Canadian provinces and territories are actively preparing for 2018, and the federally mandated base carbon tax of $10/tonne that it will bring. Along with it comes considerable speculation and debate around how exactly each province or territory will opt to install the federally mandated price on carbon and how revenues will be used.
In Canada’s North, where the per-capita use of fossil fuels rapidly exceeds the average in the rest of Canada, anxiety abounds about impacts on affordability. The Yukon Chamber of Commerce (YCC) has published a position paper cautioning that government tread carefully and remain mindful of the unique affordability implications of carbon pricing in the territory. The paper goes on to recommend an at-arm’s-length apolitical advisory committee to oversee the allocation of revenues, warning that government should not merely use the carbon levy for government programs, but instead to spur innovation, invest in technologies, and drive the private sector towards maximising efficiency in reducing emission. This Yukon-specific context bears keeping in mind in the following examination of other jurisdictions’ approaches to carbon pricing.
Carbon Pricing Across Canada
For provinces already engaged in carbon pricing, the new federal pricing scheme isn’t coming as a shock. British-Columbia and Alberta, which have a carbon tax, are well on track for the federal government’s requirement that each province has a carbon price in place or that the federal government will step in to administer the price for the province or territory and return revenues accordingly. Ontario and Québec, meanwhile, present the case for a cap-and-trade permitting system.
Possible legal challenges notwithstanding, the exact way each province and territory would handle its carbon pricing revenues won’t be subject to the same guided approach. Across Canada, we’ve already seen a number of models in play and it’s fair to say that many more will soon enter the fray.
Under Canada’s system of government, each province and territory is able to decide the structure of its price on carbon, so long as its price reflects the established minimum in any given year. Given the capacity for numerous differing approaches, economists across the country will now vie to deliver the solution that is most effective in balancing the often-competing priorities of economic prosperity and environmental protection. The real risk lies in either failing to take measures far enough, choosing political palatability over environmental prudence, or instead going too far and actually stifling economic growth, along with jobs across virtually all industries.
One frequently noted example is British Columbia’s carbon tax, which was introduced in 2008 as a revenue neutral tax, meaning that it was designed to not raise taxes overall but to replace other sources of government revenue, leading to reductions in other taxes and rebates for low- and middle-income earners. Currently, the tax remains at $30/tonne. However, although the recently-replaced provincial government, had planned to adjust upwards only when other provinces had as well, the swearing-in of a new government may soon see revenue neutrality no longer being the tax’s selling point in the global context. The new government repeatedly promised over the course of the provincial election to appropriate revenues for government spending and raise the tax per tonne of carbon emitted.
It has been British Columbia ’s success in both being one of the first jurisdictions to introduce a carbon tax in North America (with a freeze on increases that went into effect in 2012) and growing the economy (at a rate that makes it Canada’s fastest growing economy) that has drawn the attention of the World Economic Forum, among many others in the global context. Time will soon tell if playing around with the model impacts its capacity to function alongside a growing economy, rather than in opposition to it.
In Alberta, the election of a new government in 2015 brought a carbon tax to the province under the banner of the Climate Leadership Plan. The current $20/tonne tax is expected to rise to $30/tonne by 2018. Low- and middle-income rebates have been put into place, to offset impacts on affordability. Industrial emitters, including within the energy sector and agriculture, are treated differently, under the Specified Gas Emitters Regulation. In a nod to Alberta’s practice, the backdrop for the new federal plan, the Pan-Canadian Framework, incorporates a system for addressing industrial high-volume carbon polluters.
This year, Ontario joined Quebec and California under the Western Climate Initiative, a common carbon credit market where industrial emissions are capped and companies must buy credits to emit carbon. These credits can be traded within and across participating jurisdictions. The Ontario government has made a point of promising to utilize its revenues from the price on carbon with to fund alternative and sustainable energy initiatives. This decision has come to the applause of advocates for green technology, but the ire of some economists who view government involvement in green technology research and development as needless intervention better suited to industry actors.
Quebec implemented $3 per tonne carbon tax in 2007 and in 2013 it switched to a cap-and-trade system, joining California. The current permit price for one tonne rests at $16 a tonne – and by 2022, it is due to rise to $24. At present, it is higher than the federal base rate, but, by 2022, it may lag behind the forecasted $50/tonne that will be federally mandated.
