Maria Panezi is a postdoctoral fellow at the Centre for International Governance Innovation. She is the author of the CIGI paper When CO2 Goes To Geneva: Taxing Carbon Across Borders – Without Violating WTO Obligations.
A study published this month by authors at U.S., Canadian and British universities found that not only is there widespread belief among Canadians that global warming is happening, but Canadians also show strong support for adopting carbon-pricing mechanisms in response. Canadians are ready to transition to a greener economy with products made accountable for their carbon emissions.
Unfortunately, studies such as this continue to frame the debate about carbon pricing as an either/or choice, pitting a cap-and-trade system against a carbon tax. This doesn't make sense. Canada will meet its targets for reducing carbon dioxide only through a combination of climate-change solutions.
From a policy perspective, there may be products or manufacturing sectors that will be more environmentally accountable with one system or the other. Climate change is a complex problem and the solution does not lie in choosing a single legal framework and applying it across the board. Instead, federal and provincial officials should focus on major emitters and products that contribute most to climate change and tailor their policy responses to whatever would create financially and legally sustainable results in their marketplace.
The political, economic and environmental context is crucial to choosing the right tools for addressing climate change. For example, the carbon tax system may be working well in British Columbia in its current form, but it cannot be used as it is in national contexts or other provinces and states. This is because each region is unique. For example, British Columbia has a warmer average temperature and a political landscape that allows the carbon tax to be a feasible option. These factors might not exist in another region.
Similarly, cap and trade is not without its drawbacks, either. There is a significant burden on administrative resources and monitoring for cap-and-trade systems. A carbon tax can produce more immediate benefits and is less costly to implement, while cap and trade is more complex and needs to be complemented with a supervisory authority. For other regions, this layer of supervision made carbon pricing more appealing. In some instances, it's possible that a carbon tax and a cap-and-trade system can have the same effect on the environment and the economy.
After establishing the will to move forward with carbon pricing, no tool should be off the table. Depending on the challenges and priorities of the given region, one or both systems could be employed to reduce carbon emissions. This also applies to different products: A policy that may work well for one sector and one set of products (such as energy-intensive, trade-exposed industries) may not work as well for others.
Another policy option in the carbon-pricing toolkit that would complement a federal carbon tax would be to use "border carbon adjustments" that work by imposing the same carbon price on "dirty" imports that are "like" environmentally accountable Canadian products. For example, a tonne of cement that was produced with a high carbon footprint halfway across the world would be taxed for its carbon emissions at the border, just as a tonne of cement produced domestically, with the same carbon footprint, would be taxed under a carbon-pricing system. This could help to make international trade environmentally fairer.
For this measure to work, countries must first ensure that all domestic industries are included, before trying to expand such policies to products from other countries. To do so fairly, adopting a carbon tax helps a lot: Any price imposed on the domestic product can be automatically imposed on the identical imported one.
With cap and trade, a specific price on individual products is not obvious and studies would have to be conducted before the government could determine an equal price for the similar imported products. Then, each time the cap is lowered, or more participants are added to the cap-and-trade system, the calculation must happen again.
Ideally, governments should adopt a combination of the two systems: carbon tax for some products and a hybrid cap and trade for others (with a price floor for carbon) in order to tackle climate change holistically.
The consensus is there to support using carbon pricing to tackle the problem of climate change and create a carbon-accountable world for everyone. Rather than focus on cap and trade or carbon taxes, we'd do better to use all the tools at our disposal.