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Industrial buildings and smokestacks are lit by sunshine peeking through winter storm clouds over Oakville, Ontario on Jan. 27, 2012.

Peter Power/The Globe and Mail

Carbon pricing can cut greenhouse gas emissions in Canada without hurting the economy, as long as the revenue generated is effectively "recycled," a new report says.

There are many ways to use the money raised by carbon pricing, and each province should do what is right for its own economic circumstances, according to the report released Wednesday by Canada's Ecofiscal Commission, a think tank of private-sector economists.

While there is considerable discussion across the country about what kind of carbon charge can best reduce emissions, the economic benefits of generating funds this way "are very often the forgotten part" of the equation, said Christopher Ragan, associate professor of economics at McGill University, chair of Ecofiscal and one of the report's authors. "You can make a choice [in spending the money] that will be very growth friendly."

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So far in Canada, British Columbia has put in place a carbon tax, Alberta has a limited carbon-pricing program that it is now redesigning, Quebec has introduced a cap and trade system and Ontario is also working on a cap and trade program. Several other provinces are considering some form of carbon pricing.

The money generated by carbon pricing can be substantial. Based on a carbon price of $30/tonne (and emissions at 2013 levels) Alberta could raise $5.9-billion a year from pricing carbon, Ontario could generate $3.9-billion, and Quebec could raise $1.8-billion, the Ecofiscal report said. The other provinces would come in at lower levels.

In figuring out what to do with the money generated, two key issues have to be dealt with initially, the report said. First, it is important to make carbon pricing fair to provincial residents – and especially to ensure poorer people don't get hit hard from higher energy prices. Second, the system needs to be designed so businesses stay competitive relative to similar operations in other provinces or countries which may not have the same carbon price.

To alleviate those concerns, "revenue recycling" options might involve making direct payments to low-income households, or reducing income-tax rates. Companies affected could get transitional support in the form of free carbon credits, or rebates off their carbon tax.

But even if there is considerable spending to deal with those issues, "you'll have revenue left over" from carbon pricing, Mr. Ragan said, and provincial governments should consider other actions to boost their economies.

That might include investing in emissions-reduction technology, putting money into public infrastructure projects, cutting taxes broadly or reducing government debt, the Ecofiscal report said.

What's crucial, it said, is that each province take the approach that suits it best. "No single revenue-recycling approach is a clear winner across all dimensions. Optimal revenue recycling within any given province will depend on the relative weights placed on the different objectives, and these weights will naturally depend on the provincial context."

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A lot depends on the economic situation each province is facing, Mr. Ragan said. "Alberta has low income taxes, no public debt and a huge emission-intensive sector. Quebec has high income taxes, high public debt, and a very small emission-intensive sector, along with crumbling infrastructure. Is it any surprise that you would probably come out with different recycling options?"

The Ecofiscal report includes models of potential scenarios for several provinces. In Ontario, for example, it says the best use of extra revenue might be to invest in low-carbon technology and infrastructure projects, while also reducing provincial debt. In Alberta, more might be spent helping households pay higher power bills, proving transitional support to the energy sector, and investing in clean technology. In Quebec, the money would likely be most effective cutting taxes and public debt, and investing in infrastructure.

As for the federal government, Mr. Ragan said Ottawa can play a role in co-ordinating carbon pricing systems across the country, while leaving it up to the provinces to decide what to do with the revenue it generates.

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