Will this be the world’s most significant carbon pricing scheme?

Canada’s new nation-wide carbon pricing strategy is a promising step towards putting a robust price on pollution, but some of the scheme’s technical details such as intensity-based targets cast doubt on its environmental effectiveness.

©Gavin Schaefer

The start of a new year marks the launch of Canada’s nation-wide carbon pricing strategy, which was announced in 2016 as part of the pan-Canadian Framework on Clean Growth and Climate Change. The country aims to reduce its greenhouse gas emissions by 30% below 2005 levels by 2030, and carbon pricing is set to play an important role in its climate policy framework.

Under the new rules, a country-wide price on greenhouse gas emissions will be set, starting at C$10/tCO2 in 2018, and rising to C$50/tCO2 in 2022. Despite low initial prices, the C$10-a-year hike will place it among the most ambitious pricing schemes around the world, with prices in 2022 far higher than what are expected from the EU Emissions Trading System (EU ETS).

However, behind the simplicity of a nation-wide price on carbon, hides a complex system which reflects the need of the Canadian federal government to negotiate with ten provinces. While 80% of the Canadian population already lives in a jurisdiction which implements some form of carbon pricing, the new plan is likely to force provinces to do more to reduce emissions. But at the same time, the scheme allows for a lot of flexibility and autonomy in its implementation which could undermine its performance.

Carbon pricing à-la-carte

Several options will be available to provinces in order to reach the emission reductions mandated by the federal government. If they choose to design their own carbon pricing tool, which they are free to do, this could take the form of a direct tax, a cap-and-trade system, or a fuel tax combined with a crediting system based on output levels. In each of these cases, emissions reductions should reach a level equivalent to what would have been reached under a direct national carbon price.

This is likely to be the road taken by provinces which already price carbon. For example, Ontario and Québec share a linked trading scheme with California, British Columbia has a carbon tax, and Alberta has a combined fuel levy and output based trading system.

Alternatively, provinces can decide to adopt the federal government’s benchmarking system, for which a first proposal was released this week. Unfortunately, it is a watered down version of a carbon price.

The federal system will have two parts: a fuel tax for small consumers, and an emissions trading system for large emitters (above 50 000 tCO2/year). However, instead of being based on actual emissions levels, the trading scheme will be based on emissions intensities, i.e. the level of emissions per unit of output. A standard level of emissions intensity will be set for different industries (the “benchmark”) and any company which emits above this level will need to either pay a levy to the government, buy credits from companies which emit less than the benchmark or compensate their emissions using offsets.

There are several issues with such a system. First, it allows for an overall increase in emissions over time, as long as emissions per unit of output (i.e. intensity) decrease. In addition, the fact that only emissions above the benchmark will be priced means that the scheme will be strongly dependent on the level at which this benchmark is set. This could be 30% below the nationwide average of emissions intensity but has not been clearly determined yet. Third, the ability to use offsets raises significant concerns due to the questionable nature of such mechanisms. Offsetting does not reduce emissions but merely attempts to compensate them through emission-reductions projects in other parts of the world, a task which often fails due to the lack of quality and accountability of these credits.  

Looking ahead

The cost of climate change for Canada could amount to C$5 billion per year in 2020 and rise to C$43 billion per year by 2050. Urgent action is therefore needed, and carbon pricing carries a lot of potential for cost-efficient climate mitigation. However, despite a good first step by the Canadian government to set a nation-wide price on carbon, its technical details are likely to open loopholes which will allow polluters to shy away from their responsibilities. Improvements to the scheme’s design are needed in order for it to deliver on the Canadian government’s climate targets.

The federal government invites interested stakeholders to comment on the framework until April 9th.