Blog Posts | Pembina Institute

Carbon pricing 101: why we need to put a price on pollution

Published Oct. 22, 2010 by Matt Horne

Matt Horne

If you show up at the landfill with a truck full of garbage, you have to pay to dump it. But if you pump pollution into the atmosphere, most Canadian jurisdictions provide a free dumping ground.

Outside of B.C. there aren't any simple and broadly applied financial signals in Canada to encourage reductions in greenhouse gas emissions. Essentially, the atmosphere is treated as a free and bottomless landfill. It's no surprise then that emissions have been on an upward trend in Canada for as long as we've been measuring them.

Most climate change experts agree putting a price on greenhouse gas emissions is a vital strategy in a portfolio of solutions to fight dangerous climate change. Under an effective carbon pricing system every tonne of pollution comes at a cost, rather than being free. The dirtier the energy source, the more expensive it becomes.

The idea is not a radical one. If we want families and businesses to adopt green technologies, it's only logical to make the dirtier options more expensive and the cleaner options relatively more affordable. Pricing pollution empowers the market to identify and develop the most cost-effective solutions. Instead of building coal plants, we'll build wind turbines; instead of driving gas-powered cars, we'll choose electric vehicles powered by renewable energy.

Canada line bridgeThere are two ways to put a price on carbon: a carbon tax or a cap and trade system. Both can apply to consumers and industry.

To implement a carbon tax, the government sets a price per tonne of emissions and adds that cost to the price of different energy sources. A $75 per tonne carbon tax would more than double the cost of coal-fired electricity, for instance, but it wouldn't affect the price of solar power. B.C. implemented a carbon tax in 2008 and Sweden and Norway have charged similar taxes since the early '90s. Ireland implemented a carbon tax this year.

Cap and trade systems are more complicated, but can also be effective if the urge to introduce loopholes is resisted. The European Union's cap and trade system was launched in 2005 and is the world's largest.

In an effective cap and trade system, governments set a limit on total emissions and sell allowances equivalent to that cap. Emitters buy allowances for every tonne they emit. The lower the cap, the fewer the allowances and the higher the price — thus the stronger the incentive to reduce emissions.

The essential elements of an effective carbon price

There are four factors that determine if carbon pricing will be fair and effective.

1) How high is the price of carbon? The gap between the costs of clean and dirty energy is still wide in many cases, so if the price of dirty energy isn't increased enough by a carbon price, clean solutions risk being left behind.

2) How broadly is the price applied? The carbon price will only affect the emission sources that it is applied to, so the narrower the application the more emitters that can continue to pollute for free.

3) How well are people living on low incomes protected? People living on low incomes already spend too much of their income on energy and aren't able to afford the solutions that could reduce their emissions. Any carbon pricing system should ensure that these people aren't adversely affected and that they have an opportunity to be part of the solution.

4) How is revenue from carbon pricing used? There's no magic formula, but governments need to find a balance between investing in projects that reduce emissions, protecting low-income families and other priorities such as paying down debt and lowering other taxes.

Leading by example: B.C.'s carbon tax

With one of the most comprehensive carbon taxes in the world, B.C. provides a solid example. Applying to almost three quarters of provincial emissions, the tax will ramp up to $30 per tonne of carbon dioxide by 2012. Revenues are used to reduce other taxes and provide some protection to low-income families.

That's not to say there aren't opportunities to improve B.C.'s carbon tax. The biggest challenge will be getting from $30 per tonne to $200 per tonne in the next ten years in a way that protects low-income families. That's the price that economic modelling shows is needed for Canada to do its fair share of an international effort to avoid dangerous climate change.

Just as big a challenge will be getting the rest of Canada on a comparable track. In doing so, Canadians will begin to put their money where their mouths are in recognizing that pollution and climate change cost us all. By reflecting the true cost of dirty energy, carbon pricing is a market-based solution that directs investment — and attention — toward a cleaner future.

Download our fact sheet on the carbon tax: Putting a Price on Climate Pollution

It's part of a three-part series, including:

Walking The Green Talk: How the Carbon Tax Will Effect Families

The Business of Climate Change

If you show up at the landfill with a truck full of garbage, you have to pay to dump it. But if you pump pollution into the atmosphere, most Canadian jurisdictions provide a free dumping ground.

