Canada will either have to raise carbon prices to $210 per tonne or adopt more expensive policies funded by higher income taxes to meet its 2030 Paris targets, says an environmental economics group in a new report.
Canada’s Ecofiscal Commission finds carbon pricing is the most cost-effective way for Canada to hit its targets, but also acknowledges that carbon taxes can be politically unpalatable. The report, embargoed until Wednesday, sets out other options for meeting the Paris targets that use a combination of regulations and subsidies, but it cautions that those measures could cost much more.
“At this point, (governments) have told us they want to achieve 2030 emissions targets, but they haven’t yet put policies in place to get us there,” said Chris Ragan, chair of the Ecofiscal Commission, in an interview. “Actions, I think, count louder than words at this point.”
The Liberal government insists it’s committed to meeting Canada’s target under the Paris Agreement, a reduction of greenhouse gas emissions to 30 per cent below 2005 levels by 2030. During the election campaign, Prime Minister Justin Trudeau also announced plans to make Canada carbon neutral by 2050. But the Liberals have not explained how they plan to make that happen. Ottawa’s latest projections show the government’s existing climate plan will still fall 79 megatonnes short of the Paris target.
Under the federal government’s plan, all provinces must have a carbon price equivalent to $20 per tonne in place this year, rising to $50 per tonne in 2022. But the Liberals have been reluctant to say whether the price will increase after that. According to the commission’s report, carbon prices will need to rise by $20 per tonne each year after 2022 until they hit $210 per tonne in 2030, if Canada is to meet its targets relying largely on carbon pricing. The report estimates that would increase gasoline prices by about 40 cents per litre.
“Continued increases in Canada’s carbon price might prove politically challenging. One factor may be the visibility of the costs of carbon pricing,” the report reads. “This high visibility could provoke opposition to increasing the carbon price beyond planned levels.”
The commission analyzed two other policy packages that could get Canada to its 2030 targets. The first is a blend of economy-wide regulations and subsidies that would require emissions intensity from industrial production to be cut in half by 2030, among other measures.
The second package would apply regulations and subsidies only to industry, to avoid direct costs to households. In that scenario, industrial emissions intensity would need to drop by two-thirds by 2030.
Both scenarios would require increases to corporate and personal income taxes to pay for subsidies, in the range of 1.5 to two per cent for the economy-wide package and four to six per cent for the industry-focused package.
In contrast, rebates from carbon pricing would increase along with the carbon price, up to more than $4,000 per person in 2030 in Saskatchewan, where emissions per capita are the highest in Canada. Most of the revenue from the federal carbon tax is currently rebated to households, and Ottawa estimates that 80 per cent of people get back more than they pay.
The report projects that average per capita income will increase even with a carbon price rising to $210 per tonne, but would fall under the industry-focused scenario, and would be $3,300 lower in 2030 than under carbon pricing.
“Approaches that avoid imposing direct costs on households ultimately cost them more by reducing growth in average income,” the report reads. “Households will often not be aware of these costs.”
The report speaks to an ongoing debate about the best way to reduce emissions. While many economists agree that carbon pricing is the most efficient tool that policy-makers have, some say it’s too politically toxic to be the best choice. “If an economist says you have to use a carbon tax, they’re not telling you the truth. And somebody has to point that out,” Marc Jaccard, a professor of sustainable energy at Simon Fraser University, told the National Post last week. Jaccard favours flexible regulations, similar to the economy-wide package in the commission’s report.
Brett Dolter, an economist at the University of Regina who was not involved in the report, said regulations and subsidies can seem more appealing than carbon pricing at first glance, but can also provoke backlash. He pointed to Ontario’s feed-in tariff program that contributed to rising electricity prices in the province. “People can still get mad at costs increasing due to regulation,” he said. “It’s not immune from becoming a political issue.”
The commission’s estimate differs substantially from an analysis released by the parliamentary budget officer in June, which found the federal carbon tax would need to increase to just $102 per tonne in 2030 to meet the Paris targets.
But that analysis did not include the existing output-based pricing system for industrial emitters, assuming instead that the carbon tax would cover almost all sectors of the economy. The pricing system for heavy emitters only applies a carbon price to a portion of industrial emissions, to try and maintain competitiveness in trade-exposed sectors. Leaving that system in place means the carbon tax on the rest of the economy has to be higher, Ragan said.