Carbon Pricing Considerations
A common theme always appears to be concern for affordability – jurisdictions that have implemented carbon pricing have frequently looked for ways to ensure that while the price serves to deter carbon use and gradually reduce emissions, that individuals and families are not adversely impacted by increased living costs. Indeed, Alberta’s approach may serve to leave some families better off with the rebate than they would have been otherwise, though only 44% of the revenues are allocated for the rebate, with the rest going to “greening” initiatives.
Another central concern presents itself as the balance between creating restrictions on emissions as an environmental decision and ensuring that business and industry are not hobbled beyond the point to which they can survive and continue to grow Canada’s economy. Nevertheless, theconsensus has clearly formed amongst academics that a social cost for carbon is the approach that makes most sense in limiting carbon emissions.
On the flip side, Manitoba and Saskatchewan have refused to sign the national agreement this past December; it remains unclear whether they will actively pursue the matter in court.
Others have criticized the assertion that the price is revenue neutral for Ottawa, pointing to the money that the feds stand to earn from the layering of the GST on top of the tax (or integrated price via permitting).
Still, there does seem to an appetite for most governments to support some sort of carbon system aiming at reducing emissions, even as fears abound around disproportionate hits to living affordability, especially in the North where reliance on fossil fuels is greater.
The Pan-Canadian Framework on Clean Growth and Climate Change has since confirmed that territories would be treated differently, due to their carbon-intensive economies and reliance on fossil fuels for electricity (particularly for Nunavut, which is entirely reliant on fuels for energy). The extent of this differential consideration is not yet clear.
Carbon Pricing: An Array of View Points
The Yukon Chamber of Commerce position is that without significant reductions in income and business taxes, a carbon price could hinder the economy to an unacceptable degree. A report by SFU professor Mark Jaccard identifies that the greatest reductions in emissions have come from regulatory changes. In British Columbia alone, the decision to be zero-emission for electricity was responsible for a reduction in annual emissions of 10-15 Mt of carbon – three times the impact of the carbon tax in that same jurisdiction. Ontario’s decision to close coal-fired power plants accounted for 27 Mt annually in reductions. For context, Canada-wide emission were at 722 Mt of carbon in 2015, down from a high of 750 Mt in 2007. California’s massive reduction in emissions is also attributed to stringent regulations, as opposed to the carbon trading system it has established.
Most crucially, Jaccard assesses the political cost of explicit carbon pricing (taxation, as opposed to ‘softer’ implicit pricing via regulation), concluding that flexible regulations may indeed appear to be more effective for reasons of political palatability than outright taxation. Rather than ceding to the sort of “command-and-control” type of industrial regulation, Jaccard suggests that Canada might be well-positioned to create reduction quotas by sector and allow for industry to innovate solutions on its own, rather than pushing industries to adopt specific technologies that might preclude the development of better ones.
These recommendations may well jive with a revenue-return mechanism that comes in the form of lower corporate taxes, returning $3-5 to the economy for each foregone corporate tax dollar to government purses.
The conclusions of Jaccard’s research circle around the political difficulty of adopting a carbon price that is sufficient enough to reduce emissions – a suggested $200/tonne by 2030. In lieu of carbon pricing alone, he concludes that flexible regulations by the year 2030 amounting to $200/tonne implicit cost, as well as an explicit $40/tonne price on carbon, would be sufficient to meet Canada’s climate commitments under Paris. British Columbia’s redistribution of revenues from the carbon price is identified again as a possible redress for any growth inhibition typically generated by a tax, with Jaccard identifying its applicability in both a scenario where it is the carbon price alone working to reduce emission and where the carbon price is joined with flexible regulations.
Note that subsidies and incentive programs are distinct from regulatory mechanisms – Jaccard asserts that such schemes are prone to “free-ridership” as those already likely to invest in sustainable tech do so anyways and get to benefit from free money for doing it.
