By Nicholas Martin
In the Edmonton Journal
June 22, 2017
On June 1, U.S. President Donald Trump announced his intentions to withdraw the United States from the Paris Climate Agreement. On this side of the border, Trump’s decision is sure to raise anxiety about Canadian competitiveness. Calls to abandon a carbon tax will only become louder.
In a world where its largest trading partner and competitor seems poised to shirk its climate responsibilities, Canada should be worried about competitiveness. But when it comes to policies crafted to reduce emissions, the last thing Canadians should be worried about is a carbon tax.
They should be worried about every other policy put in place to reduce emissions.
That is one of the key points from Canada’s Ecofiscal Commission in its new report, Supporting Carbon Pricing. When a stringent carbon price is in place, governments should ensure other policies designed to reduce carbon emissions are not ineffective or needlessly high-cost, the Ecofiscal Commission urges.
A carbon tax sends a price signal to firms and individuals to reduce carbon emissions in a cost-effective manner. At a tax level of $30 per tonne, a firm will reduce a tonne of emissions if doing so costs less than the tax. If the reductions cost the firm more than $30 per tonne, they won’t. Using price signals such as a carbon tax ensures society at large harvests the cheapest emission reductions available.
Unfortunately, politicians have typically avoided carbon taxes. And why shouldn’t they? Who likes taxes? Alternative policies to reduce emissions remain much more popular with voters. In a recent survey conducted by Navigator, only 30 per cent of Albertans support the introduction of a carbon tax, while 53 per cent oppose it. Yet when asked about their support for renewable energy assisted by government funding, most of them were in favour.
This dynamic has led politicians to push for alternative policies such as direct subsidies for clean technologies or renewable fuel mandates. These policies will ostensibly reduce emissions, but they will also have a cost. A cost that is not transparent to consumers – and often much higher than any proposed or existing carbon tax. In a 2013 study by the Organization for Economic Co-operation and Development (OECD), researchers found that the cost per tonne of CO2 reduced for policies like direct subsidies and renewable fuel mandates can exceed $1,000 per tonne.
In the competitive world we live in, paying $1,000 to reduce one tonne of CO2 emissions is not something we can afford.
Luckily Canada is on the right track. An explicit carbon price is the centrepiece of the federal government’s climate plan. The plan has provisions, modeled after Alberta’s Climate Leadership Plan, to protect against emissions-intensive trade-exposed industries shipping their emissions (and economic activity) to another country with output-based allocations.
Despite political headwinds, carbon taxes are smart policy.
Now it is time to make sure other climate policy choices are just as smart. Governments should review their suite of policies aimed at reducing carbon emissions to ensure they do not force Canadian businesses and households to pay exorbitant costs to reduce emissions. A good place to start would be with prescriptive policies such as Alberta’s Renewable Fuels Standard. The OECD study found that renewable fuel mandates were some of the most inefficient and expensive policies for reducing carbon emission in the transportation sector – commonly costing up to $400 per tonne of CO2 reduced.
With a carbon price in place, improving our other climate policies will ensure Canada remains competitive while still living up to its climate responsibilities – even as others back away from them.
Nicholas Martin is a policy analyst at the Canada West Foundation.