Christopher Ragan is an associate professor of economics at McGill University and the chairman of Canada's Ecofiscal Commission. Annette Verschuren is CEO of NRStor and an advisory board member of Canada's Ecofiscal Commission.
The new carbon-pricing systems are now in effect in Ontario and Alberta, and some people are complaining that the policies sting a little. This is not surprising. Carbon pricing works precisely by raising the price of carbon-intensive goods and services, incentivizing all of us – households and businesses alike – to change our behaviour and reduce our greenhouse gas (GHG) emissions.
But carbon pricing doesn't have to cost us more over all, for two reasons. First, we could change our behaviour in ways that actually save us money. Second, the government could rebate some of the carbon-pricing revenues back to us without undermining the overall intent of the policy.
Let's start with the big enchilada: the price of gasoline. In the short term, the price increase can be offset by combining errands into a single car trip, incorporating carpooling into your commute, taking public transit a little more often or simply choosing not to drive to the corner store when walking can suffice. The Alberta Motor Association (AMA) is offering drivers five tips that can conserve enough fuel to offset the increase in gas prices caused by the carbon price, including watching your tire pressure and not idling your vehicle to warm it up. Over the longer run, drivers might decide to make their next car a smaller and more fuel-efficient vehicle, or even a hybrid or fully electric vehicle.
When it comes to heating our homes and offices, our immediate approach to higher heating costs could be to turn down the heat when we're not there. There are now devices that can help us automate this task, such as the ecobee WiFi-enabled smart thermostat. And whether you are home or working, you can turn down the heat a little and wear a fleece to stay cozy (which apparently also helps to burn calories and stay trim!). In the longer run, one might opt for the most energy-efficient options when making home improvements, such as replacing your windows; the Energy Star "Most Efficient" designation offers a 40-per-cent efficiency improvement over standard windows.
Now consider the case for government rebating some of the carbon revenues back to households and businesses.
Increases in costs that can't be offset with short-term behavioural changes will make a noticeable impact on the budgets of low-income families. Given these households' challenging economic circumstances, governments are right to be concerned, as they apparently are in British Columbia and Alberta.
The Alberta policy provides quarterly cash rebates to the two-thirds of households that have the lowest incomes. The rebates in many cases will leave households' purchasing power unaffected by the carbon price. In British Columbia, income-tax cuts are legislatively required as part of the carbon-pricing policy, and that province now boasts among the lowest income-tax rates in Canada. Whether such rebates make sense in Ontario is well worth debating. Recent research by Canada's Ecofiscal Commission shows that Ontario would need to use less than 13 per cent of its carbon-pricing revenue to fully protect the 40 per cent of its households with the lowest incomes.
When it comes to businesses, the requirement to pay for carbon emissions increases costs and challenges their competitive position relative to rivals in other jurisdictions – especially for "emissions intensive" firms. Providing cash rebates to these businesses makes good sense, precisely because the rebates help to maintain economic activity and jobs inside the jurisdiction doing the carbon pricing, while still providing businesses with a clear incentive to reduce their GHG emissions.
Ontario's cap-and-trade system allows for some free permits to be provided to the most emissions-intensive firms. Alberta's Carbon Competitiveness Regulation, to be introduced next year, will give rebates to emissions-intensive firms based on their level of output. Both policies are designed to protect the competitiveness of provincial business, while still making meaningful progress on reducing GHG emissions.
Carbon pricing in Ontario and Alberta will certainly require people to think a little differently – and that's the point. Households and businesses need to figure out how carbon pricing will influence their purchasing and production decisions, but this will soon become pretty natural and easy.
We should never forget how much prices matter. Most of us like saving money, and so we seek out the lowest-cost options, whether we're shopping for food or clothing, or making a new product or offering a new service. With carbon pricing, we will seek out new ways to do things, new ways to save money – and it will help even more if our governments send some of the money back to us.
Christopher Ragan