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Cap And Trade

Carbon Pricing Is Necessary, But Has Limits

Carbon pricing is starting to take off globally as a key lever in the fight against global warming. However, it faces political challenges, which means it will be very unlikely to be sufficient by itself.

Let’s look at a couple of case studies:

  • British Columbia in Canada under a progressive government implemented a carbon tax in 2008 which had a progressive increase year over year, matched by reductions in other taxes, such as income tax. This was successful and introduced slow and predictable economic changes. A centre-right party replaced the progressive (by Canadian standards) government and put a stop to increases in the tax, effectively capping it at $30 CAD per ton.
  • 098444-carbon-tax-word-cloud.gifAustralia under a progressive government implemented a carbon tax on large emitters in 2012 of $23 AUD per ton, which was subsequently revoked entirely by a fairly hard-right government in 2014.
  • Alberta in October 2015 put in place a climate plan that included a significant extension of its current and low climate tax on the largest emitters. The tax is coming into effect in January 2017 at $20 CAD per ton, increasing to $30 CAD per ton in January 2018, then increasing by 2% over inflation annually. This would result in a carbon tax of about $43 CAD per ton by 2030. By my calculations, $30 would effectively increase the cost of methane gas for generation by 35% and a $43 tax would increase it by 50%. Those are significant numbers, but, given a number of factors, are likely insufficient by themselves.

Both the BC and Australian taxes were widely agreed to be working, and working via market mechanisms of internalizing costs onto the producers of what were previously negative externalities. The BC one is widely studied for that reason.

However, both were capped or revoked by more right-wing governments than those which had implemented them, in Australia fairly explicitly because of populist rage, climate change–denialist rhetoric, and a strong focus by the government on getting coal out of the ground and into international markets.

Right-wing politicians and policy types who accept the science of climate change and the need to do something about it are starting to come around on carbon taxes as the one acceptable answer, specifically if they are matched by tax reductions in other areas and very specifically by elimination of regulations.

Conservatives should embrace a carbon tax (a much less costly means of reducing greenhouse gas emissions) in return for elimination of EPA regulatory authority over greenhouse gas emissions, abolition of green energy subsidies and regulatory mandates, and offsetting tax cuts to provide for revenue neutrality.

The BC and Australian prices are interesting because they are high enough that consumer and corporate behaviour was starting to shift and carbon emissions were diminishing, but they’re also very, very low carbon prices. Why do I say that?

The range of carbon prices considered effective are in the $60$160 USD range, with a median around $90 USD as far as I can tell. Populist backlash is kicking in at numbers less than half of the bottom end of the effective range. That’s strongly indicative of an issue.

Looking again at the Alberta example, where carbon taxes are not matched directly by reduction in other taxes, we can start to see the impacts on families:

Roughly speaking, households in the bottom 20 per cent of the income distribution face a $300 per year cost increase from the carbon tax. For a median household, the cost is $500, and for the top 20 per cent of households, the cost is about $600.

The lowest-income households will get protection of some sort, and $600 for high-income households is irrelevant. But that $500 for the middle-class annually is after taxes and a significant number as a result. And it will only increase. Assuming the projected $43 CAD per ton by 2030, that’s about $720 per year in 2030.

But at the lowest price in the range of $60 USD per ton, that’s around $1,300 CAD per year. At the median, that’s almost $2,000 per year. At the top end, that’s almost $4,000 per year.

In Canada, some policy researchers are suggesting that the evidence indicates that there is no political will to increase taxes on households by that much, and that no democratically elected party is going to have the stomach to get the rates to the right levels. That story is playing out globally as the examples show. No one is implementing a carbon tax that is anywhere near the bottom end of the necessary range and ones that rise over time are going to rise too slowly to have sufficient impact in the right time frame. That’s part of the reason why 130 businesses in British Columbia recently asked the government to increase the carbon tax by $10 annually for the next several years.

As a result, the policy research group recommended regulation instead of taxation based on what has actually had the largest impact on carbon emissions.

When asked which climate policy in Canada reduced the most CO2 emissions over the last decade, many people guess BC’s well-publicized carbon tax. They’re wrong. It was Ontario’s ban on coal-fired power, which reduced annual emissions by 25 megatonnes (MT). Surely, then, BC’s carbon tax must have caused the most reductions in that province. Wrong again. The 2007 “clean electricity” regulation forced BC Hydro to cancel two private coal plants and its own gas plant. This cut BC’s projected annual emissions in 2020 by 12 to 18 MT. The carbon tax is slated to reduce 2020 annual emissions by 3 to 5 MT.


Although implementation of effective climate policies will never be easy, there are politically palatable options that have a proven track record of achieving reductions in Canada and abroad. Rather than listen to those who ignore evidence, Trudeau should focus on developing creative solutions in a second-best world. Yes, encourage emissions pricing. But heed the evidence on the effective and relatively efficient role that well-crafted regulations can play in driving the major technological and energy transition we so desperately need.

Screen Shot 2016-04-01 at 10.57.57 AMIt’s an interesting argument related to what will be effective in a flawed world.

A price on carbon sufficient to drive sufficient change will be politically unacceptable. The right wing desire to eliminate regulation in return for a carbon tax that will undoubtedly be too low will possibly have serious negative consequences.

The answer, of course, is a blended model. Carbon taxes and cap-and-trade systems are policy tools. Regulation is a policy tool. Picking winners such as wind and solar to incent via tax breaks and feed-in tariffs are policy tools. Picking losers such as coal to eliminate is a policy tool.

The answer won’t be either taxes or regulation, but both.

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Written By

is a member of the Advisory Boards of electric aviation startup FLIMAX, Chief Strategist at TFIE Strategy and co-founder of distnc technologies. He spends his time projecting scenarios for decarbonization 40-80 years into the future, and assisting executives, Boards and investors to pick wisely today. Whether it's refueling aviation, grid storage, vehicle-to-grid, or hydrogen demand, his work is based on fundamentals of physics, economics and human nature, and informed by the decarbonization requirements and innovations of multiple domains. His leadership positions in North America, Asia and Latin America enhanced his global point of view. He publishes regularly in multiple outlets on innovation, business, technology and policy. He is available for Board, strategy advisor and speaking engagements.


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