As part of Canada's effort to meet its commitment to the 2015 Paris climate
accord, the provinces must establish their own carbon pricing policies or the
federal government will impose a policy on them. When choosing among the
various policies, provincial governments should first determine how much a
particular policy will negatively affect economic competitiveness in their
jurisdictions. When the negative impacts are judged to be low, a carbon tax
on each tonne of greenhouse gas emissions (GHG) is the preferred choice. A
cap-and-trade policy allocating tradable permits under a market price, or a
hybrid combination of carbon tax and cap-and-trade, is best when the negative
impacts could be high.
These three policies can all satisfactorily achieve emissions reductions. However,
other variables must be taken into consideration, including the provision of
price certainty, how strongly each policy promotes innovative research into
cleaner technologies, the complexity and costs of set-up, the policy’s salience,
or visibility to consumers, and the amount of revenue it can raise.
A carbon tax has a major advantage over cap-and-trade and a hybrid version
because it allows for carbon price certainty, is less costly to administer and is a
substantial source of revenue. However, a cap-and-trade policy offers its own
advantages in that emissions allowances can be allocated so as to minimize the
policy’s negative effects on competitiveness and prevent emissions leakage.
The latter is the term used when companies leave one jurisdiction to operate
in another jurisdiction that has either fewer or no rules around carbon pricing.
A hybrid policy, also known as output-based pricing, allows for some permits
to be allocated freely based on a facility’s or industrial sector’s emissions and
output. It also offers more carbon price certainty than a pure cap-and-trade
system. Research shows that a hybrid policy almost completely reduces the
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impacts on competitiveness and emissions leakage. And while a carbon tax is more
visible to the public, the advantages of higher visibility are debatable. Such a policy may
be favourable because a lower price is required to achieve the same GHG reductions,
but it might also be unfavourable because politically it is less palatable.
British Columbia has a carbon tax, while Quebec uses a cap-and-trade system. Alberta
has a hybrid policy that covers large industrial emitters and a carbon tax for smaller ones.
Other provinces remain without a carbon pricing regime, while Ontario’s newly elected
Progressive Conservative government is set to dismantle the province’s cap-and-trade
policy. Those provinces that wait for the federal government to impose carbon pricing
on them can expect to get a hybrid policy much like Alberta’s.
For provincial governments wishing to establish their own policies, choosing one that
is the right fit involves weighing the advantages and disadvantages of each. Ultimately,
a given jurisdiction should examine its own economic and emissions profile in order
to make the best choice for achieving the combined goal of reducing GHGs without
negatively impinging on industry’s competitiveness