Canada’s carbon price, which is mostly invisible to most people, most of the time, is back in headlines. For fiscal and political reasons, the Liberal government exempted homes heating with oil from the tax for three years. Naturally, the Conservatives have used this to raise populist grievances that mostly don’t hold any water.
I’ve been avoiding writing about this as it’s a bit sigh-worthy, much tempest in a teapot without much Earl Gray coming out of the spout. But a long-term acquaintance, the executive who gave me great career opportunities in Canada and Latin America a little over a decade ago, reached out recently with a good question.
A little on this executive, without naming names: They are a very successful immigrant to Canada. They have had high-level leadership positions in a few major consultancies. They are distinctly in the top-quintile of Canadians economically. They sit on the board of food banks. They support various climate change initiatives. Due to their background delivering excellent results with services to chief financial officers of major corporations, they are deeply fiscally literate.
But they are unsure about the carbon price, in part due to the rhetoric around it and in part due to shaky circumstances for the bottom quintile. As they note, food insecurity is increasing in the country, with a 79% increase in Canadians with food insecurity since 2019.
And so, they reached out to me, as they have in the past for things like shipping hydrogen for energy, and asked:
“While I support various climate change initiatives, I am still unconvinced about the effectiveness of a carbon tax because it doesn’t change people’s habits. People don’t heat their homes less, or use their car less, or fly less because of the carbon tax. Is there any empirical evidence that it works because I don’t see it around me?”
It’s a good question with a nuanced answer. If a policy isn’t creating benefits or not creating them in a way that can be observed, is it a successful policy? And so, my relatively lengthy answer, lightly edited, is below.
Invisible Consumer Goods Decarbonization
Let’s unpack this a couple of ways. First, let’s separate personal and corporate behavior. People run much more on Kahneman’s System 1 thinking, and businesses run a lot more on spreadsheets and System 2. That means that businesses are looking at their revenue vs expenses as they attempt to maximize profits. (If you haven’t read Kahneman’s Thinking, Fast & Slow, you should. As a cognitive psychologist, he won the Nobel Prize for Economics for his prospect theory, and is one of the key people behind behavioral economics.)
Heating and cooking with natural gas and using gasoline and diesel vehicles increase business expenses. Firms with more fossil fuels in their value streams become less competitive over time, and firms which make capital investments in heat pumps and electric delivery vehicles, as a couple of clear examples, become more competitive. That flows through the supply chain invisibly to people.
The humans at the end of the chain are buying goods with lower embodied carbon without changing their lifestyles at all. They just buy the least expensive product that is offered that does everything they want, and more and more often, that’s lower carbon. No requirement for them to think beyond that, and it’s invisible unless people dig into the details.
Major Household Purchases
Next, lets look at a family household. They have a gas car, a gas furnace, a gas stove and central air conditioning. They are paying more and more for gas but aren’t driving less. But then the car is up for replacement. They know that electric cars exist. They know that they can get some help with the up front cost of the electric car because their neighbor told them about it. Canada’s federal government currently provides rebates of up to $5,000 off the sale price. Most provinces also have programs to help with the up front cost or the cost of getting chargers installed. A car is a big enough capital purchase that the household is more likely to engage System 2 and do some math and research.
They discover that they can save a lot of gas money every month because electricity is so much cheaper to run cars on and gas has become expensive. So a bunch more people buy electric cars because when they make big household financial decisions, they actually think about what they are doing.
And increasingly, those electric cars just look like cars unless you pay attention closely. So you won’t necessarily realize how many electric cars are on your street or you pass while doing your daily rounds. There are more than 90 plug-in electric car models available in Canada right now, and I know that even though I like cars, pay some attention to brands and pay a lot of attention to electric cars, I don’t recognize most of them.
Time passes and the household’s gas bills have been getting bigger. In 2030, the carbon price means that a gigajoule of natural gas (about 25 cubic meters) will cost an extra $8.50. That means about $850 more per year for gas or $70 per month. It’s at about a third of that right now. Enough to be noticed, not enough for the top four quintiles to change heating practices. Enough for the bottom quintile to be turning the thermostat down in all but one room and worrying about frostbite in the bathroom, but not for everybody else.
But then their gas furnace and their central air conditioning start aging out. Those are 15 year appliances. They start asking around about replacements and get the interesting news that they can replace both with a heat pump that runs on electricity. So they investigate heat pumps and find out that they basically replace two appliances and increasingly expensive natural gas with one appliance, one vendor and one maintenance cost cycle. Their neighbor on the other side of them did it a year earlier and won’t shut up about it. Same or lower cost with installation because it’s one piece of kit replacing two.
