Tracy Snoddon is author of the C.D. Howe Institute study Carbon Copies: The Prospects For An Economy-Wide Carbon Price In Canada.
With our major trading partners, the United States and China, having recently ratified the Paris climate agreement, there is mounting pressure on Canada to come up with a plan to meet its emissions reduction targets. It's time for Ottawa to take action and put in place a floor price on carbon nationwide.
If the goal is to reduce Canada's carbon emissions in a way that causes the least amount of economic damage, a uniform price on carbon that applies across the entire country is the best option. A national carbon price has many advantages: It eliminates unproductive jockeying between provinces to attract business and doesn't push firms across borders solely because of carbon price differentials.
To date, the provinces have done all the heavy lifting to meet Canada's emissions reductions goals. British Columbia has a $30-a-tonne carbon tax. Alberta's new carbon-price regime will hit $30 in 2018. And in the cap-and-trade system in Quebec, California and (soon) Ontario, the price on carbon is currently $16 a tonne.
Provincial innovation has created carbon-pricing policies tailored to the unique situations of each province. This has been a valuable step. But additional measures are needed to achieve a Canada-wide carbon price.
It's possible for provincial carbon prices to converge. Provinces could link their carbon-pricing systems by agreeing to recognize and accept emissions permits from other jurisdictions. Or, provinces could co-ordinate their prices without allowing cross-border trading. Both options come with serious economic and political challenges. Alberta and British Columbia, for example, have chosen unique standalone approaches largely because this preserves provincial autonomy over sensitive economic sectors. And incorporating Alberta with its massive emissions profile into the Quebec-California-Ontario cap-and-trade system would change the entire complexion of this arrangement. Reliance on voluntary action by the provinces is unlikely to lead to a national carbon price.
Canada will need a higher carbon price than what currently exists in the leading provinces to reach its 2030 emissions-reduction target. It is hard to see how this will happen. For example, British Columbia recently announced that it will consider increasing its carbon tax when other provinces catch up. But there are no provincial levers to force lagging provinces into action.
The federal government needs to get involved. The most obvious move is for Ottawa to set a federal floor price on carbon emissions. It could start with the low $16 price in effect in Quebec to push provincial laggards into joining the carbon-pricing movement. Or Ottawa could set a higher price – perhaps equal to British Columbia's $30 per tonne. Such a price would obviously better position Canada for reaching its 2030 goals but would have a greater impact on the rest of the country and would be more politically challenging. In either scenario, Ottawa would apply a tax, if needed, to bring provincial carbon prices to the level of the federal floor.
It will be crucial for Ottawa to return all federal carbon tax revenues to the source province. This will minimize provincial objections, which are likely to be vociferous in some corners of the country. The federal and provincial governments will also have to agree on national standards for the measurement of emissions, coverage and related issues. Once established, a national carbon price can be increased over time to close any remaining gaps between provinces and to ensure the country meets its 2030 targets.
Provincial policy-makers deserve recognition for their carbon-pricing initiatives to date, but a federal minimum price on carbon will ultimately be necessary to ensure emissions in all provinces are covered by the same carbon price. A national carbon price is the most efficient and cost-effective way to achieve Canada's emissions-reductions targets.