Just as challenging is the notion that a carbon price renders Canadian business uncompetitive in the global market as it must compete with countries where emissions are not taxed. Luc Vallée and Jean Michaud propose that Canada adopt a “border carbon adjustment (BCA) policy” – exempting Canadians exports to countries where a carbon price has not been implemented, and subjecting imports to Canada from such countries to an entry tax. The two identify such an approach as a tax on consumption, not a tax on domestic production. Indeed, a BCA approach has been pinpointed in debate in the US House of Representatives already as a possible solution for maintaining America’s competitiveness against trade partners with less stringent regulations and costs for emitter industries.
The conversation on the carbon price must be careful not to forget the foundational aspect of a tax: revenues that government can use for any number of goals.
While the Yukon Chamber Energy Committee does not take a position on the following, a recent report by Canada’s Ecofiscal Commission (based at the Department of Economics at McGill University), “Choose Wisely: Options and Trade-offs in Recycling Carbon Pricing Revenues” issues four recommendations for government to follow.
1) Government should use revenue recycling to address fairness and competitiveness around carbon pricing.
- This recommendation identifies low-income households and vulnerable industries as possible targets for revenue recycling.
2) Governments should clearly define their objectives for revenue recycling.
- Simply put, identifying local and regional priorities, ranging from building or upgrading energy infrastructure, benefitting struggling families or business, or driving the energy transition, can help plan the intended effects of revenue-recycling.
3) Governments should use a portfolio of approaches to revenue recycling.
- There is no one-size-fits-all approach or single measure that will address the variety of issues raised by taxing consumption of an economically significant commodity.
4) Revenue-recycling priorities should be adjusted over time.
- A long-term solution must be continually reassessed, both as priorities change and as changes in consumer and business behavior assert themselves.
Such a model, while admittedly feeding into general government revenues, aims to address affordability challenges and offers rebate taxes to affected individuals and businesses. Directing revenues or decision on revenues allocations to an independently administered fund ensure that they are spent in service of a mandate that cannot change with the direction of the wind.
The US-based Urban-Brookings Tax Policy Centre has its own take, offering a categorization of possible policy priorities arising from returning revenues: “(1) offsetting the new burdens that a carbon tax places on consumers, producers, communities, and the broader economy; (2) supporting further efforts to reduce greenhouse gas emissions; (3) ameliorating the harms of climate disruption; and (4) funding public priorities unrelated to climate.”
The Urban-Brookings’ report explores a joint approach to reducing emissions, coupling regulations and taxation, with an emphasis on filling gaps that regulation leaves – it does agree though that subsidies are not an effective way to use revenues or to incentivize industry to adopt technologies that are truly best-equipped for curtailing emissions.
The economists cited above, while disagreeing on many of the finer points, broadly agree on the need for a price on carbon – few arguments against it present a credible, evidence-based case.
Yet for all the abundant debate and research in either direction, there’s no clear case that emerges for how revenues should be spent. Nevertheless, throughout the literature examined above, a narrative does begin to form around the need for flexibility and a structure for pricing that is responsive to results as they arise over the course of implementation.
The Yukon Chamber of Commerce Advisory Committee aims to erect an additional layer of security for collected carbon pricing revenues and to assure that they are spent with the intent of reducing emissions most efficiently. Such a model can indeed facilitate the targeted investment of revenues into specific projects, functioning as a distributive, grant-giving fund or recommend to measures, such as changes to taxation or rebate distribution.
Either way, the argument for revenue recycling with an eye to adaptability is one to consider. With the results yet to be seen of each provincial/territorial jurisdiction offering variation upon variation on the basic Canadian carbon pricing model, governments must pay careful attention to reporting and reviewing thoroughly and do their best to continuously evaluate the performance of each pricing system by predetermined metrics. The worst course of action could be to lock oneself into a system that is developed without substantive consultation and lacks a mechanism for change. Conversely, if Canadian jurisdictions successfully enact carbon pricing models that can be implemented, reviewed, and adjusted, they don’t just benefit themselves, but they also benefit those trying out other methods for pricing carbon and spending revenues. If Canada’s North is given consideration different from the provinces, then territories such as Yukon might use the opportunity to study outcomes and design (a) pricing model(s) adaptable to emerging insights both internally and amongst other provinces and territories.