Over and over, economists remind us that the most cost-effective way to reduce our greenhouse emissions, by far, is to put a price on carbon. As economists Nicholas Rivers and Randall Wigle have written, “analysis has shown consistently that if policy-makers aiming to meet climate goals are looking for the most-efficient, least-distortionary way to target emissions growth, there is simply nothing better than abandoning all emissions regulations except for one: A straight, revenue-neutral carbon tax.”
And, over and over, governments say they agree with them. “Around the world, businesses, governments and experts agree that carbon pricing is the cheapest and most efficient way to cut carbon pollution,” the federal government said in a 2018 background paper. “Putting a price on carbon pollution is widely recognized as the most efficient means to reduce greenhouse gas emissions while also driving innovation,” it said again in 2020.
And yet this apparent bedrock belief is not reflected in the policies it has actually pursued. As I’ve reported previously, two-thirds of the reduction in our projected 2030 emissions under this government will have been achieved by measures other than carbon pricing – three quarters, if reductions by previous governments are included. The two main federal policy statements since the Trudeau government took power – 2016′s Pan-Canadian Framework on Clean Growth and Climate Change and 2020′s A Healthy Environment and a Healthy Economy – list dozens of other programs and policies, federal and provincial, aimed at regulating a dizzying range of specific activities in specific sectors across the economy.
It’s a bit of a puzzle. The government acknowledges these measures are less efficient and more costly than carbon pricing – yet relies on them for two to three times as much of its actual and planned emissions reductions. Possibly it could be induced to take a different path if it were better understood how much more these alternative policies were costing us all.
Yet, while estimates have been made of the “marginal cost of abatement” of individual measures, no systematic audit appears to have been undertaken – certainly none has been made public.
THE COST OF NOT PRICING CARBON
Selected non-price approaches to reducing
greenhouse gas emissions
Estimated cost range
Per tonne of CO2
emissions abated
Program
Ethanol subsidies
$400 to $3,300
Clean Fuel Standard
$145 to $1,000
Electric vehicle
subsidies
$350 to $640
Energy efficiency
programs
$310 to $375
Vehicle fuel
efficiency standards
$60 to $387
Coal phaseout
(Alberta)*
$63 to $120
Federal carbon price
(2021-2030)
$40 to $170
Social cost of carbon
(2021-2030)**
$64 to $78
Methane gas
regulations
$13 to $25
Reforestation
$1 to $12
*Not counting health care savings.
**Base case, 3% discount rate.
RESEARCH BY ANDREW COYNE / THE GLOBE AND MAIL, SOURCE: U.S. GOVERNMENT; ENVIRONMENT AND CLIMATE CHANGE CANADA; COLUMBIA UNIVERSITY; GOLDMAN SACHS; ENVIROECONOMICS; RBC ECONOMICS; UNIVERSITY OF CALGARY; ECOFISCAL COMMISSION; JOURNAL OF ECONOMIC PERSPECTIVES; LFX ASSOCIATES; NAVIUS RESEARCH; MACDONALD-LAURIER INSTITUTE; NATIONAL ROUNDTABLE ON THE ENVIRONMENT AND THE ECONOMY
THE COST OF NOT PRICING CARBON
Selected non-price approaches to reducing
greenhouse gas emissions
Estimated cost range
Per tonne of CO2 emissions abated
Program
Ethanol subsidies
$400 to $3,300
Clean Fuel Standard
$145 to $1,000
Electric vehicle subsidies
$350 to $640
Energy efficiency
programs
$310 to $375
Vehicle fuel
efficiency standards
$60 to $387
Coal phaseout (Alberta)*
$63 to $120
Federal carbon price
(2021-2030)
$40 to $170
Social cost of carbon
(2021-2030)**
$64 to $78
Methane gas regulations
$13 to $25
Reforestation
$1 to $12
*Not counting health care savings. **Base case, 3% discount rate.
