Carbon Pricing Expands in Canada, Making Slower Progress in the United States

As talk of a carbon tax resurfaces with the start of the Biden administration, some form of carbon pricing applies to an increasing share of the population in the United States and Canada, according to a report jointly released today by the nonprofit research groups ACEEE and Efficiency Canada.

Read the Report

Carbon pricing, a climate tool to cut greenhouse gas emissions that is particularly popular among economists, now applies to a combined total of 37% of people living in these two countries—up from 31% two years ago. It’s considerably more common in Canada, where it’s required by federal law in all provinces and territories and thus covers all residents. In the United States, where it’s met formidable opposition but is gaining some ground, it currently covers 30% of residents.

In Canada, as the report notes, carbon pricing takes a few forms. Eleven provinces and territories have carbon taxes in place (though it was imposed by the federal government in four of them), and two have cap-and-trade schemes. There is also a separate, output-based pricing system in place in most jurisdictions for large industrial emitters. Under Canadian federal law, the carbon price must be at least $40 CAD per metric ton in 2021 and rise to $50 CAD in 2022 (approximately $31 and $40 USD at current exchange rates). The Canadian government has proposed increasing this price by $15 per year, until it reaches $170 CAD (approximately $134 USD) in 2030.

In the United States, there are three long-running carbon pricing programs: the Regional Greenhouse Gas Initiative (RGGI, a cap-and-trade program now covering 11 northeastern and mid-Atlantic states), the California cap-and-trade program, and a carbon tax in Boulder, Colorado. In addition, Pennsylvania is considering joining RGGI and three northeastern states recently announced plans to adopt cap-and-trade on transportation fuels with several other states considering membership. At the federal level, carbon pricing legislation previously failed to pass Congress, but a carbon tax has the support of several high-ranking Biden officials, including Treasury Secretary Janet Yellen who says President Biden supports it as well.

Carbon pricing’s impact and energy efficiency’s role

The British Columbia carbon tax has been in place for more than a decade, and multiple evaluations have found that it is reducing energy use and greenhouse gas emissions without hurting the province’s economy. Likewise, RGGI has been operational for more than 10 years, and evaluators have found that it has reduced energy use and emissions, reduced customer bills and wholesale power prices, created jobs, and boosted local economies. Evaluations of other carbon tax and cap-and-trade programs have been more limited, but they show results consistent with the British Columbia and RGGI findings.

Energy efficiency plays an important role in several of these states and provinces, in particular because of carbon-price-funded programs that help reduce energy use and cushion the effect of a carbon price on energy costs. RGGI, Quebec, Nova Scotia, and Boulder devote more than half of their carbon-price revenues to funding energy efficiency programs, helping to achieve net economic benefits by reducing energy use, energy bills, and energy-related emissions. Substantial funds are also spent on energy efficiency in California, and in the Canadian province of Alberta, carbon-price revenue funded Energy Efficiency Alberta until its closing in September 2020 after a change in the provincial government. The Canadian federal government’s carbon-pricing system also includes efficiency programs targeted to small and medium-size businesses and institutional buildings.

While an important strategy for reducing greenhouse gas emissions, a price on carbon will need to be complemented by other approaches to reducing energy use and emissions, such as offering energy efficiency programs. As shown by international efforts and supported by the experience of California, current carbon-pricing programs alone have only a moderate impact on energy use and emissions, far less than the 80-100% reduction by 2050 that many countries, states, provinces, and cities are targeting.

Based on the findings of our new report, State and Provincial Efforts to Put a Price on Greenhouse Gas Emissions, with Implications for Energy Efficiency, we recommend that other states and provinces study carbon-pricing options and adopt a price that builds on lessons from these leaders. One key lesson is that a substantial portion of income from carbon-pricing programs should be invested in energy efficiency. Such investments drive considerable energy savings and emission reductions, helping to cut emissions beyond what a carbon price alone could achieve.

In addition, these energy savings reduce the cost of carbon for households and businesses. In particular, efficiency investments should target underserved sectors, including disadvantaged communities. This is an issue in both countries (e.g., unlike the United States, Canada does not have a national low-income weatherization program). Without such reinvestment in energy efficiency, the benefits of a carbon price, while still positive, are not as extensive. And without investment in disadvantaged communities, the residents of those communities could pay more than they benefit.