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Tuesday 20th March 2018

Unlike Elsewhere, Canada’s New Carbon Taxes May Actually Work


Benjamin Schmidt

Thu, 04 Apr 2019 10:21 GMT

Over the past twenty years, government regulations that put a cost on carbon dioxide emissions have expanded around the world as a way to tackle climate change. Data collected by the World Bank shows that more than 40 countries have some kind of price on carbon through either direct taxes on fossil fuels or via programmes that put a cap on carbon emission use and allow companies to buy and sell carbon credits.

Economists have long recommended raising the cost of burning fuels like coal, oil, and gas that release carbon dioxide into the atmosphere as an inexpensive way to put a brake on rising emissions.

But “inexpensive” is not synonymous with “politically easy”. Indeed, many countries that have tried implementing carbon pricing schemes have encountered heavy resistance. As a result, only a few of the current carbon-curbing regulation programmes around the world are making real headway in lowering emissions.

Probably the world’s best carbon tax success story is the United Kingdom. According to a 2017 report by Carbon Brief, Britain’s carbon emissions recently fell to their lowest level since the 1890s. This sharp reduction came after 2013 when the British Parliament passed a tax of about $25 per metric tonne of carbon on certain sectors - including electricity. The bill led to a large-scale switch by electrical companies from coal to natural gas, which emits about half as much C02.

Green Canada

Other countries have struggled to replicate the UK’s success lowering greenhouse gas emissions via government policy. One country that is trying is Canada, where a patch-work climate plan recently expanded nationwide. Implemented last week by Prime Minister Justin Trudeau’s Liberal government, the new rules are aimed at bringing the country’s emissions to 30 per cent below 2005 levels by 2030.

The Canadian plan is ambitious. Outside of certain high-competition industries like chemicals and steel, each metric tonne of CO2 is taxed an additional $15. This is already a fairly high tax by global standards, and it will rise quickly each year to $38 per tonne by 2022. Thirdly, by including 47 to 90 per cent of each province's emissions, the plan encompasses a relatively high percentage of the economy compared to other national programmes.

The plan is also flexible. Provinces that set up their own climate plans - like British Columbia and Quebec have done - are allowed to opt out of the nationwide programme. Provinces that declined to make their own plan - such as Ontario - have been obligated to participate from April 1st 2019.

Most importantly, the plan is designed to hurt voters as little as possible. To do this, most of the revenue collected from carbon taxes will be refunded to Canadian citizens on their tax bills. According to the Canadian government, these refunds should offset higher energy prices for about 70 per cent of the people in the country.

Hard to swallow

The plan's tax-refund element is an essential part of the current government’s effort to make the taxes more palatable to voters. Canada’s upcoming general election in October 2019 already poses a threat. If the opposition Conservative Party takes power in that election, they have promised to repeal the new carbon taxes.

Canada’s effort to win over voters is also well-advised given how strongly resistant voters in other economically developed countries have been to energy taxes in recent years. A 2018 hike in France’s fuel taxes was key to triggering the yellow vest protests that have rattled the government of President Emmanuel Macron since last November. The taxes were withdrawn in early December 2018 as a concession to the protesters.

Similarly, a public outcry followed the implementation of higher energy prices in Australia by the country's Labour Party government in 2012. When the Liberal Party came to power in 2013, the regulations were quickly repealed.

In the United States, resistance to energy taxes has simply led to watered down rules. Gridlock at the federal level has so far kept nationwide regulations off the books. At the state level, some regulations have been successfully passed, including in 9 states in the northeast and in California.

These programmes have not proven instrumental in lowering emissions so far. The Regional Greenhouse Gas Initiative set up among 9 north-eastern states has enforced only modest price increases with muted effect. At the same time, the carbon cap in California was set high, dampening its effect through low carbon prices. California’s government estimates the programme will lower emissions by 16 per cent between 2013 and 2020. But that number is muddied by the presence of several other low-carbon and energy-efficiency policies in California. How much can be pinned purely to the cap and trade programme is unclear.

Altogether, carbon taxes are certainly growing more common around the world. What remains uncommon are carbon taxes that really work.

US & Canada