Carbon Pricing: The Good, The Bad, and the Ugly

Canadian energy issues can be hard to navigate in the political world without being equipped with a technical background in how energy is generated and used. Here is the third article of the Energy Literacy series, focusing on a particularly relevant topic in the energy industry.

With the Ontario election having just passed, and the Federal and Alberta elections happening next year, it’s time to talk about everyone’s favourite topic, Carbon Pricing!

To start, let me be clear about my views.  I think that reducing emissions should be a priority for any political party, be it Conservative, Liberal, or NDP. I would like to think we’re at the point where each party does agree action on the environment should be taken, and now it is just a matter of debating what is the most effective course of action. I have my own views on carbon pricing, but still see the merit in taking a closer look at this.

Right now, it seems like carbon pricing (carbon taxing, cap-and-trade, however you want to put it) is being defended as being the not just a way to reduce emissions, but THE way, and if you disagree you are a heinous climate denier! A tax levy on carbon from the federal government will kick in next January, at $20 a ton of emissions, with it jumping to $50 in 2022 (which will be applied in provinces that don’t initiate their own carbon pricing plan). What will this mean for taxpayers, and what will it mean for the environment?

As we can’t seem to see a question period without an actual discussion on the pros and cons of a carbon tax for Canada’s economy, I thought it was time to bring it up here. As one of my favorite jokes is; wWhat happens when you put 10 economists in a room? You’ll get 11 opinions. This is not meant to downplay the understanding economists have of the economy, but to emphasize the complexity of economics. The economics of carbon pricing is complex, so let’s actually start thinking about it, rather than the usual course.

If sacrifices to the economy are absolutely required to address environmental crises, so be it. However, let’s talk about what sacrifices as a whole should be made, if they need to be made at all. So, is a carbon tax useful for reducing emissions? It best answer seems to be; it depends, it depends on many factors.

Six economists from McGill University-based thinktank, Ecofiscal, argue that in British Columbia have, and without impeding growth. Likewise, Catherine McKenna’s main argument for a carbon tax not being damaging to the economy is that Alberta, British Columbia, Ontario, and Quebec are provinces with the highest economic growth in Canada and all happen to have carbon taxes. However, the Conference Board of Canada disagrees, arguing that it could shrink Canada’s economy as much as $3billion in 2018, due to the rippling effect of higher energy prices, as well as putting Canadian exporters as a disadvantage in trying to attract foreign buyers. Scott Moe, Saskatchewan’s premier, shares this concern of a disadvantage for exporters. His solution? Industry-specific standards for emissions reductions and bumping renewable energy generating capacity in Saskatchewan to 50% by 2030, as well as focusing on emissions specifically from mining, energy, and agriculture.

The underlying issue that should be primarily brought to the table is that there is a large difference between theory and practice when to comes to carbon pricing. In theory, despite being a tax, I can see the appeal of carbon pricing to some conservatives. It can be seen as a free market incentive to encourage companies to adapt and find cost-effective strategies to help them compete. Who needs a ton of red tape through government regulations, when you can have the free market decide how emissions will be reduced, right? Isn’t a market-driven system for emissions reductions preferable to costly, intrusive regulations?

However, carbon taxes don’t exist in a vacuum, and the context of a province must be taken into account. The ways in which consumers react to price changes also must be taken into account. The Institute for Smart Prosperity put out a report discussing this. Key takeaway points: if consumer demand for something (such as gasoline) is fairly inelastic, meaning that an increase in price won’t change a consumer’s willingness to still pay for it, then we won’t be seeing a decrease in use of it. As well, as energy demand for is fairly inelastic in the short-term, any sudden increase in price would be a financial shock to a consumer.

As well, the way in which carbon taxes have been brought in for each province, as how long they’ve been implemented for, need to be considered. Not every province is the same, just like how not every country is the same. We can’t just adopt policies in Scandinavian countries, for example, without trying to adapt them to the peculiarities of our own regions. For starters, British Columbia has made their carbon tax revenue neutral. This is in stark contrast to Ontario’s carbon tax proponents, who have decried the rejection of a carbon tax as leaving behind a massive revenue shortfall for the government. My views on this? I think that if you are going to implement carbon pricing, it should exist not as a means of funding government bureaucracy, sorry, I mean “investment”, but purely as a means of reducing carbon emissions.

But let’s go back to the argument that through changing behaviours, carbon pricing can reduce emissions. Yes, there is an impact on emissions, but is there an actual number figure to it, and one substantial enough to justify a cost of $10 per tonne, or $50 per tonne price? According to Environment Canada, to reach the 30% emissions reductions from 2005 levels by the year 2030 (set by the Harper Conservatives, yes, those terrifying tree-killing monsters), a price of up to $300 per tonne is necessary. Are carbon pricing regimes done in vain?

As well, if carbon pricing is supposed to save us all from the horrors of costly regulations that are difficult to impose to adapt to industry innovation, why isn’t that the case currently? One could argue for the use of regulations, like Scott Moe is a proponent of. The argument for taking this route instead of carbon taxation is it makes life cheaper for Canadian households and businesses, while addressing the biggest emitters instead. Of course, we won’t find out how much carbon pricing will cost us anytime soon, despite those numbers being known, so let’s look at what businesses have to say.

Some concerns for small businesses? The Ontario Chamber of Commerce brings some up, in a discussion on the implementation of cap-and-trade in Ontario. Some of these include conflicts with existing policies, ineffective government use of cap-and-trade proceeds, as well as additionally costs for companies who themselves are not large emitters but rely on products from businesses that are and would be subject to carbon pricing.

Lastly, what will putting a price on carbon do in terms of reducing emissions worldwide. Canada does not exist on a planet separate from larger emitters, such as India or China, so we need to live with the consequences of their pollution, as well as our own. With Canada having a relatively clean energy supply (about 60% from hydroelectric and 15% from nuclear), as well as arguably some of the world’s highest environmental standards for some industries, what are we doing about encouraging investment in Canada from the rest of the world? What will be the point of pricing carbon in Canada, if international firms decide to invest in countries without a carbon pricing policy?

In conclusion, there are only three points left to be made.

1. Yes, I think we do need to think about emissions reductions, no matter where we lean politically
2. No matter how important you see the environment as being, the impact on carbon pricing on socioeconomic factors cannot be ignored.
3. We can be more creative in reducing emissions while addressing these factors, then merely slapping a broad carbon tax on and hoping for the best.
4. We can’t properly address environmental issues like this if Canadians and our legislators are being kept in the dark.

Now the question remains: what is the best way forward if we want to protect the environment, the Canadian families, and the economy as a whole? Conservative Environment Shadow Minister, Ed Fast, has argued for supporting development of low-carbon technology, as an approach to more-so pull people towards emission reduction than pushing them. I had a pleasure of talking to Mr. Fast and several other environmentalists about possible options, and I personally look forward to seeing what public policy innovation can come over the next year.

What do you think of carbon pricing? Do you think it’s essential in Canada, or that we should pursue other routes for reduced emissions instead? Feel free to leave a comment with your ideas!

Originally posted on Story of a Tory.