Why price carbon?

A substantial, economy-wide carbon price is a critical component of the fight against climate change.  We cannot solve the problem with hope and good intentions.

In a study commissioned by the Harper government, the National Round Table on the Environment and the Economy has reported that a carbon price of $150/tonne CO2 would likely be required even to meet the Harper government’s pathetic emissions reduction targets, echoing similar studies made by the Pembina Institute and others.

One reason we need price signals to fight this battle is the Jevons paradox.  Jevons, a British economist, postulated in 1865 that efficiency improvements alone would not succeed in bringing down the use of a resource.  The lowered demand immediately leads to a decline in prices followed by an expansion of the market into new areas.  The paradox is well understood by economists and exemplified by automobile efficiency standards in the United States.

The oil crises of the 1970’s heralded an era when successive presidents demanded more efficient cars.  While oil prices remained artificially high, demand declined.  As soon as oil prices dropped, however, more oil than ever was used.  The hard-gained motor efficiencies were entirely wiped out by the movement of people to ever more distant suburbs, by the emergence of multi-car families and by the appearance of heavier vehicles with more features.

In European countries, where vehicle fuel is heavily taxed, cars have remained fewer in number, smaller and more efficient, public transit systems are robust and well accepted and suburbs are more compact and accessible without vehicles.  As a result, when oil prices soar, Europeans are shielded from the impacts.  Their overall fuel price goes up by a fraction of what it cost before the increase.  And of course, Europeans are in a much better position to move beyond fossil fuels altogether.

The oil companies will find a market for their product unless we restrict it.  There are basically only two ways to do it.  We can set an artificial cap on carbon emissions and let the market decide the price at which the lower supply will be sold, or we can guess the price that would result in the necessary reductions and impose that.

The two options are intrinsically related and somewhat interchangeable.  A cap-based mechanism has the disadvantage that it does not maintain price incentives following economic crises.  A tax-based mechanism has the disadvantage that it cannot guarantee emissions reductions.  The Green Party promotes a hybrid system that is tax-based, but rises to meet emissions benchmarks as required.

What are the elements of a good market plan for carbon?

An economy-wide mechanism is a critical feature of a good carbon pricing plan.  Squeezing one part of the market can simply allow other parts to expand.  A number of studies have also shown that economy wide mechanisms are more efficient, delivering more rapid reductions at lower cost overall.  This just stands to reason, since a wider market has more options for emissions reductions.  And because emissions will have to be virtually eliminated over the next few decades across the economy, it makes sense to get a head start in all sectors now.

The broader the plan, the more effective and cost effective it will be.

Another critical feature is neutrality towards emitters.  The European Cap and Trade system distributed emissions permits to large industrial emitters based on past emissions.  This punished companies that had invested in efficiency improvements with a lower amount of emissions permits, and rewarded the most inefficient companies with the largest permits.  This aspect of European Cap and Trade has been widely denounced by economists and environmentalists alike, but powerful industries are relentlessly pressing governments in Canada and the US to follow suit with the same sort of absurd plans here as well.

A good plan cannot give preferential treatment to the biggest emitters.

A good plan cannot depend on bogus offsets.  Studies of offsets permitted have indicated that a large proportion are exaggerate or even invent emissions reductions.  Plans that allow countries to pretend that real emissions cuts were made through the purchase of theoretical emissions reductions elsewhere are problematic.

A good plan will minimize or eliminate the use of offsets.

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