RESEARCH BY ANDREW COYNE / THE GLOBE AND MAIL, SOURCE: U.S. GOVERNMENT; ENVIRONMENT AND CLIMATE CHANGE CANADA; COLUMBIA UNIVERSITY; GOLDMAN SACHS; ENVIROECONOMICS; RBC ECONOMICS; UNIVERSITY OF CALGARY; ECOFISCAL COMMISSION; JOURNAL OF ECONOMIC PERSPECTIVES; LFX ASSOCIATES; NAVIUS RESEARCH; MACDONALD-LAURIER INSTITUTE; NATIONAL ROUNDTABLE ON THE ENVIRONMENT AND THE ECONOMY
THE COST OF NOT PRICING CARBON
Selected non-price approaches to reducing greenhouse gas emissions
Estimated cost range
Per tonne of CO2 emissions abated
Program
Ethanol subsidies
$400 to $3,300
Clean Fuel Standard
$145 to $1,000
Electric vehicle subsidies
$350 to $640
Energy efficiency programs
$310 to $375
Vehicle fuel efficiency standards
$60 to $387
Coal phaseout (Alberta)*
$63 to $120
Federal carbon price (2021-2030)
$40 to $170
Social cost of carbon (2021-2030)**
$64 to $78
$13 to $25
Methane gas regulations
Reforestation
$1 to $12
*Not counting health care savings. **Base case, 3% discount rate.
RESEARCH BY ANDREW COYNE / THE GLOBE AND MAIL, SOURCE: U.S. GOVERNMENT; ENVIRONMENT AND CLIMATE CHANGE CANADA; COLUMBIA UNIVERSITY; GOLDMAN SACHS; ENVIROECONOMICS; RBC ECONOMICS; UNIVERSITY OF CALGARY; ECOFISCAL COMMISSION; JOURNAL OF ECONOMIC PERSPECTIVES; LFX ASSOCIATES; NAVIUS RESEARCH; MACDONALD-LAURIER INSTITUTE; NATIONAL ROUNDTABLE ON THE ENVIRONMENT AND THE ECONOMY
It isn’t, for the most part, that these policies do not succeed in reducing CO2 emissions. But they do so in many cases at a much higher cost per tonne of emissions avoided than other measures, notably carbon pricing. How much higher? The table lists the costs of some notable popular alternatives to carbon pricing, as calculated by economists. Subsidies for electric vehicles, for example, have been estimated to cost anywhere from $400 to $800 per tonne. Estimates for the federal “clean” or low carbon fuel standard run from a low of $140 per tonne to a high of $800 or more. Vehicle fuel efficiency standards cost as much as $400 per tonne. And so on.
By comparison, the social cost of carbon – the estimated cost imposed on society by releasing a tonne of CO2 or its equivalent into the air, or the benefit to society of avoiding it – is currently officially estimated at about US$51, rising to US$62 (as atmospheric carbon concentrations rise each additional tonne grows more costly) in 2030. Spending hundreds or even thousands of dollars to save $50 plainly makes no sense, either for individuals or society.
How much we cut carbon emissions is less important than how we do so
Is carbon pricing Liberal policy? For the most part, it’s anything but
To be sure, the social cost of carbon is notoriously difficult to determine. Critics note, in particular, that it does not adequately take into account the “tail risks” of improbable but catastrophic events; neither, depending on the rate at which future costs are discounted, does it necessarily value costs to future generations appropriately.
A more useful benchmark may simply be the actual price of carbon, as set by federal legislation. It is currently at $40 a tonne, but is scheduled to rise to $50 next year, and in increments of $15 each year after that, to $170 in 2030. The very existence of non-price measures suggests they cost more than this: If they were cost-effective it would not be necessary to mandate them.
No doubt some of these same measures will become cost-effective as the price of carbon rises: switching from coal to other sources of electrical power, for example. But the moment they become cost-effective they cease to be necessary – individuals and businesses would find it in their interest to implement them without being told to. As for those measures whose cost would still exceed the price of carbon, even at $170 a tonne or more, it remains a mystery why the government would continue to insist that people comply with them.
Why do non-price approaches – subsidies and regulations – generally cost more than pricing? Regulations typically offer no incentive to do anything beyond the minimum necessary for compliance. Subsidies often end up rewarding people for actions they would have taken anyway. Both only apply to the things it occurs to government to apply them to. Whereas prices, so long as they are broadly applied, give everyone a permanent, constant and universal incentive to reduce their consumption, in whatever way they can think up.
