Clearing the air: How carbon pricing helps Canada fight climate change

Evidence proves that carbon pricing works. We need to have better conversations.

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Executive Summary

We’ve come a long way in Canada. We have real, working examples of both carbon taxes and cap-and-trade systems that are reducing GHG emissions while maintaining strong economies.

Yet the growing consensus around carbon pricing is not yet universal. Some voices have questioned the extent to which carbon pricing will affect GHG emissions. And elections are on the horizon, both nationally and in several provinces, in which carbon pricing could be a source of debate and even a key issue.

Such policy debates are healthy and necessary. But debates will support good policy decisions only if they are based on facts and evidence. And there is strong evidence, grounded in solid economics and policy experience, that carbon pricing works.

Part of the problem is communication. Governments and policy analysts (including here at the Ecofiscal Commission) haven’t always done a good enough job explaining carbon pricing to Canadians. This really matters because carbon pricing affects us all. How we design these policies will influence how we live and how we do business. We all want better understanding.

In short, we need a more informed conversation about carbon pricing. So let’s have that conversation. Let’s clear the air.

Done right, carbon pricing changes household and business behaviour, reduces GHG emissions, and provides an incentive for the development and adoption of the technologies that can play a key role in a low-carbon economy.

In addition (and this point is also often overlooked), carbon pricing will achieve these outcomes at a lower economic cost than other policies. Together, this means that carbon pricing can support both a clean economy and a prosperous economy. It achieves these goals by changing incentives and unleashing market forces. It lets businesses and individuals identify the best ways to reduce their GHG emissions and at the times and places that are right for them. And it doesn’t require governments to identify and enforce specific ways to reduce GHG emissions.

This essay unpacks the overall story. What does “working” mean for carbon pricing? Where has carbon pricing worked? Why does carbon pricing work? When does carbon pricing work? Who supports carbon pricing? How do policies put a price on carbon? We provide clear answers to these questions in simple, (mostly) jargon-free language. Just the facts.

Summary of Recommendations

#1: Canadian provinces should rely on increasingly stringent carbon pricing policies to reduce GHG emissions

Governments should continue to make carbon pricing the central plank of their climate policy, and they should add well-designed non-pricing policies only when carbon pricing alone can’t do the job. This will ensure that Canada reduces GHG emissions at the lowest possible economic cost. The stringency of carbon pricing policies across Canada should continue to increase gradually over time to drive deeper emissions reductions. Canadian provinces can achieve this by steadily increasing the rates of carbon taxes or steadily reducing the number of permits in cap-and-trade systems.

The expectation of rising carbon prices will strengthen incentives for emitters to innovate and invest in low-carbon technologies. Steady, predictable increases in stringency will ensure that individuals and businesses have time to adjust and plan their long-term investments accordingly.

#2: Policy makers and analysts should work to better communicate the realities of carbon pricing

We’ve come a long way in Canada. We have real, working examples of both carbon taxes and cap-and-trade systems. But pervasive myths about carbon pricing still cause too much of the debate to be based on poor information.

We appreciate that carbon pricing isn’t always simple, especially when it comes to the important details of policy design. It is incumbent on all of us engaged in climate policy to communicate beyond a narrow group of technical policy experts. Carbon pricing affects all Canadians, so we need to help all Canadians understand the basics.

#3: Governments should carefully evaluate their carbon-pricing policies over time, especially in the medium term.

Nothing is more convincing than hard data. To show that carbon pricing works, governments should undertake careful, detailed analysis of how carbon pricing has performed in their jurisdictions. That analysis should isolate the effects of carbon pricing from other factors. It should explicitly show the impacts of the policy on GHG emissions and the economy by estimating what environmental and economic outcomes would have been in the absence of the carbon price. This robust data and analysis should be clearly communicated to the public.

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