So they replace the furnace and air conditioner with a heat pump. Unless they tell everybody, is anybody going to know? The outside part of a heat pump looks exactly like the outside part of a central air conditioner because that’s all a heat pump is, a two-way air conditioner. Will anyone notice that the pipe with natural gas to their house is empty?
There are invisible changes occurring daily all around Canadians due to the carbon price. Human beings don’t have to change their behavior, they are simply buying lower carbon goods and when there are major purchasing decisions more often making low carbon choices.
No hair shirts. No radical changes in human behavior. As the carbon price increases, the better choices become more and more available — once again invisibly to the average person — and they tend to make the big purchasing decisions for very pragmatic reasons for options that are lower carbon.
Oh, and when they got rid of the gas furnace, they replace their gas range with an induction range. When you go over for dinner, you still get wonderful meals, but you talk about politics, grand kids, vacations and interesting traffic planning innovations and never notice that they are burning electrons not molecules. You don’t notice the absence of a faint gas smell, you don’t notice the carbon monoxide alarm has been removed and you don’t notice their missing gas bills.
Has The Carbon Price Reduced Emissions?
So that’s why most people aren’t really noticing anything changing due to the carbon price. But what about the data points and empirical reality?
Let’s start with a very big example, one that you wouldn’t notice unless you were paying attention to Alberta’s electricity grid, as nerds like me do. One of the things Alberta’s Notley government did was set a timeline of 2030 to get rid of coal generation of electricity. Nasty stuff, coal generation, and some will remember Ontario’s McGuinty government doing that and following through, although they might not know that Toronto now averages zero days instead of 55 days a year of very bad air quality due to that one change. Also, 37 million tons of CO2 less per year for the province, one of the single biggest reductions globally.
So a good thing to do, even if the Notley government wasn’t being aggressive enough in timing. But the coal plants are actually being shut down this year in 2023, seven years early. What happened with that?
Well, the federal carbon price happened. The Notley government, like Ontario’s, had their own carbon pricing scheme, but when Conservative administrations came in they scrapped the provincial scheme, which meant that automatically they were subject to the federal one instead.
The carbon price made coal generation unprofitable. When you burn a ton of coal you get three tons of carbon dioxide. At 2023’s carbon price, that’s $195 more in expenses with no more revenue for that ton of coal. Coal in Alberta only costs $45 per ton. A ton of coal turns into about 2.2 MWh, so that adds $89 to the cost of a MWh or $0.09 per kWh, but they don’t get more from utilities for that MWh.
This upended the economics, obviously, and the coal plants couldn’t keep going. Backroom and front room deals meant a big buy out for the owners for their expected future revenue from the Alberta government.
Will most people in Alberta realize this? No. Will anyone in Ontario even be aware of this? No.
Hundreds or thousands or millions of economic decisions and transformations are occurring up and down the supply chain of everything due to carbon pricing. And most people don’t see them because carbon pricing isn’t supposed to be dramatic, but gradual.
Five Million Tons Of CO2 Avoided Per Year
That coal example is a big one. Alberta’s carbon emissions for electricity were really bad in 2015, around 800 kg per MWh compared to Ontario’s 25 kg per MWh, BC’s 13 kg and Manitoba and Quebec’s 4-5 kg. Coal was obviously a huge part of that because burning carbon rich dirt creates a lot of CO2. Alberta’s grid changes has already dropped that to about 600 kg per MWh, in large part due to coal being used less because it was more expensive. With the coal plants shutting down it’s going to drop to about 400 kg, half of what it was eight years ago.
Everyone and everything in Alberta that uses electricity will have a carbon footprint for that energy that’s half of what it was. The average Alberta household is heavier on natural gas (but they they are pivoting to heat pumps as well) and so uses about 7.2 MWh per year. The average family in 2015 had about 6 tons of CO2 from their electricity, and will have only 3 tons in 2024. There are about 1.7 million households in Alberta, so that’s about 5 million tons of avoided CO2 per year just for that province.
That’s without any visible change in anyone’s behavior or even awareness in Alberta.
Sigmoids & Acceptance
Carbon pricing is very low right now, and increasing slowly every year. But that rate of increase is accelerating. It will form a classic S-curve, as designed.
At the beginning, everyone hears that there’s a carbon price, but the costs are relatively low to them. Canada’s design sends rebate checks quarterly to everyone in the provinces subject to the federal scheme, so Ontarians get them and people living in BC don’t.
People in the upper quintiles think “That’s a tiny amount of money, and completely insignificant to my budget.” Someone in the household puts it in the bank and then forgets about it. But they know that Canada has a carbon price. The bottom quintile gets that rebate of perhaps $400 a year today and about $800 a year in 2030 and it makes a significant difference in their household budgets.
