Clarity needed on carbon pricing
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Hey there, time traveller!
This article was published 21/06/2017 (2168 days ago), so information in it may no longer be current.
The nationwide price-on-carbon proposed by the federal Liberal government to reduce greenhouse gas (GHG) emissions is a topical subject, with lots of debate and discussion. Provinces will be required to have a minimum price equivalent to $10 per tonne starting in 2018, rising $10 per tonne per year, up to $50 per tonne by 2022. What this action will really mean to the public at large, however, remains unclear.
As an exercise with real-world implications, MBA students studying sustainability economics at the Asper School of Business examined two key associated questions. First, what level of carbon price is needed in order for Canada to fulfill its commitment to the Paris Agreement, which means reducing GHG emissions 30 per cent by 2030 relative to 2005 levels? And second, what level of carbon price would likely result in damage to our country’s economy, particularly since our largest trading partner, the United States, has opted out of the Paris Agreement?
The answer to the first question is most clear — opinions in the literature vary somewhat, but a carbon price of at least $140 per tonne appears to be necessary for Canada to achieve its commitment under the Paris Agreement. This is much higher than the level proposed by the federal government, but should come as no surprise. The final report of the federally sponsored Pan-Canadian Working Group on Carbon Pricing Mechanisms looked at several price scenarios — including upward of $90 per tonne — and found in all cases that Canada would fall well short of its intended target.
A subtle but important factor in this is how the revenue from carbon pricing is actually spent. In Manitoba alone, the total revenue over the five-year period from 2018 through 2022 would likely exceed $1.5 billion. This could go a long way to funding a variety of higher-cost GHG-reduction measures, increasing the level of reduction achieved at a lower carbon price point. Using funds in this way is contrary to assertions in a recent report by the Ecofiscal Commission group, which is a notable fan of carbon fees.
However, as noted above, the proposed carbon price alone is entirely inadequate. Also, there is only so much “low-hanging fruit” available, especially in difficult areas such as addressing transportation emissions. The final report of the separate federally sponsored Pan-Canadian Working Group on Specific Mitigation Measures suggested that achieving more substantial reduction levels could require measures costing in the range of $100 to $250 per tonne.
One example is accelerated implementation of electric vehicles, which in Manitoba makes sense given our electricity advantage. It is estimated that a modest but effective electric-vehicle incentive program could be implemented here over a period of four to five years, based on a GHG cost as low as $100 per tonne. It could increase the numbers of such vehicles enough to create a critical mass, much like what happened a decade ago with conventional hybrids.
Using carbon-price revenue to fund further reductions has obvious benefits. However, there is no requirement to do so under the federal program. There are also other serious adverse impacts that will need to be addressed, as well as the more general concern of revenue-neutrality and the notion of the carbon price not merely being just a new tax.
More dramatic approaches have been already suggested in order for Canada to achieve its Paris Agreement commitment. One example is to completely close all oilsands production; interestingly, shuttering not just the oilsands but all petroleum production operations across Canada would come nowhere near to the reduction required in Canada by 2030.
Without any domestic fossil fuels, Canada would have to adapt very quickly, most likely becoming dependent on expensive, imported fossil fuels from other countries, including sources such as Venezuela or Nigeria that have much worse GHG emissions than Canadian oilsands. What this highlights for Canada is that in order to significantly reduce our emissions, we need to effect changes to our broader consumerist attitudes rather than merely blaming selected industries.
In accounting for emissions, the federal government could assign upstream-related GHGs from petroleum extraction and refining proportionately to finished fuel products so that they are counted in consuming provinces. This is not currently done, but makes sense as a means for consumers to see the true impact of their fuel choices and to further enhance the economics of alternative vehicle and fuel options when combined with a carbon price.
Tracking full-cycle GHG emissions through supply chains and across boundaries would also help defend the federal government against obvious accusations of intrusion into provincial areas of constitutional jurisdiction.
The second question regarding economic damage from the carbon price is more complex. In terms of overall economic damage, a price level of around $110 per tonne appeared to emerge, but was based on much more variable results being found in the literature. This is also much higher than the level proposed by the federal government. As such, it is unlikely the federal program will have much effect either way — it will neither promote much in the way of overall emission reductions nor cause much in the way of overall damage. That said, the impact of carbon pricing, as proposed, will vary dramatically based on region, industry, and socio-economic group. Manitoba provides a useful example.
Within Manitoba, the impact of a carbon price on electricity will be negligible, given our already clean grid. The increase in gasoline and diesel fuel prices, which today both hover around $1 per litre, will start at around 2 per cent in 2018 and rise to around 10 per cent by 2022. However, since we already see price changes of this magnitude, sometimes in a single week, such an increase will not be overly significant.
On the other hand, the price of natural gas — including delivery costs — is today somewhat over 20 cents per cubic metre. The price increase due to the federal program will be close to 10 per cent in 2018 and will rise to roughly 50 per cent by 2022. This is much more dramatic and will have a particularly great impact on lower-income families who have less choices available.
The structure of the proposed federal program appears to have less to do with achievement of GHG results and more with what is sellable from a political perspective.
As such, the proposed program is part of a broader problem for governments of all political stripes when dealing with emissions.
It is seductively easy to propose dramatic but very long-term reductions; in this regard, it is useful to note the 2030 target of the current Liberal government is the same as the one proposed by the previous Conservative government.
Such a time of reckoning is too far into the future for any sort of relevant accountability.
If the intent is to actually reduce emissions, the preferred approach would be to have more modest, short-term programs and targets against which a given government could be actually measured, so results could realistically be achieved.
Robert Parsons, MBA, PhD, teaches sustainability economics in the Asper School of Business at the University of Manitoba.