By Brett Dolter, PhD
Climate change is an urgent problem. Getting off fossil fuels will be difficult. If you agree with these two statements, I’d invite you to consider my arguments in support of a third statement: Carbon pricing is the most effective way to reduce our greenhouse gas emissions. Here are ten reasons why:
- Climate change is an investment problem not an environmental problem. To stop climate change, we need to invest in technologies and products that do not pollute. Carbon pricing makes dirty technologies more expensive and guides our investment choices.
- The transition to a zero-emissions world will take time. Carbon prices can be slowly increased over time, allowing for clean energy investments to be made when equipment is old and in need of replacement. For example, if you just installed a new natural gas furnace, you can choose to wait 20 years before installing a new electric heating system. Carbon pricing does not tell you when to invest, but encourages you to make a smart, clean energy investment when the time is right.
- Carbon pricing is not a punishment, it is a source of information. If you wanted to live a pollution free life without carbon pricing you would have a tough time. When you go shopping how would you know whether the apples you are buying were grown in a greenhouse heated by diesel fuel, or in a well-insulated greenhouse heated by clean electricity? With a carbon price in place, the apples grown in a diesel heated greenhouse would be more expensive. Carbon pricing provides information to help us sort between clean and dirty products.
- And related to #3, many of us are “more influenced by prices than by environmental concerns”. With carbon pricing, you don’t have to care about the environment to reduce pollution, you just have to be a smart shopper and pick the products that cost less.
- Carbon pricing accounts for differences between polluters. In Canada, the carbon price will be $10/tonne starting in 2018. Businesses that find it expensive to reduce emissions can pay a carbon levy on every tonne of pollution they emit. Businesses that can reduce emissions for less than $10/tonne can reduce pollution and avoid paying the carbon levy. What this means is that all businesses will face the same cost for pollution: $10/tonne. It would be difficult to design a regulation that would achieve this level of fairness. In 2019 the carbon price will rise to $20/tonne, encouraging pollution reductions that are slightly more expensive. This progression means investments in low-cost “low-hanging fruit” will be made first, providing more “bang for our buck” in terms of emissions reductions per dollar. Because it leads to equal treatment of polluters and because it encourages the lowest cost pollution reductions first, economists say that carbon pricing leads to “efficient” outcomes.
- Carbon pricing provides an incentive for continuous improvement. When businesses and households pay for every tonne of pollution they release, the incentive to reduce pollution is ever-present. By comparison, a regulation may require businesses to achieve a certain level of emissions reduction and no more. For example, in the electricity sector, federal regulations require coal plants to release only 420 tonnes of CO2 per gigawatt-hour (GWh) electricity produced. Once the regulation is achieved, there is no incentive for companies like SaskPower to go further and get pollution levels down to 300 t/GWh, or 0 tonnes/GWh. Carbon pricing provides an incentive for continuous improvement.
- Carbon pricing limits “rebound effects”. Let me explain. We know that one way to reduce pollution is to purchase a vehicle that is more fuel efficient. If you trade your Ford F-150 for a Ford Fiesta you can drive the same distance for half the gas. A rebound effect happens when people use the money they saved on fuel to drive twice as far, bringing pollution levels right back to where they started! A carbon price increases fuel prices and discourages this rebound effect.
- Carbon pricing is the climate change policy that maximizes freedom. For every $10/tonne that the Canadian carbon price increases, gasoline costs will increase by 2.2 cents/litre. This will mean an extra $11 cents/litre at the pump when carbon prices reach $50/tonne in 2022. If you want, you can still choose to drive a Ford F-150 truck in 2022. The government will not tell you what you can or can’t drive, or what car companies can or can’t sell. You will, however, pay for the damage your tailpipe exhaust is causing.
- Carbon pricing reduces government’s need for information. What kind of boiler should Mosaic install to provide steam for their potash mining operations? With a carbon price the government does not need to know. Mosaic will work to minimize their costs and will account for the cost of pollution in their decisions. When government provides a carbon price signal, companies can make their own decisions on how to best respond.
- Carbon pricing provides an incentive for innovation by creating markets for clean technology. When it is costly to pollute, there are business opportunities for products that lower pollution. For example, carbon capture and storage (CCS) is a technology that only becomes economical once carbon prices reach levels of $60-$250/tonne. Green technology entrepreneurs are hungry for the new markets that carbon pricing will create.
Carbon pricing is, of course, not perfect. Those who oppose carbon pricing are justifiably concerned about how it will impact business competitiveness and energy affordability. Here are seven thoughts on ways to design a carbon pricing system that minimizes these negative impacts.
- Carbon pricing increases the cost of doing business and there is a risk that companies will move to places where carbon is not priced. This is called carbon leakage and is a problem because the pollution has not disappeared, it has just moved to a pollution haven. These leakage risks can be addressed with a global carbon price. If every region in the world implemented a carbon price there would be no incentive to move to “browner” pastures. Already, 90 countries around the world, responsible for 60% of greenhouse gas emissions, have carbon pricing as part of their climate change strategies. By adopting a carbon price in Canada, we send a message to the rest of the world that it is time to move in this direction.
