Opinion: The unfairnesses in carbon pricing
According to its advocates, carbon pricing measures have many advantages. They are simple, equitably applied, economically efficient and ultimately fairer than intrusive regulation and subsidy measures. Somewhere between the theory and the design of Canada’s climate policy, however, the theory got lost. Quebec’s “cap-and-trade” system is a prime example.
In 2007, Quebec joined with California in the Western Climate Initiative (WCI), a carbon dioxide emissions trading system that combined regulatory limits on the use of hydrocarbons with permit trading by the regulated companies. This cap-and-trade system is similar to a carbon dioxide taxation system, except that the price of a tonne of carbon dioxide emissions is determined by periodic auctions in the combined California-Quebec competitive market.
When the federal government initiated its national carbon pricing system in 2018 it endorsed the continued operation of the Quebec system but declared that all provinces must implement emissions cuts “equal to or greater than what would be achieved by a direct price.” This was intended partly to achieve comparable emissions reductions effects in all provinces. It was also to ensure that the financial burden of the different systems did not differ by so much as to impose much higher financial costs and competitive disadvantages on Canadians residing in the provinces subject to the federal “backstop” regime. Today, those are Alberta, Saskatchewan, Manitoba, Ontario and New Brunswick.
The carbon tax in provinces subject to the federal backstop rose from $10 per tonne in 2018 to $50 per tonne in 2022. At the same time, California-Quebec auction settlement prices rose from US$14.61 per tonne in February 2018 to US$30.85 per tonne in May of this year. That’s C$39.49 per tonne at current exchange rates. Canadians in most provinces are thus paying $10.51 per tonne more in carbon prices than people and businesses resident in Quebec. That’s a 27 per cent difference, which is not fair.
Federal and provincial carbon tax revenues were to be largely recycled back into the economy through the tax system, although there were important differences in how each province did so. In Quebec, however, the average household receives no rebates; the province instead directed the revenues from its sale of permits into a “green” fund to finance its preferred program objectives. That’s not fair, either.
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The federal regime applies broadly to industrial firms, with some exceptions to ease the adverse competitive effects on trade-exposed firms. Quebec, however, gave free allocations of emissions permits to agriculture and to “emissions-intensive and trade exposed emitters,” such as aluminum smelters, steel mills, cement plants, and pulp and paper plants. Since 2013, the province’s total allocation of free permits has ranged from 17 million to 19 million tonnes per year. Assuming 18 million free permits are issued this year, the $10.51 per tonne saved is worth $189 million. The consequence is that Quebec-based firms enjoy a significant tax-related cost advantage over their counterparts (and competitors) in other provinces.
The federal carbon tax rate is scheduled to continue rising to at least $170 per tonne by 2030, thus potentially further widening the gap between it and the price of permits in the California-Quebec market. How will the federal government give force to its declaration that the carbon tax regime and the cap-and-trade regime must have roughly equal effects? It could insist that the price of permits in Quebec be at least as high as the federal carbon tax. But that would convert a market-based pricing system into a tax system and spell the end of the California-Quebec arrangement. Or it could negotiate with Quebec to obtain changes to the province’s climate policies and measures so that the emissions-reduction effects would be roughly equivalent to those implemented in other provinces. So far Ottawa has given no public indication of what it will do but with the carbon tax due to rise by $15 per tonne in 2023 it cannot wait indefinitely.
Quebec has already initiated changes to its system for issuing free emission allowances. In May it outlined reforms that would eliminate the blanket granting of free allowances to high-emission firms in certain industries and instead phase down the free emissions. The phase-down proposed would mean a reduction from 21 million tonnes of emissions per year to 17.2 million tonnes by 2030. Even with these changes, however, Quebec firms will have much lower carbon pricing costs than those in other provinces until well into the 2030’s.
Despite carbon pricing’s much extolled simplicity it has not displaced regulations, subsidies and other highly-intrusive state interventions. Canada’s biannual report to the United Nations Framework Convention on Climate Change lists over 300 federal and provincial measures, with many more being added every year. That is not simple, equitable, efficient or fair.
Robert Lyman is a retired energy economist.