There have been a number of policies proposed to reduce greenhouse gas emissions (GHG) thereby mitigating climate change. An important class of climate policies involves putting a price" on carbon, either by implementing a carbon tax or some form of tradeable permit scheme. In theory, carbon pricing is a cost effective way of resolving the externality problem, thereby improving efficiency. These policies may also generate government revenue, in the form of tax or permit revenue, and these revenues may be used to generate further efficiency gains by lowering distortionary taxes. Alternatively, some of the revenues earned can be allocated to various measures intended to promote emissions reductions. Carbon pricing policies also have important effects on the distribution of welfare across individuals, sectors, regions, and time.
There are some unique challenges when it comes to the implementation of carbon pricing in Canada. Federal and provincial governments not only share responsibility for the environment but also share directly or indirectly most major tax bases like the carbon tax base. Either level of government could implement carbon pricing to address GHG emissions. Indeed, as we shall see, both levels of government are already involved. Intergovernmental coordination (or lack thereof) and revenue sharing between federal and provincial governments are important characteristics of the federation and may play a role when it comes to implementing carbon pricing. As well, recent developments in the United States further complicate climate policy in Canada at both levels of government.