When patience isn’t a virtue – why Canada needs a carbon price

This week, the Intergovernmental Panel on Climate Change (IPCC) will be releasing the third of its “assessment reports.” These reports come in batches of three, every 6 or 7 years, with the fifth set of three coming out now. Fall 2013 saw the release of the report on the science of climate change (punchline: experts are 95% certain human activity is causing climate change), March 2014 saw the release of the report on the likely impacts of climate change and adaptation actions (punchline: climate change is impacting people in every region of the world right now) and this week, experts have gathered to finalize the report on what we can do to mitigate climate change. While the wording of that report won’t be official until April 13, the findings have already been emerging – and the punchline is that we need to dramatically reduce our dependence on carbon-emitting fossil fuels, as soon as possible.

In essence, when it comes to taking action to reduce greenhouse gas emissions, patience is not a virtue.

With a call to action that compelling, the next question is – what action? At SP, we’ve done a lot of work on how best Canada can transition to a low-carbon economy. And we’ve come to a pretty clear conclusion: a carbon price is a necessary, but not sufficient, policy if Canada intends to close its emissions gap.

Let’s look at our emissions gap more closely. The image below shows Canada’s historical emissions, and 2 projections – one in which we do nothing, and one in which the actions we’ve already introduced have the effects we’re expecting. It also shows Canada’s Copenhagen target of 17% below 2005 emissions by 2020. As you can see, we’re not on a path to get there yet – in fact, even if everything we’re doing works as well as we think, we’ll be 20% over our target. And even if we were to hit our target, emissions will need to come down much more to slow the pace of climate change.

This argues for doing, within reason, whatever we can to bring Canada’s emissions trajectory back in line with our target. There are lots of ways that can be done – through subsidies, voluntary programs, traditional regulations, cap-and-trade emissions trading systems (ETS) or carbon taxes. At SP, we believe that there’s no single policy for the task at hand, and that most of these policies will need to employed in one way or another, but that if we are serious about bringing our emissions back in line, we need policies that put a price on carbon emissions – and that means either an ETS or a carbon tax because either is a form of carbon pricing.

Today SP released a short issue summary that outlines, in one handy reference place, the body of work SP’s researchers, academics and policy analysts have put together about carbon pricing. It covers some of the different policy design options and helps answer some of the big questions about carbon pricing — like fairness, business reaction, impacts on trade and experience to date.

A carbon price is a necessary condition because it indicates that carbon pollution has a cost and by putting a cost on carbon emissions, a carbon pricing policy encourages emissions reductions. But it’s not a sufficient condition for two reasons – 1) the size of the challenge is so big that we need to engage more than just the big emitters so we will need other policies as well, and 2) a carbon price will cause us to take emissions reducing actions, but we need to be ready with processes and technologies for implementation. The neat thing about a carbon price is that in sending the signal via the market that carbon pollution has a cost, independent parties can react and respond to that market signal as they see best – some emitters might implement new processes or technologies, while other emitters might using trading mechanisms (if available) to cover the emissions. That flexibility, as research has shown, is what accounts for the cost-effectiveness of carbon pricing policies. Similarly, industries or companies that don’t emit will be advantaged, and find themselves more competitive because of the avoided cost of carbon. Finally, there will be a stronger incentive for developing technologies that are non-emitting or reduce emissions. That incentive for innovation – in technology, process, or business practice – is another powerful argument for a carbon price. Although innovation can happen under a command-and-control regulatory framework, the incentive for innovation – in the form of avoided costs or improved competitive position – is constant and escalating (depending on policy design) in the case of a carbon price.

Like any policy, carbon policy can be done badly. But as SP’s latest issue summary shows, there’s enough research, analysis and real-world practical experience to show that a carbon pricing policy can be done right – and that Canada’s ready for it. If we have any hope of bringing Canada’s emissions profile back in line, a carbon price is necessary — and patience is not a virtue.