But you are both aware of the carbon price, and you aren’t feeling any sting from it. You aren’t noticing a radical transformation.
This is okay, the average person thinks. Little sting, quarterly checks that are nice to have. If you are more thoughtful, you ask yourself if it’s making a difference, if it’s a good policy for climate efforts. As noted above, most people don’t see anything indicating that it delivers climate value because of the invisible hand it’s applying to a lot of economic decisions, and because a lot of the changes just aren’t visible. But they exist.
So now people are accustomed to the price and rebate. And the price goes up. We’re entering the steeper part of the curve. We’re at $65 per ton of CO2 today after four years. It’s been going up at $10 per year. Now it’s going up at $15 per year. In 2028 it’s going up at $25 per year.
In 2030, the carbon price will be three times what it is in 2023. A lot more businesses will be switching away from having fossil fuels in their value streams to maintain their profits. The ones that don’t won’t be competitive against the ones that electrify.
The carbon rebate checks will get bigger too. People who have switched to heat pumps and electric cars will be both paying less every month and getting more in rebates. They’ll be ahead of the game. They’ll be going on vacations more on average. They’ll be buying new things more on average. They’ll be dining out more.
People in the third quintile will be asking their neighbors about vacations and hearing things like “Yeah, used the carbon rebate to spend a week in Cancun.” and “God, this heat pump thing has paid off.” and “Have you seen what my new Tesla can do?”
Invisibly Decarbonizing Electricity: Ontario Edition
Ontario is changing its electricity grid too. While the Conservatives rode to power on populist anger about electricity rates rising to below the North American average, and promptly did things which screwed up electricity in Ontario, just as Harris did in the 1990s, populist stupidity doesn’t survive very long in the face of the biggest machine in the world, the grid.
In 2018, Ford and company killed 758 renewables contracts, including a wind farm that was 70% complete, claiming they were driving up electricity prices. As about 50% of the cost increase was from paying off nuclear debt and the rest was from allowing electricity rates to rise again after populists prevented that and fixing the grid mess the populists left behind while they were in power, it was once again populist messaging in a nuanced space.
Now Ontario is very quietly creating provincial auctions for big wind and solar farms, and putting big battery storage on the grid to the east and west of Toronto to balance hydro, nuclear and renewables better. While they are promoting the stupid things that they are doing like small modular reactors, and trying to dodge questions about the increase in natural gas generation that was a result of their previous policies, now they are being forced to be sensible.
Ontario’s electricity has been getting higher carbon since 2018. Now that’s starting to impact electricity because every gigajoule of natural gas is costing more, and Ontario energy spreadsheet jockeys are looking at $8.50 per gigajoule more in 2030 and raising red flags. Queen’s Park has to pay attention and actually is.
As with their pivot on the Green Belt, they are pivoting on electricity too. That will keep Ontario’s electricity lower carbon and once again, it’s an invisible carbon price thing.
Conservatives Should Love Carbon Pricing
Carbon pricing is a deeply conservative fiscal policy. It’s leveraging market forces to drive carbon out of the system. Actual fiscal conservatives should love it, and it’s an interesting question as to why they don’t, and in fact spend so much time attacking it.
The British economist Pigou came up with them when he was looking at externalities on market transactions a hundred years ago. He looked at both positive externalities like abundant clean water for industry from rivers and negative externalities like fouled water downstream of industry.
Instead of regulation, he said, let’s add the externalities into the transaction value. The positive externalities are already baked in because they lower the cost of the product. But the negative externalities aren’t and are borne by society as a whole, especially the most economically disadvantaged.
So we used alcohol and tobacco taxes to price those negative externalities in the developed world, and smoking and drinking came under control for the most part. Casual smokers said screw it to five dollar packs of smokes, and casual drinkers drank less.
But that’s statistical, and statistics is a System 2 domain that human brains are notoriously bad at. Carbon pricing is making life better for everyone, just like equal rights, but that doesn’t mean Joe Average and Jill Median see anything like that. It’s a challenge.
That’s why typically regulation is required in addition to carbon pricing. Ontario killing coal and the USA’s rapidly diminishing coal consumption didn’t come about due to carbon pricing, but Alberta turning its coal plants off years ahead of schedule did.
The Invisible Hand Is The Blessing & Curse of Carbon Pricing
My acquaintance, as with most people, can’t see the benefits. They think people’s behavior is supposed to change, which isn’t correct. They can’t see the carbon debt of consumer goods, so don’t see it decline. They can’t see the electric cars and heat pumps that are more and more prevalent because they look like air conditioners and normal cars. They can’t see the rapidly declining Albertan electricity carbon intensity. The vast majority of Canadians don’t see any carbon prices because they are mostly against the backdrop of significant fluctuations and normal inflation.
