Carbon pricing is boring

Climate and Energy
If you judged by Twitter alone, you could be forgiven for thinking carbon pricing was as controversial as the colour of a certain dress. And look, I get it. On one hand, there’s increasing apprehension around the costs of climate change. On the other, there’s anxiety around the affordability of a low-carbon transition. Combining those legitimate issues with the media’s love of a good conflict narrative makes for a potent mix. But here’s a rather media-unfriendly secret: carbon pricing is boring.

“This is not controversial”

Politicians might like to debate about carbon pricing, but economists—who, it should be noted, are also relatively boring—mostly don’t. Earlier this year, 45 top economists from across the United States endorsed a carbon pricing proposal for the United States. The group included all living former chairs of the Economic Council, former chairs of the Federal Reserve, and multiple Nobel laureates. Noted conservative economist Greg Mankiw, one of the signatories noted: “this is not controversial… The politics is complicated, the international relations is complicated, but the economics is really simple.” It’s easy to see why that economic consensus exists. Basically:

  • Carbon pricing works. It creates incentives for businesses and individuals to choose lower-carbon practices, products, and investments.
  • Carbon pricing costs less than other policies. Carbon pricing provides flexibility for emitters to reduce emissions in whatever way makes most sense for them; it lets the market choose, rather than trying to identify specific ways to reduce emissions.
  • Carbon pricing drives innovation. More innovation means even lower costs over time. It also help Canada get ahead of the curve to become competitive in global markets that increasingly care about carbon emissions.

The economic impacts of carbon pricing are modest at most

Despite efforts to build some drama around the economic impacts of carbon pricing, the reality is much more boring. We expect the net impacts of carbon pricing on the economy to be extremely modest. As the figure below shows, the expected economic impacts of carbon pricing are much smaller than the uncertainty in GDP forecasts in general. The same finding emerges when we look at historical impacts in British Columbia, which has had a carbon price since 2008. Economists have looked at B.C.’s data and clearly found that the carbon price has reduced emissions, bending B.C.’s emissions curve down. But at the same time, it hasn’t really affected the economy or the number of jobs overall. In other words: carbon pricing just isn’t likely to be a major factor on GDP growth or overall jobs one way or another. So boring.

Rebates mean that most households come out slightly ahead

How about the costs of carbon pricing to households and their day-to-day budget? Do these costs hurt affordability for Canadians? Well, when we consider both the costs of carbon pricing for households and the benefits of revenue recycling, the net impact is also pretty boring. In provinces facing the federal “backstop” policy, for example, 90% of the revenue generated in each province will go back to households in that province (the other 10% will go to small businesses, municipalities, schools, universities and hospitals). According to the federal government, seven out of 10 households will receive rebates larger than their carbon costs. And those rebates don’t undermine incentives to reduce emissions: you can collect the rebate and save money by avoiding the carbon price. And if you can’t change your behaviour right away, you aren’t worse off, because you still get the rebate.

You know what’s not boring? Climate change

Our blog series earlier this year explored the risks of climate change. If you haven’t already, it’s worth checking out. The impacts of climate change in Canada are potentially huge, and frankly a little scary. Climate change isn’t some future hypothetical. It’s here. Insured losses from extreme weather events hit a record $134 billion in 2017. Oceans are now rising at the fastest rate in recorded history. Illnesses like Lyme disease and mosquito-borne disease are starting to appear in places they hadn’t before. Keeping global temperature rise below 2 degrees Celsius will spare the world from a lot of irreversible damage. We have time—but not much. So perhaps we’re focusing on the wrong debate. Yes, let’s design our climate policy to minimize costs. But let’s not lose sight of the much bigger picture here: doing our part to reduce the risk of catastrophic climate change.

Stick to the facts

Perhaps part of the challenge here is that carbon pricing is an easy target. Its costs are visible, while its benefits are a little more abstract. As a result, myths around carbon pricing and its costs have become pervasive. So try to cut through the noise and ignore the drama. Good policy is hugely important, especially when it comes to climate change. That’s why we should rely on solid evidence and and analysis, not newsworthy rhetoric. Here at Ecofiscal, we’ll continue to dig into that evidence and bring it into policy conversations as best we can. For policy wonks like us, that’s anything but boring.

10 Myths about Carbon Pricing in Canada

Read our latest report. Canadians want a serious plan to take action on climate change. And they deserve an honest discussion about our options. The facts are out there. Let’s use them.

 

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