Provinces are increasingly moving forward with carbon pricing to reduce their greenhouse gas emissions in a cost-effective way. Yet a price on carbon is only half of the policy story. Pricing carbon also generates revenue for governments, so governments need to decide how best to “recycle” this revenue back to the economy.
A new report from the Ecofiscal Commission explores the options for provinces in recycling revenue from carbon pricing policies. The report is called Choose Wisely for a reason: the trade-offs between options are complex. No single option outperforms the others on all dimensions.
In short, there are many opportunities for revenue recycling. But there are also lots of trade-offs. Some approaches to revenue recycling are better for economic efficiency. Others can drive more emissions reductions, above and beyond those from the carbon price itself. Some approaches address concerns around the fairness of carbon pricing, while others address concerns around the competitiveness of emissions-intensive and trade-exposed industries. And still other approaches might make carbon pricing more politically practical. To complicate the choice even further, differences between provinces mean that the right mix of revenue recycling in one province will not necessarily work best for another.
To help inform our analysis, but also to frame these trade-offs, we commissioned six position papers from smart policy thinkers across the country; these papers are presented here. Each makes the case for a different approach to revenue recycling. They are entirely the work of their authors. While the Ecofiscal Commission provided comments and suggestions on early drafts, the analysis and positions presented are exclusively those of the authors.
The six papers are as follows:
- Lars Osberg makes the case for a “Carbon Fee and Dividend” approach in which revenue is returned to citizens as lump-sum cheques. He suggests this approach is fair, but can also build a constituency for carbon pricing, allowing for more ambitious policy.
- Ken McKenzie makes the case for using revenue to reduce existing tax rates. In particular, he highlights reductions in corporate and personal income taxes as the best way to minimize the costs of carbon pricing policy.
- P.J. Partington and Vicky Sharpe argue that revenue should be invested in the development of low-carbon technologies in order to complement the carbon price by driving more emissions reductions at lower costs.
- Marc Lee argues that carbon revenue should be invested in public infrastructure. He suggests that these investments could lead to long-term improvements in productivity, but also to additional emissions reductions if infrastructure projects are chosen wisely.
- Jean-François Wen suggests that provincial governments should pay down their public debt, thus giving future generations fiscal flexibility, but also reducing the economic costs associated with public debt.
- Mark Purdon, David Houle, and Blake Shaffer explore the case for providing transitional support to industries to address competitiveness concerns. They show that forgoing revenue by providing emitters with free permits can reduce the extent to which economic activity and emissions relocate to jurisdictions with weaker climate policy.
As a collection, the papers highlight the strengths of different approaches to revenue recycling. They also illustrate the range of perspectives on this issue: smart policy analysts can—and do—disagree as to how carbon revenue should be used. By presenting a diversity of views, we hope to help provincial governments think through and determine their own policy priorities. Considering the full range of these perspectives in designing revenue-recycling approaches can help them to choose wisely.