Canada's Carbon Tax: A Model For The Future?
- Oct 17, 2016 2:00 pm GMT
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Prime Minister Trudeau “outsmarts opponents of carbon pricing” — that’s how the John Ivison of the National Post described it. Bloomberg said, “Trudeau’s national carbon tax is a model that should be ‘widely copied’ around the world.” In the last few years, the complexities of cap and trade have conservative economists, environmentalists and even Fortune 500 companies coming together enthusiastically to align themselves around a carbon tax. As Ronald Reagan himself said, “If you want more of something, subsidize it; if you want less of something, tax it.”
The bad messaging from the environmental groups has already started. Organizations such as Smart Prosperity and Canadians for Clean Prosperity claim a carbon price will enlist the “free market” to reduce carbon emissions “with only modest economic costs.” Name a point in time where unleashing pent up innovation had “modest economic costs”? Since the 1970s, many nations around the world have poured billions of dollars into R&D only to see the fruits of their research gather dust on the shelf. Natural Resources Canada has supported hundreds of climate change solutions that have been deployed in pilots, unable to scale under the current rules of the game. This does not mean that they cost more, but simply that consumers are not aligned to create a more efficient low carbon future.
In order for all of the nations to meet their commitments under the Paris climate-accord, we need policy that aligns technology that is on the shelf with consumers who will benefit from it. Carbon pricing is one clean way to accomplish that goal.
Along these lines, Prime Minister Trudeau announced a plan to mandate a $50-a-tonne carbon tax across Canada by 2022. Pundits were quick to point out that this carbon tax would add just 11 cents to the price of a liter of gasoline. What they haven’t told you is that many technologies including electric fleet vehicles are cost effective without subsidies today because of substantial fuel and maintenance savings. The challenge is that vehicle financing companies are nervous to fund these vehicles for fear that there won’t be an active resale market after the financing term. A carbon tax would fix that by providing policy certainty and unleashing electric vehicles for fleet applications.
Carbon pricing is basically a “nudge” tactic. CEOs and CFOs are trained early on that they can’t manage what they can’t measure. A modest carbon tax of $50-a-tonne would force accountants, software, and dashboards to measure carbon and manage it. The classic case is energy efficiency. From industry to buildings, if Canada just matched the carbon efficiency of coal rich Germany they would achieve their Paris climate commitments and become a more competitive manufacturing nation.
The concept of “sin” taxes aligns customers and innovators towards a common goal. This is a good tag line and tends to work in electricity where entrepreneurs and capital have lined up. But to make a carbon tax work in areas like transportation, we need more ambitious government policy. Transportation requires government planning. In Donald Shoup’s book, “The High Cost of Free Parking,” he writes, “Parking requirements create great harm: they subsidize cars, distort transportation choices, warp urban form, increase housing costs, burden low income households, debase urban design, damage the economy, and degrade the environment.” Cities like Barcelona have found that instead of building new roads, that a better way to deal with downtown congestion is just to get rid of cars altogether to create “Superblocks”. Carbon taxes are a way to focus everyone around a common goal and unleash creativity, but success in reducing emissions will rely on complementary local policies.
So while many people are asking: At what carbon “price” would Canadians begin reducing emissions fast enough to meet their Paris commitments of 30-per-cent fewer emissions than in 2005? I would ask, what carbon price would be high enough to encourage people to deploy all of the technology Canada has spent research dollars on that already save people money without any subsidies at all? The answer, probably $50-a-tonne. See the famous McKinsey cost curve here:
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Economists have a theory that purchasers will be more rational with a carbon-tax-induced increase than to a general increase in fuel prices. Because purchasers see a carbon tax as more permanent than the ever volatile nature of fuel prices.
The Acadia Center estimates that, in Canada, every $1 million spent on energy efficiency investment results in an increase in GDP of $3-$4 million and 22-27 job years. The high scenario shows almost $200 billion of near term potential that would surely be unlocked by a $50-a-tonne carbon tax.
On renewable energy, the Trottier Energy Futures Project, which in 2013 completed an inventory of Canada’s renewable energy potential, estimates that renewable energy (including existing nuclear and large hydro) could provide almost 100 percent of Canada’s electricity needs with an investment of around $400 billion – a number accessible today with a carbon tax.
Fundamentally, a carbon tax would level the playing field for climate solution entrepreneurs that have been scratching out a living over the past 40 years. Further, a carbon tax would reduce other pollution that causes well documented human health impacts from burning fossil fuels. Lastly, a carbon tax would unlock Climate Wealth, the largest wealth and job creation opportunity of a generation.