It’s both the blessing and curse of carbon pricing policies. Starting slowly does create change, and some of those changes are very momentous, like Alberta’s coal demise, but are almost entirely invisible to the average person. Most of the changes are invisible because your neighbor getting a new central air unit, an induction range or a new car aren’t really something you pay attention to, and so you mostly don’t notice that it’s a heat pump, an electric appliance and an electric car.
You don’t notice that the bottom three quintiles of the economy, who live pay check to pay check, have a group who are running on low-carbon transit, bikes, second hand electric cars, buses, baseboard heaters and the like who are not paying the carbon price, and who are getting ‘free’ money in the form of the rebate that’s changing their lives for the better. But you might notice the second group who are still high carbon, for whom the rebate isn’t covering their increased costs.
Those people talk with one another. The high-carbons are wondering how their neighbor, who has the same salary as they do, is inching ahead. They wonder how they could afford those neat electric bikes or that second-hand Tesla. They know that they can’t afford them. Economic pressure is exerted.
But at the beginning, it’s slow and almost invisible by design. Those 5 million tons a year of Albertan coal-generated electricity are a big deal, but who sees it? It’s not like Alberta’s government is going to be celebrating that one. It’s not like the Ontario Conservatives are announcing that the carbon price is why they are quietly buying wind, solar and grid battery storage.
There’s a marketing and communications gap that’s hard to bridge, and populist idiocy about taxes is a very easy button to press. But the Canadian carbon price is already having big impacts and will have bigger ones.
The Carbon Price Is Too Low
Canada’s social cost of carbon is $261 right now. That’s the future economic and societal impact of every extra ton we emit. That’s aligned with the USA EPA’s social cost of carbon, and the EU’s budgetary guidance for carbon pricing for major projects.
The social cost of carbon in 2030 will be $294. In 2040, $341. In 2050, $394. Most of the developed world is aligned around these numbers. The EU emissions trading scheme is being specifically managed to arrive at these numbers and the EU’s carbon border adjustment mechanism will price every ton of embodied carbon on all products that they import at those costs. They’ll discount carbon pricing in the exporting countries.
Low-carbon economies and countries will have a significant competitive advantage when exporting to the world’s third largest economic region. Countries which have carbon prices will have a double economic advantage. First, the invisible hand will mean that their products have lower embodied carbon. Second, the remaining carbon will already be priced, so the CBAM will discount that. High carbon countries and companies selling exactly the same product to the EU won’t be able to. Low-carbon economies will thrive. High-carbon economies will struggle.
The reality of Canada’s carbon price is that $170 is too low, and that after 2030 it needs to continue to rise aggressively on the curve.
How Do We Explain This To People Struggling With Food Security?
The question becomes, how do we explain the benefits of the carbon price to people struggling to make ends meet when populist politicians are whipping up grievances that benefit them politically and major fossil fuel donors financially?
Regarding the bottom quintile, that’s an excellent question. There have to be explicit and separate action plans to assist them, and at the federal and non-Conservative led provincial levels, there are a lot of them.
BC is intentionally shifting natural gas homes and multi-unit residential buildings to heat pumps with big rebates. They are leaning on landlords to do that.
Studies show that the bottom deciles are actually getting more in the rebate than they are spending in carbon taxes, which is unsurprising. They are the lowest consumers by definition already, and so have the lowest energy consumption and carbon footprint. That’s true at the current 2030 cap of $170 as well. Only the top 30% of income earners in Canada, those making over $95,000 a year, are paying more in carbon prices than they are receiving in rebates, and even then it’s close.
It’s the Achilles’ Heel of carbon pricing, that it’s easy to attack with populist idiocy.
Of Heating Oil & Carbon Taxes
But it’s also why the government gave a three year reprieve to home owners using heat oil. A few years ago I did an assessment of the carbon price’s impact on the cost and CO2 emissions of small building heating in Canada.
Unsurprisingly, for most owners in most provinces, it was deeply advantageous economically and from a carbon footprint perspective to switch to heat pumps by 2030 when the carbon price hits $170. The emissions exceptions of Alberta and Saskatchewan are temporary because their grids are getting lower carbon due to the carbon price. This assessment used the 800 kg per MWh grid carbon intensity for Alberta, so it’s already a net positive and will be even better next year.
The price point is interesting because the provinces with the most fossil fuels also had the highest electricity prices. One of the big ones is gold-plated transmission upgrades in Alberta that make connecting any generation to transmission expensive.
