TLDR – A digest of our new report Supporting Carbon Pricing
With the signing of the Pan-Canadian Framework on Climate Change and Clean Growth in December 2016, nationwide carbon pricing is on its way in Canada. In addition, the provinces and the federal government are putting a range of other, non-pricing climate policies on the table. But how can they ensure that these policies genuinely complement carbon pricing? In our latest report, Supporting Carbon Pricing, we take a deep dive into complementary climate policies. This blog lays out the highlights.
Identifying effective and cost-effective policies to support carbon pricing
As Ecofiscal has argued extensively, carbon pricing makes sense because it can reduce GHG emissions at lowest cost. Our new report outlines how—if they’re chosen and designed well—additional, non-pricing policies can support carbon pricing in driving low-cost emissions reductions. But it also shows that the wrong non-pricing policies can raise the costs of a policy package overall.
The report provides a framework for identifying genuinely complementary policies. The figure below provides a visual of the framework. It sorts and categorizes policies so that only genuine complements to carbon pricing make it out the bottom.
1. Does the policy fill a role that carbon pricing can’t?
Non-pricing policies can complement a carbon price in three different ways:
- They can be gap-fillers. By covering emissions not covered by the carbon price, gap-filling policies can broaden coverage and lower the overall cost of reducing emissions.
- They can be signal-boosters. By addressing market problems that interfere with the carbon price signal, signal-boosting policies can help carbon pricing to work better.
- They can be benefit-expanders. By achieving objectives in addition to reducing GHG emissions, benefit-expanding policies can achieve outcomes that carbon pricing can’t on its own.
If a policy doesn’t have one of these three rationales, carbon pricing would be a lower-cost way to achieve those same emissions reductions.
2. Does the policy adversely interact with carbon pricing?
A policy that overlaps with carbon pricing will interact with carbon tax and a cap-and-trade instruments in different ways. Negative interactions reduce a policy’s effectiveness, cost-effectiveness or both. In particular, policies that overlap with a cap-and-trade system might not drive additional emissions reductions. Instead, they might simply displace cheaper reductions (For more details see our report).
3. Is it well-designed?
Even if a policy does something that carbon pricing can’t and doesn’t interact with the carbon price, its design will still have big implications for its performance. Five particular design features matter here. A non-pricing policy should: 1) be stringent 2) have appropriate coverage 3) be flexible 4) be predictable, and 5) have good governance. These design features can pull in different directions at times—for example, increasing the flexibility of a policy might compromise its stringency. So the key is to create a reasonable balance across them.
4. How much does it reduce emissions, and at what cost?
All of this comes back to the environmental and economic performance of a policy:
- How effective is the policy? Does it reduce GHGs? By how much? An ineffective policy cannot complement carbon pricing.
- Similarly, is the policy cost-effective? What are the costs of those emission reductions on a per-tonne basis? Are these costs reasonable? As we show in the report, what’s “reasonable” can be a matter of perspective. Still, the lower the costs, the better.
In the end, only policies that that are both effective and cost-effective can truly complement carbon pricing. If a policy can’t make it all the way through our framework, it should be re-designed or abandoned in favour of genuinely complementary climate policies (or a greater reliance on carbon pricing).
Three case studies
To illustrate the framework, in our report we explore three case studies of existing or proposed non-pricing policies. Each case study exemplifies a different rationale. For a gap-filler, we look at the federal government’s recently proposed regulation of methane emissions in the oil and gas sector. For a signal-booster, we look at electric vehicle (EV) subsidies in Quebec. And for a benefit-expander, we look at Alberta’s planned phase-out of coal-fired electricity. The figure below provides a summary of the results.
Federal methane regulations drive significant reductions in an area that carbon pricing doesn’t touch. And they do so at a cost-per-tonne that’s lower than current carbon prices, suggesting they’re a good complement to carbon pricing. EV subsidies in Quebec, on the other hand, may interact negatively with its cap-and-trade program, and the mitigation that they drive comes at a very high cost. This suggests that they’re likely not complementary. Alberta’s planned coal phase-out has significant health co-benefits that lower its costs. The mitigation it delivers comes at a mid-range cost—more than the current carbon price, but less than where carbon prices will need to go in the future. Its complementarity is therefore a matter of perspective: some might say it’s too costly, while others might simply say its simply forward-looking.
Our analysis isn’t meant to be the last word on any of these policies. Rather, it’s meant to illustrate the questions that need to be asked of any non-pricing climate policy. The case studies show that whether a policy is complementary or not will depend on the role it plays, the context it’s implemented in, and how it is designed.
For more on how these case studies break down across our framework, and for details on the methods and assumptions that we used to assess them, see our report.
Fishing for complements
The best non-pricing policies complement carbon pricing, and improve the effectiveness and cost-effectiveness of the overall climate policy package. But simply adding more policies won’t necessarily improve performance. As Canadian governments continue to move forward with climate policy, it’s critical that they identify and design policies that are genuine complements to their carbon prices. Our framework aims to help them do just that.Read the Report Check out our Events
Join us today at 1pm EST for Achieving the Right Balance, an online discussion of the role complementary policies should play in our climate packages.