The point of a carbon price is to avoid paying it
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.
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.