Carbon Pricing

November 9, 2022

The 2022 United Nations Climate Change Conference, or COP27, is going on right now in Sharm El Sheikh, Egypt.  Given that, I thought this might be a good time to discuss carbon pricing as one of the more controversial aspects in the battle on climate change.

Let me preface this by saying that this is the President’s Blog so that these are my opinions.  The Board of Directors of NOTL Hydro has been very supportive of my blogs and I am very appreciative of that.  However, I have never represented that these are their opinions though, as a matter of good governance, our thoughts should be closely aligned as pertains to the managing of NOTL Hydro and to my views on the Ontario electricity system.  In this case my views are not those of the Board of NOTL Hydro.  This is not because they have a different view but because I do not know their view on this subject matter.  The Board of NOTL Hydro is very comfortable taking positions on matters pertaining to electricity in Ontario because that is an area on which they have subject matter expertise and access to a very knowledgeable staff.  This includes steps that NOTL Hydro can take to adapt to changes driven by climate change, steps that NOTL Hydro can take to assist customers in their own decision-making and steps the Province of Ontario should take in managing the electricity industry in Ontario.  A position on carbon pricing is beyond this.

I support a meaningful revenue neutral carbon tax.

Revenue neutrality is a key aspect of this.  One of the very valid arguments against a carbon tax is that it is just another tax grab by governments.  Unfortunately, the actions of many governments in Canada have demonstrated the logic of this concern.  The carbon tax in British Columbia was originally revenue neutral until the government decided to not offset increases in the carbon tax in 2013 with new tax offsets.  Similarly, in Ontario, the Mayor of Toronto was once campaigning for a toll on the Gardiner Expressway to provide the City of Toronto with tax revenue from commuters.  The Premier of Ontario did not allow this but instead promised some of the revenue from the planned carbon tax to the City.  Give a government of new source of revenue and they will find a way to spend it.  Ask the Mayor of any municipality that sold their Hydro company how much of the proceeds are left.

As can be seen with British Columbia, there is no way to guarantee revenue neutrality.  One way to at least provide some pressure to maintain it would be to require the provincial auditor to provide an annual opinion on the neutrality of the tax.  Keeping politicians to account is very difficult but at least this would provide some tools.

A carbon tax must also be meaningful.  If it is too low then it will not have any impact so will have no point.

The reason I support a carbon tax is twofold.  First, it is about influencing behavior.  The best way to effect change is to have the demand driven from the bottom up.  If consumers want electric vehicles or heat pumps because they view them as cheaper alternatives for their transportation and heating/cooling needs then this will drive change much better than any government subsidy programs.  Subsidies are usually rather bureaucratic, are subject to change and are viewed as government suasion.  A carbon tax adjusts the underlying economics by making the carbon emitting alternatives more expensive.  Taxes are also viewed as more permanent; not many taxes have gone away.

The second, and more important, reason I support carbon pricing is that it corrects a market pricing error.  One of the challenges in our market-based system is that of externalities; costs that are not reflected in the price of goods.  Carbon is having a clearly demonstrated cost due to its impact on climate change.  This cost is not reflected in the price of carbon fuels.  A carbon tax would add this cost.

Beyond being a tax grab, there are a number of other valid arguments against a carbon tax.  One is that it creates real costs for segments of society that can least afford it.  We are all reliant on carbon fuels for our modern existence.  This impact can be mitigated by using the tax offset mechanisms to provide the additional support necessary.  The current tax rebates being provided by the federal government are an example of this.

A second is that it puts Canada at a competitive disadvantage if other countries are not doing the same.  The best solution would be if every country acted in a cohesive manner.  That is, unfortunately, unrealistic.  The European Union is trying to mitigate this impact by creating a tax that is applied against the carbon footprint of imports.  This is complicated and has the potential for abuse but it is a solution.

A third argument is that the impact of Canada is too small so a carbon tax will have a big negative impact on Canadians without affected the worldwide situation.  I do not buy this argument.  Our emissions may be small compared to the United States and China but they are still considerable and much bigger than most countries.  Canada is too good a country to shirk our responsibilities in this.  Keeping tax neutrality should also help mitigate this risk.

A fourth argument is that a tax is not effective if all it does is drive up prices.  Gas taxes, like taxes on tobacco and alcohol, were considered sin taxes that could be increased almost without limit as the cost would have little impact on demand.  This argument may have been valid a decade ago but no longer.  There are more and more non-carbon alternatives for transportation and heating/cooling.  The technological progress in these solutions is staggering and impossible to keep up with.

Finally, there is the argument that this is somehow anti-Alberta and anti the oil and gas industry and that as it is one of the biggest contributors to prosperity in Canada, we should be supporting the oil and gas industry and not seeking to penalize it.  Again, I do not buy this argument.  There are certain facts that should be clear:

  1. The use of carbon fuels is highly responsible for much of our current standard of living.  They are not an evil but have been a very cheap and effective source of energy.
  2. The need for oil and gas is not going away.  Even if we need it less, we will still need it for petrochemicals, plastics and many other products.
  3. The demand for oil and gas will decline and must decline due to its impact on climate change.

There is a balancing act to be performed.  To the extent that it can remain competitive we should support the oil and gas industries through such things as having the proper infrastructure (pipelines) and taxing the product, but not the industry, more than normal.  At the same time, we need to do our part as part of the international effort to reduce the carbon emissions and reduce the impact of climate change.  Finally, we will need to support the transition in our oil and gas industry, preferably one up the supply chain as, with declining demand, simply being an extractor will no longer be enough.

One of the side debates is whether a carbon tax or a cap-and-trade system is better.  I do not know enough to take a position on this other than to say the simplest approach is often the best.

I have written before that I am a technological optimist and that I believe solutions to this problem will be found that will help solve the climate change challenge while allowing us to maintain our standard of living.  A carbon tax attempts to add the cost of climate change to the cost of carbon.  This will help consumers and decision makers choose non-carbon alternatives that the market will create.  The point of the carbon tax should not be to create government programs but to improve the functioning of the market.