Supporting Carbon Pricing: Identifying complementary climate policies

Supporting Carbon Pricing: How to identify policies that genuinely complement an economy-wide carbon price

Abstract   

Complementary policies reduce emissions at low-cost—when a carbon price can’t.
Carbon pricing is the simplest and most cost-effective way to lower greenhouse gas (GHG) emissions, so it should do most of the heavy lifting in reducing our emissions. However, it can’t quite do it all. Some emissions are difficult to measure and price, and some market problems can impede the effectiveness of the carbon price. Other climate policies are therefore likely to be needed. But these policies should complement—and not undermine—carbon pricing. This report presents a framework to identify genuinely complementary policies that can support carbon pricing. It provides key considerations that should be used in the design and evaluation of individual climate policies as well as overall policy packages. Three rationales are presented for additional non-pricing policy: gap-fillers, signal-boosters and benefit-expanders. Case studies illustrate the framework, and underscore the key role of cost-effectiveness.

Six Recommendations

#1: Governments should make carbon pricing the core of their climate policy, with steadily increasing stringency

There is a role for non-pricing policies as part of an effective and cost-effective policy package for reducing GHG emissions. Yet to achieve reductions at lowest cost, these policies should complement rather than substitute for carbon pricing. The price of carbon should continue to rise—steadily, consistently, and predictably—beyond 2022 and well past $50 per tonne.

#2: Governments should clearly demonstrate complementarity before adopting non-pricing policies

More GHG policies do not necessarily make for a better climate strategy. Additional, non-pricing policies can increase costs and undermine the effectiveness of a carbon price. Policymakers should focus their efforts on policies that clearly have one of the three rationales explored in this report. They should fill gaps in carbon pricing policies (gap-fillers), boost the signal of the carbon price (signal-boosters), or generate significant co-benefits (benefit-expanders).

#3: Governments should strive to coordinate carbon pricing and complementary policies across the country

Over time, if differences between carbon prices across provinces and territories increase, pan-Canadian climate policy will have higher costs than necessary. Similarly, differences in complementary policies—and differences in interactions between carbon pricing and other policies—can increase overall costs. Therefore, it is important that governments continue to cooperate to ensure that policies work together coherently.

#4: Governments should regularly review and assess both individual climate policies and the larger policy package

No matter how carefully governments design a policy package, they should plan for regular review and assessment of its actual performance. Policy review and evaluation creates an opportunity for ongoing adjustment and improvement, and is always well advised—but especially so for complementary climate policies.

#5: Governments should rely on integrated modelling to assess the overall effectiveness of proposed and existing policies

This report highlights interactions between policies as a particularly thorny issue. The combined impact of federal and provincial climate policies should be regularly assessed. The means by which the interactions are assessed, however, is important. Only economy-wide, integrated modelling can provide a full examination of these effects.

#6: With the implementation of an economy-wide carbon price, governments should phase out and avoid redundant, high-cost, or ineffective policies

All Canadian governments should seek to identify and eliminate existing policies that no longer make sense. The emergence of pan-Canadian carbon pricing as a policy norm creates an important opportunity to shift toward more cost-effective policy by clearing the books of some older and higher-cost regulations and subsidies. Governments should only employ additional policies that are genuinely complementary to carbon pricing.

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