But sharp-eyed viewers will notice something missing: oil heating. In fact, entire provinces are missing. Those are Maritime provinces where burning oil for residential heating was still the biggest piece of the pie. I was curious enough to look at gas vs heat pumps, but not curious enough to look at oil more than cursorily.
There are a few things to know about the Maritimes and oil heating. The first is that the region is the least affluent in Canada. Home ownership doesn’t equate to massive wealth increases for most people there, it just gives them a roof over their heads. Home ownership in cities is a clear path to affluence, but home ownership in the Maritimes, not so much. Many get rich schemes have fizzled out in the past decades and Maritimers continue to be desperate enough to buy in and try it out, sometimes with federal money that goes nowhere.
Right now it’s green hydrogen that has them thinking wishfully. A couple of years ago I was paying attention to a perpetual motion hydrogen energy con that New Brunswick power threw $23 million at. Now they are hoping to build massive wind farms to make green hydrogen for export to Europe. That’s not going to end remotely well.
On the oil heating perspective, they don’t have any natural gas in that end of the country or offshore, so they have stuck to the legacy of heating oil. That mode of home heating has two attributes. The first is that heating oil emits a lot more carbon dioxide when it burns than natural gas, about 40% more for the same heat. The second is that heating oil is about double the cost per unit of heat.
So this non-affluent part of the country has a lot more home owners that are in the bottom couple of quintiles economically than home owners in other parts of the country. And they are already paying double for heat. The carbon price means that they are also paying 40% more in carbon price than people using natural gas.
The combination means that a temporary reprieve aligned with other programs to get them onto heat pumps, like the oil heating to heat pump program for Nova Scotia that will rebate up to $10,000 for the conversion, and up to $40,000 in interest free loans for the entire conversion. Money for nothing and your heat for free!
A lower-income group which was inequitably hit by the carbon price and needed some breathing room to convert faster had the carbon price removed for three years and is being given a lot of help to transition. Oh, and as soon as they turn on their heat pumps, they are paying a carbon price for heat again, just a vastly smaller one.
This is reasonable policy aimed at the socioeconomically less advantaged, although a bunch of rich people from Toronto and Montreal who have vacation and retirement properties will also benefit. The federal government has made it clear that there are no more exemptions. It’s an imperfect policy, but nothing is perfect. It’s a reasonable policy given the excess hit on some of Canada’s poorer people.
Naturally populists are shouting about this, even though it’s sensible policy. After all, Albertan home owners who use a lot more natural gas heat than the average for Canada aren’t getting the break. They do have lots of programs to help them with heat pumps, however, and rather absurd amounts of federal money has flowed into oil country for pipelines and clean up.
Carbon Pricing & Politics
Now Canadian Conservatives are fanning grievances, as they are wont to do in the absence of actually sensible fiscal, energy or climate policy. Those poorer people who are feeling the pinch probably aren’t aware that they are coming out ahead and that it’s actually rich people coming out behind on the carbon price and rebate.
And remember, while on average poorer people are coming out ahead, that means a bunch of them are and a bunch aren’t. The ones coming out furthest ahead are the ones with lower carbon footprints, urban dwellers who bike and take transit, people who live in multi-unit residential buildings heated by electricity and the like.
The less affluent people in rural areas in western Canada, a demographic that already heavily leans Conservative, are impacted more heavily. They are much more likely to drive gas guzzling pick up trucks and SUVs a long way. They are much more likely to burn a lot of gas to heat their rural spreads. They are a very high carbon demographic in rural areas that have outsized voting power due to the legacy of a constitution and governance system created in times when 90%+ of the population was rural.
Rural ridings typically have twice the political representation per voter has urban areas in Canada. The Canadian Conservatives like that math and think this is an election winner. They want to make it an election issue in our next election, likely a couple of years from now.
The national Liberal party is saying “Bring it on,” which is reasonable. Carbon pricing was part of the Liberal Party’s campaign platform in 2015 and every subsequent election. Two-thirds of Canadians have voted consistently for parties which supported the carbon price, although most didn’t vote for it specifically. Those quarterly physical checks keep coming and keep getting bigger, and provincial Conservative parties shot themselves in the foot by eliminating provincial carbon schemes that prevented those checks from arriving.
In the biggest Conservative strongholds, every household gets a carbon rebate check every quarter. Voting against it means that they stop getting that rebate, taking money out of their own pocket. It’s a pretty easy message to tell, and weakens Conservatives considerably.
And so, a bit of a tempest in an oily teapot. The Liberal carbon price is very moderate compared to what it needs to become, and is well below Europe’s carbon border adjustment mechanism already.
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