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Canada Needs a Single Price on Carbon

Canada Needs a Single Price on Carbon

In The Carbon Bubble, Jeff Rubin explores how the very climate change that will leave much of the country’s carbon unburnable could at the same time make some of Canada’s other resource assets more valuable: our water and our land. Rubin was chief economist and chief strategist at CIBC World Markets where he worked for over 20 years. Below, Jeff writes with David Suzuki for The Toronto Star on how Canada needs a federally mandated national price on carbon emissions to ensure there is a single, meaningful price for emitting carbon anywhere in the country:

We’ve been schooled to believe that reducing fossil fuel dependence comes at the cost of economic growth and jobs. Indeed, Conservative Leader Stephen Harper has called proposals to reduce carbon pollution “crazy economics,” but in the emissions-constrained world that climate change is dictating, the opposite is true. Instead of sacrificing growth, turning to greener energy sources will soon be the only way to grow.

Holding the line on our economy’s carbon footprint requires that carbon emissions per unit of GDP must fall at the same rate as GDP expands. If we heed the warnings of most climate change projections we will need to see emissions per GDP decline even faster than the rate of economic growth to ultimately reduce dangerously high levels of atmospheric carbon and avoid the worst consequences of climate change.

How do we go about setting the conditions for our economy to de-carbonize? Carbon pollution is a classic example of a market failure where polluters aren’t required to pay for the damage they create. In order that they do, government has to set in place the right policy framework.

In Canada, that requires a federally mandated national price on carbon emissions to ensure that, despite the hodgepodge of different provincial regulations, there is a single, meaningful price for emitting carbon anywhere in the country. Otherwise footloose emissions, and the industries that produce them, will move to where carbon pollution is least penalized.

British Columbia’s $30-a-tonne carbon tax remains the gold standard in Canada and is an obvious benchmark for a national price — although we should look at Sweden, which imposed a carbon tax in 1991. It was set at $133 U.S. a tonne but raised in 2014 to $168. Between 1991 and 2008, emissions fell by more than 40 per cent below 1990 levels and the economy grew by 44 per cent. Even with a much lower carbon price, B.C.’s motor fuel consumption has fallen. The same could be expected across the country. Carbon emissions from other sources would also decline.

The federal carbon tax rate could be adjusted for existing provincial emission pricing to ensure an effective national standard. In B.C., the federal carbon tax would be zero and in provinces with no carbon pricing it would be the full $30 a tonne.

In Quebec, which has joined California in a cross-border cap and trade system, and Ontario, which is about to join, the federal carbon tax could be added to the trading price of emission credits to achieve the same combined price for carbon emissions as elsewhere in the country.

One problem in integrating a federal carbon tax with provincial cap-and-trade schemes is that the latter typically exempt key industries. In California, oil and gas extraction, paper mills, steel and iron, chemicals and cement are effectively exempt. In Quebec, the province’s aluminum smelters and oil refineries are afforded free credits.

The argument for such exemptions is that these industries are vulnerable to carbon prices and are strategically important to their province or state. Forcing them to pay for their emissions will drive them to more emissions-friendly jurisdictions. Hence, the rationale goes, why sacrifice local jobs when there is no global environmental benefit to be had?

That is why trade policy is needed. A better approach than exempting industries from paying for their emissions would be ensuring that everybody, including competing imports, play by the same rules. Instead of providing free emissions credits to exposed, vulnerable industries, why not make their foreign competitors pay the same price for carbon emissions when they sell goods in our market as our industries pay through a national carbon tax? It’s time we recognized that carbon pollution is an unfair trade subsidy that needs to be countervailed with a tariff.

Foreign producers might denounce the carbon tariff as green protectionism, but as long as the tariff is no greater than the price our own industries pay for their emissions the only thing being protected will be our carbon-choked atmosphere. Leaders at the UN climate summit in Paris next December would do well to consider a global tariff.

In a world of accelerating climate change, how fast we can de-carbonize our economy will determine how quickly it can grow. Unfortunately, that transformation won’t happen by itself. Both tax and trade policies will have to nurture the process. We need a national carbon tax to ensure we pay for our own emissions and we need a carbon tariff to ensure that everyone else pays for theirs.

Jeff Rubin and David Suzuki/Toronto Star/September, 2015