A new paper from Tracy Snoddon, an associate professor in economics at Wlifred Laurier University, argues that while a decentralized, inter-provincial carbon pricing approach is attractive for Canada, a federal carbon price floor combined with these provincial policies could lead to emissions reductions at the lowest possible cost.
Carbon Copies: The Prospects for an Economy-wide Carbon Price in Canada, done for the CD Howe Institute, says provincial initiatives have led to different carbon prices in different provinces. This means that some regions are spending more to reduce emissions while leaving low cost reductions on the table.
Adopting a nation-wide price would ensure emissions reduction occur where it’s cheapest to do so, states the paper, adding that the cost savings compared to a purely provincial method could be significant. Carbon Copies highlights the US cap and trade system for sulphur dioxide as an example, which resulted in annual savings ranging from $700 million to $2.1 billion between 2000 and 2009.
Going with a single national price would also help prevent carbon leakage from occurring, something a decentralized approach may not. Studies have indicated that on average 12% of emissions reductions in one area resulted in increases elsewhere.
In the absence of a national plan and price, provinces could cooperate to reduce the carbon price differential, says Snoddon in her paper. Provincial governments could formally link their carbon pricing regimes. For example, cap and trade regimes could be joined, meaning each jurisdiction recognizes and accepts the others’ permits.
“Carbon prices and marginal abatement costs would be equalized as a result of unrestricted permit trading in the linked system’s regional carbon market,” says Carbon Copies.
A second approach would be to participate in a third-party system such as a common offset market. In this method, entities would be able to buy offsets to satisfy their compliance obligations. A price for offsets lower than the permit price would “put upward pressure on the offset price and downward pressure on permit prices” therefore helping to reduce the carbon price differential.
If going the formal route is out of the question, then there are ways provinces could work together in an informal manner but still achieve price parity for carbon emissions. One example would be for a province to have a carbon tax equal to the carbon price of another province and determine the conditions under which price changes would be matched. As well, a province could simply set its carbon tax price equal to an other’s cap and trade reserve permit price.
“If linking and coordination efforts were successful, they could reduce differences in carbon prices and in the marginal cost of abatement across provinces, allowing provinces to achieve emission reductions at lower cost and, at the same time, alleviating competitiveness and leakage concerns,” states the paper.
There is proof to suggest that this approach could work too. Recent research indicates that Ontario, by linking its cap and trade system with that of Quebec and California, could achieve its 2020 emission’s reduction target at a lower carbon price, smaller loss to GDP and less emissions leakage.
Even with evidence that linking various provincial carbon pricing regimes might work, the report says it’s unlikely to happen. The simple reason is an unwilling province can’t be forced to adopt a carbon pricing regime or a specific price. This means the federal government has to step in establish a common price.
Carbon Copies says a carbon price floor could work. For example, if the federal government established $30 as the minimum, provinces with a price lower than that would face a tax of the difference. To ensure that the federal tax is as broad as possible, provinces would adopt the same coverage as the national model. In return, the federal government would return all money raised in the provinces back to them, “ensuring that provinces retain control over the use of carbon-pricing revenues.”
Snoddon argues the minimum price combined with a federal carbon tax would not only ensure all provinces are covered, but it would also “improve the cost effectiveness of carbon pricing for the country as a whole, ensuring emission reductions occurred where they were least costly, and it would increase the likelihood of achieving the national emissions-reduction target for 2030.”
She adds the federal government could also adopt measures to help provinces adjust to a national regime and ensure an equitable sharing of reducing emissions.
“By introducing a national carbon price floor and a federal carbon tax to work alongside provincial carbon-pricing policies, the federal government could eliminate carbon-pricing differentials. And, by increasing the price floor over time, the federal government could improve Canada’s prospects for achieving its 2030 emissions reduction target,” states Carbon Copies.
Snoddon is also the associate director of the Viessmann European Research Centre.