How to price carbon so that emissions go down and citizens don’t go crazy*

Revenue recycling - carbon pricing - clean-tech research and development
Climate and Energy

by PJ Partington and Vicky Sharpe

Our next report will explore the challenges and opportunities with different approaches to recycling revenues from carbon pricing. To better understand the trade-offs associated with each revenue recycling option, we commissioned a set of six papers authored by some of Canada’s leading policy thinkers. What are the advantages of each option? Under which conditions do they work best? Our Revenue Recycling blog series provides a glimpse into some of these difficult questions, voiced first-hand by the authors of each paper.

With provincial action barrelling ahead and renewed interest from the new federal government, the Canadian wonkosphere has recently been treated to more than its fair share of sharp analysis on climate policy and carbon pricing. One exchange illustrates an especially useful lesson for policymakers and advocates. Mark Jaccard’s case for smart regulations to complement carbon pricing, along with Brendan Haley’s thoughtful response, reminds us all that successfully delivering the transition to a low-carbon economy is about more than determining the optimal carbon price in a vacuum and pushing an “implement” button; it’s about a broad package of measures to properly align incentives to build low-carbon solutions from R&D through to deployment, taking account of real-world barriers and even— though many may reflexively gasp at the thought—political dynamics.

The scale of the challenge

There’s no question that the transformations required to meet the mid-and longer-term goals of the Paris Agreement are enormous. Investments in low-carbon research and development, demonstration and deployment (RDD&D) must grow dramatically to help deliver this change in a cost-effective way. Alongside carbon pricing and regulations, these investments are the third pillar of an effective policy package.

Businesses and citizens require the tools to respond effectively to climate policy; using revenue from carbon pricing programs to provide these tools makes intuitive sense. As Canadian governments move from setting emissions targets to delivering on them, they should consider the investment of revenue from carbon pricing programs as an integral part of their approach.

The case for low-carbon investments

The submission that Vicky Sharpe and I prepared for the Ecofiscal Commission’s upcoming report argues that, when invested in supporting low-carbon technologies, the revenue from carbon pricing programs can serve as a powerful complement to the price signal, boosting its effectiveness in reducing emissions and driving innovation. Many would also argue that these low-carbon investments, effectively and transparently delivered, can also help build engagement and support for climate policy, strengthening the political durability of the carbon price while expanding the scope of future action.

We explore the rationale and opportunities for making these investments across the innovation chain from early-stage research to deployment programs, and highlight how leading jurisdictions are currently making these investments. The evidence suggests that well-designed revenue recycling to climate solutions can increase innovation by addressing market failures, support additional emissions reductions and deliver co-benefits like cleaner air and local economic development. Over the longer term, these investments can support deeper and more comprehensive decarbonization by broadening the solution set and making future reductions more cost effective. Beyond environmental benefits, these investments can have significant positive effects on jobs, economic growth, productivity and competitiveness.

The importance of implementation

As strong as the case is for investing carbon pricing revenues in climate solutions, that’s not the end of the story. How these decisions are made and managed also matters. As much as well-designed programs can deliver significant benefits, poorly designed ones risk providing limited value for public funds and can erode public support for the carbon pricing program itself.

We offer six factors for jurisdictions to consider when designing an effective portfolio of low-carbon investments: the balance of outcomes they are targeting, their unique context, focus, collaboration with others, adaptability, and, lastly, transparency and governance.

California and Quebec’s recent experience managing the revenues from their cap and trade programs is instructive of some of the challenges involved. Quebec has recently moved to strengthen the management of its Green Fund, which has been criticized for its lack of transparency. California’s lawmakers and executive branch have recently had trouble agreeing on how to invest the 40% of annual proceeds that are not subject to continuous appropriations.

Like all aspects of carbon pricing, the design details are critical. Policymakers must strike a balance between robust planning and processes on the one hand and the flexibility to respond to new opportunities and course correct on the other. Investment plans should be grounded in clear principles yet designed to evolve, continually assessing results, updating programs and engaging with stakeholders. Experience shows this balance can be struck, and that investing carbon pricing revenues into creating climate solutions can build a powerful and lasting framework for driving innovation and long-term prosperity in a low-carbon economy.

* With all respect to Michael Barber

About the Authors

PJ PartingtonPJ Partington is a policy advisor who has worked in the public and non-profit sectors to advocate, design and implement effective climate change policies. He holds degrees in Environmental Policy and Political Science from the London School of Economics and UofT, and is only slightly embarrassed to think about policy for most of his waking hours. P.J. currently works at a provincial environment ministry. Any views expressed here are personal and in no way reflect government positions or thinking.

Vicky SharpeVicky Sharpe is a long term champion of integrating the environment and the economy and has 35 years of diverse energy and natural resource sector experience, extensive investment networks, international exposure and is a seasoned director. She built SDTC whose 280+ companies deliver increased productivity and competiveness to primary economic sectors in Canada. Vicky took public funding of SDTC from $100M in 2001 to $1.4B in 2014 and mobilized private capital for project and commercialization financing of over $4B.

Revenue Recycling Blog Series:
1. Reducing existing taxes
2. Transferring revenue to households
3. Investing in clean technology
4. Investing in public infrastructure
5. Reducing government debt
6. Providing transitional support to industry

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