The Political Economy of Carbon Pricing

With the victory of the Liberals in the federal election on October 19th, Canada’s federal government now has a commitment to establish national emissions-reduction targets, and ensure that the provinces and territories have targeted federal funding and the flexibility to design their own policies to meet these commitments, including their own carbon pricing policies. While three provinces, British Columbia, Alberta, and Quebec, have already put a price on carbon (with Ontario soon to follow suit), the challenge of coordinating a new federal/provincial/territorial carbon pricing framework that recognizes such existing policies while coordinating new initiatives across provinces and territories to meet updated national emissions targets makes it important to consider the political economy of carbon pricing, and what challenges and design options should be considered nationally and provincially.

Back in 2013, we at SP wanted to find out more about the political economy of carbon pricing, so we funded PhD student David Houle to research the Obstacles to Carbon Pricing in Canadian Provinces under the supervision of Professor Erick Lachapelle. They found that there are administrative, political, fiscal and economic obstacles to the adoption of a carbon price in Canadian provinces. In particular, provincial governments where carbon pricing isn’t in place often lack the environmental and climate change policy capacity to design and implement an effective and equitable market-based instrument, such as a carbon tax, to curb carbon emissions. Houle also notes that a carbon tax was an electoral wedge issue in both British Columbia’s 2009 and Ontario’s 2011 elections; with conservative parties being more successful at tapping into the antipathy of their voters to block or slow the implementation of carbon taxation.

Unsurprisingly, Houle as well found that the economic make-up of provinces plays a large role in whether they’ve been able to adopt a price on carbon and how effective it has been at reducing emissions. The climate policy preferences of business reflect their capacity to reduce emissions and the more homogenous a province’s economy, the more likely it is that this capacity will be reflected in the policy choices made by governments.

Houle’s research helps explain the current state of affairs in Canada, but what does it mean looking forward? PhD student Pascal Doray-Demers and Professor Kathryn Harrison looked abroad to find some answers in Environment, Economy and Carbon Taxation in France and Ireland (2014).

Doray-Demers and Harrison compared both why carbon taxes were adopted in the first place and their fate in France and Ireland. In response to electoral attention to climate change in 2007 to 2008 a centre-right coalition adopted carbon taxes to meet Kyoto targets in both countries. Within a year the French tax was abandoned while the Irish carbon tax remains in place. However, several years later, a left-of-centre French government adopted a new carbon tax, which remains in place today. Doray-Demers and Harrison investigate a variety of potential explanations for this divergence and conclude that both successful carbon taxes were underpinned by fiscal goals. The Irish carbon tax was adopted and retained as a significant revenue source for a cash-strapped government mired in an economic depression. Revenues from the second French carbon tax were needed to help fund a major job stimulus program pursued by the Socialist government.

This is an interesting lesson for Canadian governments currently facing slowing (or negative) economic growth amongst low global oil prices. Governments looking to implement carbon pricing will need to balance economic efficiency, emissions reductions and social acceptability. In Carbon Pricing and Mind the Hissing (2014), PhD student Marisa Beck and Professor Randall Wigle look at how the allocation of revenues from carbon pricing polices can help with these challenges, and identified four alternatives: revenue recycling, technology support measures, redistributive measures, and general productivity enhancing measures. Examples of these can be seen in the three Canadian provinces who have priced carbon. Responding to the difficulties faced by Alberta’s oil sector in reducing emissions, Albertans judged the funding of technological developments to help with this task to be fair. British Columbia took a different approach in making its broadly applied carbon tax revenue neutral and focusing tax benefits and rate cuts on low income and rural populations. Choosing to enhance its productivity, Québec uses parts of the carbon revenues to fund infrastructure enhancements and climate change adaptation measures that take into account the province's specific challenges and vulnerabilities. All of these approaches serve to boost economic performance while re-orienting the Canadian economy away from being dependent on fossil fuel extraction and catalyzing green growth.