- If a country (like the United States) refuses to introduce a carbon price, their businesses will have a competitive advantage because their energy prices will be artificially low. Countries that have a carbon price can respond by banding together in a carbon club. Countries belonging to the club can trade freely with one another. When countries outside of the club try to sell their artificially low-cost products abroad they will be hit with a carbon border tax. This would increase the price of the exported products to the level they would have been if they had faced a carbon price at home. French President Macron recently suggested that the European Union take this approach. Trade agreements can be written to ensure carbon has a price.
- Before the carbon club comes into place, carbon pricing can be designed to ensure that businesses that trade in world markets maintain their competitiveness. The federal government’s “output based allocation” system seeks to do this. Targets will be set in terms of how much pollution can be released for every dollar of production. For example, Regina-based steel company Evraz might need to reduce its emissions from 1 tonne CO2 per tonne of steel produced to .75 tonnes CO2 per tonne of steel. Evraz would pay a carbon levy only if the company does not meet its emission intensity targets, and then only on pollution above the target level. So if it produced 280,000 tonnes of steel, it would have a target of 210,000 tonnes of CO2 emissions (75% of 280,000). If it instead released 215,000 tonnes of CO2 (as it did in 2015), it would need to pay a $50,000 carbon cost (5000 tonnes x $10/tonne) instead of a potential $2.15 million cost (215,000 tonnes x $10/tonne). The incentive to reduce CO2 remains, but the cost of failing to meet the target is reduced, which ensures that Evraz can continue to compete in world markets.
- Carbon pricing provides revenues that can be used to help those who struggle to pay for higher energy costs. For example, Alberta offers a means-tested rebate that ensures that households earning less than $95,000/year receive as much money back in rebates as they would likely spend due to higher fuel costs. Wealthier households don’t receive a rebate, but they are also well positioned to pay higher fuel costs and make the investments needed to reduce energy use.
- Some argue that carbon pricing is simply a “tax grab” by government. Carbon pricing is not a tax-grab if revenues are returned to citizens. British Columbia has legislated that their carbon tax must be “revenue-neutral”. This means all revenues collected from their carbon tax must be returned to citizens. Since 2008 they have used their carbon tax revenues to lower income taxes and offer grants to rural and northern households. This approach offers a double-dividend. First, it discourages something we want less of: pollution. Second, it lowers a tax on something we want more of: people working. In Saskatchewan, if all carbon tax revenues in 2022 were returned in the form of tax cuts the province could decide to nearly eliminate personal income tax or eliminate the PST. Would you be willing to pay an extra 11 cents/litre at the gas station in exchange for a break on your income taxes?
- In Saskatchewan, there are concerns that agricultural producers will be hit hard by carbon pricing. One thing to keep in mind is that most carbon pricing systems in Canada, for better or worse, exclude farm fuels (formerly known as “purple gas”). One argument made in favour of excluding these fuels is that farms do not have many good options for reducing fuel use. We should, however, not overlook the ability of the agricultural sector to innovate. Saskatchewan equipment manufacturers are creating autonomous technology that promises to revolutionize agriculture. Pairing autonomous technology with electric tractor motors could eliminate diesel fuel use in agriculture. If this technology is more expensive than conventional equipment today, we can ask, at what carbon price would it become economically viable?
- Beyond fuel use, farm fertilizers and manure release nitrous oxide (N2O) to the atmosphere and cow burps release methane (CH4) (see picture below). Both are powerful greenhouse gas emissions that trap heat more effectively than carbon dioxide (CO2). To create incentives to reduce these emissions, carbon pricing can be applied to nitrous oxide and methane in terms of their ‘carbon dioxide equivalent’ ratings (multiply nitrous oxide by 298 and methane by 25 to convert to CO2 equivalent). On the other side of the ledger, certain farm practices can store carbon in agricultural soils. An assessment of any given farm operation would need to consider both the release of pollution like CO2, N2O, and CH4 and the capture of CO2 in the soil. Pricing would act as a way to encourage agricultural operations to store more carbon and to reduce CO2, N2O and CH4 pollution. To minimize the economic impact on the agricultural sector, pollution pricing could be made “sector-neutral”. This would mean money paid for emissions of CO2, N2O and CH4 could be awarded to producers who store carbon in their well-managed pastures, protected wetlands, or farm fields. Producers using the best practices would earn extra money for their efforts.
Agricultural Greenhouse Gas Emissions (Source: WRI, 2017)
The federal government requires Saskatchewan to have a carbon price of $10/tonne in place by
January 1, 2018 (update: January 1st may not be a hard deadline for Saskatchewan to have a carbon pricing system in place. See this article). If Saskatchewan fails to implement their own carbon price, the federal government can impose their “backstop” carbon pricing plan. This means the Saskatchewan government will have given up the ability to influence the design of carbon pricing in Saskatchewan.
With the ten arguments for carbon pricing listed above, and the seven ideas for how to avoid negative impacts to trade-exposed industries, low-income households, and the agricultural sector, the only question remaining is: what are we waiting for?
(Note: Many items on these lists are adapted from the article: Andrea Baranzini, Jeroen C. J. M. van den Bergh, Stefano Carattini, Richard B. Howarth, Emilio Padilla and Jordi Roca (2017) “Carbon pricing in climate policy: seven reasons, complementary instruments, and political economy considerations.” WIREs Clim Change 2017, e462. doi: 10.1002/wcc.462.)