Outside of B.C. there aren't any simple and broadly applied financial signals in Canada to encourage reductions in greenhouse gas emissions. Essentially, the atmosphere is treated as a free and bottomless landfill. It's no surprise then that emissions have been on an upward trend in Canada for as long as we've been measuring them.

Most climate change experts agree putting a price on greenhouse gas emissions is a vital strategy in a portfolio of solutions to fight dangerous climate change. Under an effective carbon pricing system every tonne of pollution comes at a cost, rather than being free. The dirtier the energy source, the more expensive it becomes.

The idea is not a radical one. If we want families and businesses to adopt green technologies, it's only logical to make the dirtier options more expensive and the cleaner options relatively more affordable. Pricing pollution empowers the market to identify and develop the most cost-effective solutions. Instead of building coal plants, we'll build wind turbines; instead of driving gas-powered cars, we'll choose electric vehicles powered by renewable energy.

Canada line bridgeThere are two ways to put a price on carbon: a carbon tax or a cap and trade system. Both can apply to consumers and industry.

To implement a carbon tax, the government sets a price per tonne of emissions and adds that cost to the price of different energy sources. A $75 per tonne carbon tax would more than double the cost of coal-fired electricity, for instance, but it wouldn't affect the price of solar power. B.C. implemented a carbon tax in 2008 and Sweden and Norway have charged similar taxes since the early '90s. Ireland implemented a carbon tax this year.

Cap and trade systems are more complicated, but can also be effective if the urge to introduce loopholes is resisted. The European Union's cap and trade system was launched in 2005 and is the world's largest.

In an effective cap and trade system, governments set a limit on total emissions and sell allowances equivalent to that cap. Emitters buy allowances for every tonne they emit. The lower the cap, the fewer the allowances and the higher the price — thus the stronger the incentive to reduce emissions.

The essential elements of an effective carbon price

There are four factors that determine if carbon pricing will be fair and effective.

1) How high is the price of carbon? The gap between the costs of clean and dirty energy is still wide in many cases, so if the price of dirty energy isn't increased enough by a carbon price, clean solutions risk being left behind.

2) How broadly is the price applied? The carbon price will only affect the emission sources that it is applied to, so the narrower the application the more emitters that can continue to pollute for free.

3) How well are people living on low incomes protected? People living on low incomes already spend too much of their income on energy and aren't able to afford the solutions that could reduce their emissions. Any carbon pricing system should ensure that these people aren't adversely affected and that they have an opportunity to be part of the solution.

4) How is revenue from carbon pricing used? There's no magic formula, but governments need to find a balance between investing in projects that reduce emissions, protecting low-income families and other priorities such as paying down debt and lowering other taxes.

Leading by example: B.C.'s carbon tax

With one of the most comprehensive carbon taxes in the world, B.C. provides a solid example. Applying to almost three quarters of provincial emissions, the tax will ramp up to $30 per tonne of carbon dioxide by 2012. Revenues are used to reduce other taxes and provide some protection to low-income families.

That's not to say there aren't opportunities to improve B.C.'s carbon tax. The biggest challenge will be getting from $30 per tonne to $200 per tonne in the next ten years in a way that protects low-income families. That's the price that economic modelling shows is needed for Canada to do its fair share of an international effort to avoid dangerous climate change.

Just as big a challenge will be getting the rest of Canada on a comparable track. In doing so, Canadians will begin to put their money where their mouths are in recognizing that pollution and climate change cost us all. By reflecting the true cost of dirty energy, carbon pricing is a market-based solution that directs investment — and attention — toward a cleaner future.

Download our fact sheet on the carbon tax: Putting a Price on Climate Pollution

It's part of a three-part series, including:

Walking The Green Talk: How the Carbon Tax Will Effect Families

The Business of Climate Change

Find more content by topic: Climate Change, Green Economics, Renewable Energy, *Community Services, British Columbia, Carbon Pricing, Federal Action, Provincial Action, Solar Power, Wind Power.

Leticia — Jun 07, 2012 - 10:06 AM MT

Green technology tends to save more money in the long run, dtsipee being more expensive to begin with for example, motion-sensing light fixtures that only turn on when someone walks into a room are more expensive than regular lights, but after a few years the reduced power usage saves money. What examples of green energy are you looking at that are so cost-inefficient? Around here (Midwest) people have been installing windmills, which are quite green that have consistently proven profitable.