Why are governments still so hesitant to use them, then? Politics, mostly. Relying on carbon pricing alone to hit our target, the Trudeau government says in the 2016 Framework, “would require a very high price.” Very high, compared with what? Compared with the current price, undoubtedly. But compared to alternative measures? What the government really means is that the price would be visible to the public and therefore politically toxic. Whereas the cost of subsidies and regulations, though higher – and though the public just as surely pays for them – is invisible.
There are some abatement policies that are truly complements, rather than substitutes, for pricing. For example, it is more or less impossible to price emissions of methane, another greenhouse gas given off in the production of oil and gas – and by cattle – given the difficulties of measuring or monitoring so many, er, emission points. More to the point, regulating methane emissions turns out to be quite cheap: less than half the current price of carbon. Some policies advanced in the name of reducing emissions, such as eliminating fossil fuel subsidies, probably add to GDP, rather than subtract.
Others have more dubious rationales. In some cases public “investments” in higher-cost alternatives, notably involving new technologies, are defended on the grounds that, though they may be more costly than carbon pricing now, they will be less costly in future, as production increases and scale economies kick in. But there is no way of being certain of this – nuclear technology has only gotten more expensive over time – and so far as it can be predicted, could as easily be anticipated by private investors as by government planners.
More credibly, others argue that investors may doubt that governments will actually follow through on their commitment to raise the price of carbon, inhibiting them from committing to otherwise viable projects. However, it’s not clear this “certainty gap” requires a regulatory solution. Economists Dale Beugin and Blake Shaffer have proposed using the Canada Infrastructure Bank to provide a kind of insurance, or forward contract in the price of carbon, allowing investors to lock in a particular price, much as they do with other prices on futures markets.
Suppose the government took economists’ advice, and scrapped all measures with a cost greater than the price of carbon (social or regulatory). The presumption in much commentary is that the carbon price needed to replace them would be prohibitive. Would it? Not necessarily. Part of the reason carbon pricing accounts for such a low proportion of total emissions reductions now is that so much of it is given back to large emitters in “trade-exposed” industries, through the federal Output-Based Pricing System and its provincial equivalents.
Companies eligible for OBPS pay tax only on the proportion of their emissions that exceeds a certain threshold, set at 80 per cent (in some cases, 90 per cent or 95 per cent) of the industry average, per unit of output. Put another way, the government rebates 80 per cent of the average large emitter’s carbon tax – though this is scheduled to decline somewhat as the carbon price rises. Of course, firms still pay the tax at the margin, and heavier-than-average emitters are subsidized less than lighter-than-average emitters. But still: that’s an awful lot of forgiven emissions.
The merits of OBPS can be debated. Without it, it is claimed, output and emissions would “leak” to the U.S. and other countries. Whether or not this is the crisis it is made out to be, it’s far from clear that averting it warrants such an enormous subsidy – since the subsidy, as always, comes at the cost of other industries and firms. So far as competitiveness/leakage is a concern, it is better addressed by charging a compensatory tariff on imports from countries with no or low carbon taxes, known as a “carbon border adjustment.”
How much more could we cut our emissions if we scrapped OBPS? Where the next phase of carbon pricing, post-2022, is projected to cut emissions by 70 megatonnes or so by 2030 (the Parliamentary Budget Office puts it at 96 MT, when the tighter OBPS limits are included), the advocacy group Clean Prosperity has calculated that with “full industrial pricing” this would increase to nearly 160 MT. That’s enough on its own to close the gap between currently projected emissions of 674 MT and our original Paris target of 511 MT.
The same result could be achieved by a relatively modest increase in the rate of growth of the carbon price – from $15 a year to $25 a year, a schedule that would take the price to $250 a year in 2030. The PBO calculates a carbon price of about that amount ($261) would get us below our Paris target, without any “additional measures.” Throw in some additional reductions for changes in land use, forest sinks and sundry other credits and offsets, and we’re down to 468 MT, in line with the projections in the last budget.
If we both raised the price of carbon and eliminated OBPS subsidies, we could also roll back most existing measures. Political suicide? A $30 carbon tax was supposed to be political suicide. The Liberals were re-elected on a $170 carbon tax. $250 isn’t going to kill them, or us.
So a (more) purely carbon-price approach is quite feasible. If it would achieve the same reductions in emissions, at a fraction of the cost of current policy, what on earth is stopping us?
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Andrew Coyne