Charging a price on emissions ensures we appropriately weigh costs and benefits. According to Trevor Tombe, one can argue for high or low carbon taxes, but that is where the debate should be. The price on carbon should be our target, not the quantity.
By Trevor Tombe
Climate change. Carbon taxes. Pipelines.
Few issues in Canada are as passionately debated, and even fewer are as divisive.
The gulf between those opposed to resource development (“keep it in the ground”) and those opposed to stringent action on climate (“job killing carbon taxes”) appears intractable. But it isn’t.
Canadians, for the most part, accept the evidence that climate change is real and believe we should act. So do our leaders. Last June, all but one federal MP voted to reaffirm our Paris commitment to lower greenhouse gas emissions (GHGs) to 30 per cent below 2005 levels by 2030.
For many, this commitment is the primary goal. And, as such, it motivates opposition to pipelines (which may increase emissions) and carbon taxes (which fall short of the goal). It also leads many to criticize provinces with high emissions levels — like Alberta.
But this is wrong; we’re aiming at the wrong thing.
The rising tensions over pipelines, carbon taxes, and so on, are because we’ve failed to properly define the problem we are trying to solve.
So what should be our goal?
We should pay a lot less attention to the quantity of emissions, and instead focus (almost entirely) on the price.
The social cost of carbon
As long as we use fossil fuels, there will be carbon emissions. But some emitting activities are incredibly valuable, like airlifting an accident victim to the hospital. Others are not, such as idling your car.
The optimal level of emissions is not zero.
The debate is over how much is acceptable, and in a practical sense, how much we are willing to spend to reduce GHGs and avoid some environmental damage. Every decision we make entails costs and benefits. And we should avoid lowering emissions in ways that cost more than the environmental benefits we receive.
One useful benchmark is the so-called, “social cost of carbon.”
It tries to capture the damages from a tonne of GHGs emitted, so provides a rough limit on what we should be willing to pay to avoid emitting. Environment and Climate Change Canada — the federal ministry responsible — estimates a range from a few dollars to nearly $200 per tonne, and its “central estimate” is $45 by 2020.
These are useful guides. Lowering emissions at a cost below these values makes sense; lowering emissions in more costly ways doesn’t.
The right way, and the wrong way, to lower emissions
“Climate leaders don’t build pipelines” is a common view at anti-pipeline protests. But this blanket statement neglects the high costs involved.
Alberta is landlocked, so getting oil to market is costly. Without pipelines, only higher-cost transportation options (like rail) remain, leaving Alberta producers to pay the price.
A big price. Scotiabank economists Rory Johnston and Jean-Francois Perrault find current pipeline capacity constraints may cost Canada’s economy roughly $10.8 billion in 2018, or as high as $15.6 billion if current conditions persist.
Now, to be sure, blocking pipelines will lower carbon emissions, since oil and gas production in Alberta will decline (slightly). But the costs of that could easily exceed $1,500 per tonne, based on my own estimates from National Energy Board analysis.
We shouldn’t want to lower emissions this way. The environmental benefits are not worth the costs.
Instead, consider carbon taxes. They lower emissions, too, but in a far more cost effective way.
If you face an (eventual) $50 fee to emit one tonne of GHGs — a level in line with the environmental damage from GHG emissions — you’ll carefully consider whether your choice is worth it or not. If you can cut the emission, (say, by installing a better machine) at the cost of $30, you’ll do so. And you’d be right to do so. But if cutting that tonne of emission costs $1,000, you won’t. And you shouldn’t.
Costs and benefits are (in general) automatically aligned.
But there is a problem.
Many opponents (correctly) note a $50 carbon tax is insufficient to meet our emission goals. Thus, the argument goes, we should use regulations and technology subsidies instead. But this is the wrong way to think about it.
We should forget the quantity target as a goal “at all costs.” Rather, we must focus on getting the price of emissions right.
That should be the measure of performance.
Is Alberta an environmental laggard?
Our current focus on emissions levels, instead of prices, also distorts how we view provincial climate performance, especially Alberta’s.
With barely 12 per cent of Canada’s population, Alberta emits nearly 40 per cent of the country’s greenhouse gases. Should we feel guilty for emitting so much? Is this evidence Alberta does less than other provinces? To both questions, the answer is no.
First, much of Alberta’s emissions are exported, embodied in goods that are consumed elsewhere. In recently published analysis, School of Public Policy researchers Kent Fellows and Sarah Dobson find Alberta’s oil and gas sector alone is a net exporter of over 90 million tonnes of GHGs each year. For perspective, that’s much more than all of B.C. emits each year.
But those Alberta emissions, in a very real sense, are the result of decisions made elsewhere. They are a result of global demands for energy.
Second, Alberta is taking climate change action. It has a carbon price that creates an incentive to lower emissions — where appropriate.
If Alberta oil and gas emissions rise in the coming years (as is likely), that doesn’t mean the policy is ineffective, or that Alberta isn’t doing its share. Instead, it means there are fewer low-cost options available here to lower emissions.
In short, Alberta’s emissions level is a misleading measure of our climate performance. We’re pricing at a reasonable level, and therefore doing our part.
Change the way we think
I’m not arguing for complacency in the face of a global challenge, I’m suggesting we change the way we think about it.
Rigid emissions targets are a problem.
They lead some to question any activity that increases emissions — like a pipeline that facilitates oil production growth. They lead others to question or discount policy tools that fall short — like the eventual $50 carbon tax. And still others use them to criticize high-emitting provinces like Alberta.
This isn’t helpful.
Emissions are harmful, but not infinitely so. Charging a price on emissions ensures we appropriately weigh costs and benefits. One can argue for a high price or a low one, sure, but that is where the debate should be. The price on carbon should be our target.
We should focus on cost, not quantity.
Trevor Tombe is an associate professor of economics at the University of Calgary, and a research fellow at the School of Public Policy.
This article was posted by CBC.ca on Feb. 24.