Reality Check — Nov 02, 2010 - 09:34 AM MT

And the cost to the people of BC is .... staggering. In the end, its you and me that pay for this. Your talking increasing the current carbon tax by 10 times its current value! Talk about killing our energy based economy. And again, all based on flawed science. Like it or not, its energy that allows us to live in Canada. If you were truly concerned about the fate of the planet, you would encourage the migration of all Canadians to a warmer climate where we don't have to heat our houses to stay alive through the winter! That would tremendously cut down the carbon output. So what is this really about? Transfer of wealth maybe?

Chad Unser — Feb 10, 2012 - 09:38 AM MT

Dear Reality Check,

A carbon tax amigo is all about moving to clean forms of energy. The way it stands now fossil fuels are subsidized by the government to be even less expensive than they really are especially in Alberta. Secondly, the cost to society as a whole is not included in the price of fossil fuels. That is why the people in Central Chile for example are spending their money providing communities with water. These are communities that used to get their drinking water from glaciers in the summer months. These glaciers are now gone and so is there water. So who is paying for this? The Chilean people are. This is one of thousands of examples of the cost of climate change and the cost of burning oil and coal. If these costs were incorporated in the product in the form of a carbon tax then people would choose cheaper options like wind power or hydrogen fuels that have been made by wind power. Aside from incorporating the true cost of fuels like coal a carbon tax will cause people to consume less. All of these will help humanity avoid the doom and gloom that climate change will bring if we continue down the path of Carbon based fuels for heating and transportation. That is what it is really about my friend.

Chad Unser
Kelowna, BC
Canada
chadunser@gmail.com
Registered Professional Biologist of BC
Masters in Environment and Management

Matt Horne — Nov 18, 2010 - 07:21 AM MT

The 'Reality Check' post asks "What is carbon pricing really about?" Good question. Here are three answers:
1) Its about avoiding the truly staggering costs of unchecked global warming that we're currently on a collision course with because of our unwillingness to put a price on carbon across the country. Those costs will be borne by our economy, society and environment if don't stand up and do something about it.
2) Its about providing a life-line to our potential clean energy economy, so instead of having a country that encourages investments in dirty energy, we can transfer those incentives to the investments in renewable energy and energy efficiency that are going to strengthen the economy and reduce our impact on the climate.
3) Its about spurring creative solutions across the country in all sectors of the economy so that Canadians can continue to thrive in the communities that have defined who we are.

d sanden — Oct 22, 2010 - 02:39 PM MT

http://dug9.users.sourceforge.net/GCDEV.jpg
GCDEV - grid connected diesel electric vehicle
GCBEV - grid connected battery electric vehicle
Q. would it be a good use of carbon tax revenue to invest in grid connected vehicle infrastructure? I'm thinking of something that a vehicle would connect to intermittently - just on main routes and in serviced lanes. For transport vehicles, they would need an electric transmission much like diesel train locomotives: the diesel engine runs a generator when off grid, when on grid the grid power supplies the drive electric motors directly. This would allow a seamless transition -when changing lanes to pass. And when stopping at a red light, regenertative breaking would go into the grid -not a battery- and be bought back when the light turns green. For cars, being able to cut $10k off the price of a $15k lithium ion battery would make BEVs more affordable relative to gasoline vehicles, and with the grid connection teather would have no range limitations within a serviced zone. In both scenarios the devil is the details - how to design grid lines for safety at road speeds and teathers that don't rip out sections of bridges or blow over a small car in a side wind. And that are economically viable enough to form a new dominant design with initial infrastructure investment. What do you think?

Matt Horne — Nov 18, 2010 - 07:23 AM MT

It makes a lot of sense to use a portion of the revenue to help pay for electric vehicle infrastructure and the transition to a grid powered by renewable energy. When thinking about the best uses of the revenue from a carbon tax or cap and trade system, we should be particularly focused on the solutions that need government involvement because it isn't reasonable to expect households or companies to finance them on their own. So investments in transit, bike lanes and electric vehicle infrastructure are great examples.

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