On Wednesday, Canada 2020 will convene a distinguished panel in Ottawa for a discussion of “how to sell carbon pricing to Canadians”. In advance, Diana Carney, the VP of research for the progressive policy think-tank, has written a thorough report that laments the “disintegration of constructive debate about carbon management at a national level in Canada.”
Since its disastrous GreenShift platform in the 2008 federal election, the Liberals are gun-shy on climate change. When asked about carbon pricing during the recent Liberal leadership campaign, Justin Trudeau answered that he doesn’t know whether he favours a carbon tax, cap-and-trade or “another pricing mechanism”.
Having helped crucify the GreenShift, the NDP now touts cap-and-trade but is coy on the details. Moreover, the NDP persists with its absurd assertion that, while a carbon tax is regressive, somehow poor households won’t be affected by a cap-and-trade system. This is either simple dishonesty or ignorance of economics.
The Conservatives are absent from the field altogether.
Carbon pricing has become the issue that parties fear to touch – “a ‘third rail’ in Canadian politics” in Ms. Carney’s words. Notwithstanding the environmental costs, the political deadlock is fast becoming an economic threat.
Economists agree that a carbon price is the most efficient way to achieve reductions: If you can reduce for less than the price, you reduce; if you emit, you pay the price.
The benefit of cap-and-trade is certainty about how much emissions will be reduced. The drawback is that the carbon price can be highly volatile. On the other hand, carbon taxes provide certainty on price but not on the quantity of emissions.
But the longer that the morass over carbon pricing lasts, the more difficult that it becomes for Canadians to plan their behaviour.
Without knowing prices, households can’t make informed cost-benefit decisions about buying a more fuel-efficient vehicle or installing better insulation. When investing in new equipment, businesses need certainty about the future costs they will be facing. Even large emitters expect carbon pricing to come. The big concern for businesses is that they don’t know what the price will be.
Too much time has been wasted with partisan maneuvering around carbon tax versus cap-and-trade. These aren’t mutually exclusive options. For an efficient design, we should use the whole toolkit. What matters is that Canadian families and businesses know what to expect.
An effective scheme would stage the introduction of carbon pricing and might use both a gradually increasing carbon tax alongside a tradable permit mechanism. At the early stages of implementation, a carbon tax would provide predictable prices. Later, as Canadians adjusted, competitive auction and trading of emissions permits would provide a flexible market price.
However a carbon price is set, a troublesome question is how to offset the disproportionate economic impact on provinces with high emissions and on low-income Canadians.
Absent targeted transfers, any price on carbon will increase the cost of carbon-intensive goods and services. Transport, housing and food make up around 60 per cent of the consumer basket for Canadian households in the lowest income quintile but only roughly 50 per cent of that for the highest income quintile.
Whether by cap-and-trade or a carbon tax, a carbon price would hit low-income families disproportionately. A certain portion of carbon revenues from either a carbon tax or an auction of emission permits should be used to counteract such regressive impacts. Such income-targeted redistribution was a key aspect of the Liberals’ GreenShift platform.
Nationwide carbon pricing will also place strains on our federation. Economic modeling commissioned by TD Bank shows that certain provinces will bear the brunt of a carbon tax. While the federal government must co-ordinate a Canada-wide carbon-pricing scheme, most of the carbon revenues from each province should be earmarked for the respective provincial government.
Finally, there is the issue of foreign trade. Won’t consumers just switch to cheaper imports from countries without carbon pricing? Won’t exporters lose out? As Tom Courchene and John Allan of Queen’s University have argued, the solution is border adjustments that would place tariffs on the imbedded carbon of imports and rebate exports. A legal analysis by Paul-Erik Veel of the University of Toronto concludes that such tariffs would comply with World Trade Organization obligations.
In the face of the clear and present costs of climate change, arguments against pricing carbon are out of step with the evidence. Canadian families and businesses should not tolerate obfuscation from Ottawa. The time to resolve deadlock on carbon pricing is now. More delay will only deepen the ultimate economic and environmental costs.
Grant Bishop is a law student at the University of Toronto and previously served as an economist at a major Canadian financial institution
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