The Business Case For Carbon Pricing

Carbon pricing is getting a lot of attention as the federal and provincial governments discuss how to meet Canada’s commitments under the Paris Agreement. But the idea is hardly new.

The Business Council of Canada endorsed carbon pricing almost a decade ago, in a 2007 policy declaration titled “Clean Growth: Building a Canadian Environmental Superpower”. A year later, British Columbia introduced its groundbreaking carbon tax – the first such scheme in Canada and one of the first anywhere in the world. The rationale behind our position was quite simple: price signals are the clearest and most effective means to influence behaviour in a way that reduces emissions of greenhouse gases (GHGs). Higher prices on carbon give consumers an obvious incentive to reduce energy consumption at home, use public transit, or opt for an electric or hybrid vehicle. They also change the economic calculus for business, tipping the balance in favour of lower carbon alternatives to power factories, or to make investments in new technologies that reduce emissions.

Of course, there are other ways to reduce GHG emissions without creating financial incentives. Governments could just adopt tougher regulations – the so-called “command and control” option. The problem with traditional regulatory programs is that, by asking for a specific emission result from each firm, they tend to be technology-prescriptive and can actually frustrate innovation. This is exactly the opposite of what we should be trying to achieve. We are going to need as much innovation as we can get – from all sorts of different players, making use of all kinds of different technologies – to overcome the challenge of climate change without damaging our economy and forcing citizens to accept a lower standard of living.Price signals by their very nature spur innovation. In theory, governments that adopt carbon-pricing systems need only set the broad parameters of the pricing mechanism. After that, they can get out of the way and let the market figure out the most cost-effective option in any given situation.

Of course, there are some important considerations to keep in mind when introducing any such scheme. When the Council adopted its position, we also stipulated the following conditions that we felt should apply to any carbon pricing program in Canada:

  • It should cover a broad base of GHG emissions while being both transparent and national in scope.
  • Revenue raised through carbon pricing should be largely offset by reductions in other taxes, with a portion of the proceeds used to stimulate development and adoption of less GHG-intensive technologies.
  • To ease the transition for both businesses and consumers, the price per tonne of GHG emissions should be set at a relatively low level and raised at predictable intervals.
  • Revenues generated should be retained in the province where they are raised.
  • Care should be taken to ensure that any carbon pricing system did not impose an undue competitive burden on Canadian industry.

That logic is still compelling today. It is worth considering what has happened in the intervening 10 years.

Since 2008, we have seen British Columbia adopt a broad-based and revenue-neutral carbon tax, now set at $30 per tonne of emissions. Quebec has joined with California in a cross-border cap-and-trade regime, which will be expanded to include Ontario in 2017. Next year, a broad-based carbon tax will come into force in Alberta, to replace a narrower carbon levy that applied only to the largest, most GHG-intensive industries in the province.

When all of these initiatives are up and running, close to 80 per cent of the country’s GDP and GHG emissions will be covered by some form of carbon pricing system. In addition, at least a couple of other Canadian provinces have adopted major policy initiatives – for example, mandating reduction of coal-fired electricity generation – that will substantially increase energy costs in their jurisdictions and will therefore, they contend, be equally effective in reducing GHG emissions.

These various sub-national efforts in part reflect differing political priorities and the reality that the specific energy mix can vary considerably across the country. Some policymakers argue that, with the economy still in a fragile state, now is not the time to raise the cost of energy and energy-intensive goods. As well, territorial leaders have pointed out that energy users in remote communities, disconnected from southern energy systems, already pay much higher energy prices than their counterparts in the rest of the country, and lack access to less GHG-intensive fuels.

On the road to a more coherent national approach, the Business Council’s key considerations have not changed:

  • While we recognize that some variation in provincial policies may be necessary to deal with different regional circumstances, Canadians must recognize that the lack of a common approach imposes a higher cost per tonne of emissions reduced. It also forces Canadian companies to contend with conflicting obligations, as well as multiple reporting and compliance regimes. Furthermore, our country’s patchwork approach to climate policy arguably means that it will be harder to integrate with schemes in other jurisdictions as they develop, something that will be necessary to avoid competitive dislocation.
  • Funds generated from carbon pricing should not simply flow into general government revenues or be earmarked for ill-defined social infrastructure. Canadians want to know that the money they pay in carbon fees is making the economy more productive and improving the environment. In that context, adjustments to corporate tax rates can increase Canada’s overall tax competitiveness and promote economic growth, while targeted personal income tax reductions can reduce the burden on low-income households and those living in remote communities.
  • The widespread development and adoption of new generations of low-carbon technology is the only sustainable solution to climate change. Governments need to work with industry to determine how some of the proceeds from carbon pricing, together with other tools, can help Canadian companies become key players in this innovation space.
  • We need to avoid penalizing Canadian companies merely for being carbon-intensive. Many of our country’s resource-intensive firms have already made significant investments to improve their economic and environmental performance. As a result, they benchmark well against their competitors elsewhere. When such Canadian firms lose market share to companies in other jurisdictions whose production is more GHG-intensive, Canadian businesses and workers suffer without any benefit to the global environment.

In partnership with the provinces and territories, the federal government is committed to devising a comprehensive national plan that will allow Canada to meet its obligations under the Paris Agreement. Carbon pricing can be an important tool in that effort, but we owe it to Canadians to make sure that the policies we adopt are implemented effectively and fairly.

John Manley is the former Deputy Prime Minister to Jean Chretien, Minister of Finance and the President and CEO of the Business Council of Canada.

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