The point of a carbon price is to avoid paying it

Climate and Energy Sans catégorie

Carbon prices don’t work in quite the same way as other taxes or levies. Unlike income or sales taxes, which are primarily revenue tools, carbon prices are all about reducing emissions (sure, they also raise revenues, but that’s a separate issue). But if you reduce your GHG emissions, you can avoid the carbon price. In fact, the whole idea is not to pay it.

What’s the point?

The carbon that is embedded in the goods and services we consume has costs for society. Higher concentrations of carbon in the atmosphere intensify extreme weather events, increase biodiversity loss, and acidify the oceans. These environmental damages have real economic costs, and we can use a carbon price to signal them. The higher the carbon content of a good or service, the costlier it is for society.

Carbon pricing is an incentive to move away from these costlier options. Put another way, the objective of a carbon price is for emitters to find ways to not pay it. By reducing your GHG emissions, you can avoid paying the carbon price—which is the whole point.

At the wheel

But is carbon pricing doing that? It’s a fair question, but both theory and evidence say yes.

Carbon pricing now covers the majority of emissions in Canada, with prices ranging from around $19 per tonne to $30 per tonne. Current prices are too low to drive deep emissions reductions. But that doesn’t mean they don’t drive any.

Take gasoline, for example. Currently, carbon prices in Canada add a nominal amount to the price of fuel – between 4 and 7 cents – well within normal market fluctuations. But just because you can’t hear the signal over the noise doesn’t mean it’s not there. The carbon price raises the maximum price and the minimum price of gasoline, and every price point in between. Even at current levels, carbon prices are having an impact.

If gasoline consumption is still going up, it’s not an argument against carbon prices. It’s an argument for higher carbon prices.

Eyes on the road

Carbon prices send two kinds of signals. Current carbon prices signal the financial cost of emitting carbon right now. On the other hand, future carbon prices signal the cost of emitting carbon going forward. Where carbon prices are set to rise over time, they create an incentive to find ways to avoid those higher future prices (for example, by buying a different vehicle or choosing to live closer to work).

In Canada, current carbon prices are low, but will ramp up (they are set to increase to $50 by 2022). Ramping up—and stating clearly that that is the plan—gives citizens and businesses time to anticipate and adjust. Any actions they take to cut carbon will allow them to avoid paying higher carbon prices in the future. Offering that long-term certainty will change behaviours sooner.

But future carbon prices need to go higher. The sooner we have certainty on this, the better. Currently, there is no plan in Canada to raise carbon prices beyond $50/tonne. For Canada to reach its emissions goals, prices will need to rise gradually but steadily higher so that we do more to avoid producing GHG emissions. The path to decarbonization will be a lot clearer if we set out a clear and rising path for carbon prices. This will spark the long-term thinking necessary to transition to a low-carbon economy.

The destination

Prices influence behaviours, and carbon prices are no different. They provide a signal that gives us an incentive to be thriftier with our carbon emissions, to develop and use low-carbon technologies, and to make gradual changes to our behaviours that will make a difference over time.

Current carbon prices—even though they are low—are doing this work now. As the carbon price rises, incentives to avoid the tax will grow stronger, and emissions will decrease faster.

Carbon prices aren’t like other taxes. No one wants to avoid paying income taxes by earning less. But smart businesses and individuals can find innovative low-cost ways to avoid paying carbon prices. It’s the whole point. To get to where we want to be, we need everyone working to avoid the carbon price.

8 comments

  1. Phil Northcott

    Carbon prices only work as long as they are less than the cost of transportation from a non-pricing jurisdiction… unless we put a carbon price at the border.

  2. Dr. Tom Brydges

    Hello. Putting a price on carbon to reduce consumption is like pushing with a rope ! OPEC has been doing it since 1972 and we know that it is not very effective. Raising the price of gasoline from about 5 cents a litre in 1973 to the present $1.20 hasn’t done enough. Reducing fossil fuel use requires the forced application of technology !
    This is happening worldwide via building codes and entrepreneurs with new ideas such as smart thermostats. Carbon pricing can provide funds for developing and applying green technology but a price per se on carbon is not nearly effective enough as OPEC has shown for us.
    Solar power for heating water and buildings has a huge potential. We have a research institute at Queen’s University.
    A final point. I live in a south facing apartment with large glass widows and patio doors. The low sun in the winter heats the unit and the electric heat pump doesn’t come on. In summer, the rays from the sun high in the sky are blocked out but the balcony above.
    It is time to get the fossil fuel issue properly focused !

    • Brendan Frank
      Brendan Frank

      Hello Tom,
      Thanks for your comment. There is research that shows that people respond differently to carbon taxes than they do to normal market fluctuations in gas prices. That’s good news for reducing emissions.

      You’re certainly right that carbon pricing isn’t a silver bullet. One of the advantages of carbon pricing it that it doesn’t force choices like some regulation may; that’s what makes it cost-effective. We should rely on it as much as we can (and use the revenues wisely), but we will need complementary climate policies as well. These can include everything from using best practices in agriculture to maximize soil retention to stricter building codes and more efficient heating, like you alluded to. You can check out our report on complementary policies here.

  3. Derry

    Carbon taxing is only going to effect the middle class. All goods and service fees will be passed on to the consumer. Who is already taxed. Big Corp will get credits through acquisitions mergers etc. No difference in emissions at all. Yet they’ll all increase their fees. It’s just another tax … they’re just blowing smoke 🚂

    • Brendan Frank
      Brendan Frank

      Hi Derry,
      An economy-wide carbon price applies to everyone, not just the middle class. And we can use the revenues to help households with affordability while still maintaining the incentive to change behaviour.

  4. Ambrose

    Individuals are limited as what they can achieve. However communities of people working together can optimize the scale and effectiveness of change. Empowering groups of people to action through leadership will have a more powerful and faster response than leaving to the invisible hand of the market place. Managing the incentives is as or more important than managing the disincentives. Your plan only appears to use less than half of the potential for change and we need all of that potential working for us if we are to survive.

    • Jason Dion
      Jason Dion

      Hi Ambrose. You’re right that our post (and a lot of our work) focuses on government policy. While we believe that it’s the most important tool in the toolkit, you’re right that it’s not the only one. Private initiative – especially coordinated initiatives from entire communities – is another. I see it as a powerful complement to carbon pricing and other policies.

      • Brendan Frank
        Brendan Frank

        Hi Ambrose,
        I will add that you’re right that there are limits to what any one person can do. But one of the benefits of carbon pricing is that we can apply it throughout the economy, so every single person and firm has incentive to change their behaviour. All of these changes will add up to something much bigger.

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