrastructure (such as in Quebec).
Despite the many uncertainties associated with developing carbon pricing regimes, we have made incredible strides, as it wasn’t too long ago that carbon pricing was regarded as a “job-killing tax”. In Canada, the conversation has begun to shift from whether or not to put a price on carbon, to what kind of carbon pricing mechanisms will best serve each province. Further, governments, businesses and investors around the globe are recognising that nationally-appropriate taxes and trading schemes are integral to a well-aligned package of policies that will help to reduce GHG emissions without harming the economy.
Although we still have a long way to go towards carbon neutrality, Canada is finally beginning to see a push in the right direction with carbon pricing. However, in order for us to continue to maximize the potential of these economic tools, the ambition and coverage of such pricing instruments will need to continue to accelerate and diversify.
This blog was written by Sara Ganowski. Sara is a fourth year University of Waterloo student double majoring in Environment & Resource Studies and Speech Communication. She is also a lead on the Climate Students Communications Team.