Lessons Learned from Canada’s Emission Trading Systems

Canada has a carbon pricing system to recognize the cost of pollution. It makes it more expensive to use fossil fuels; the more you pollute, the more you pay. Carbon pricing is recognized globally as the most efficient means to reduce greenhouse gas emissions. It works because when fossil fuels cost more, people use less and are incentivized to adopt lower-carbon options. Other methods, such as direct regulations, tend to be more intrusive, inflexible, and expensive.

Canada’s Greenhouse Gas Pollution Pricing Act was first applied in April 2019 at $20/T, increasing by $15/T annually until reaching $170 in 2030. On April 1, 2024, it escalated from $65 to $80/T, roughly translated to 3.3 cents more per liter at the gas station, higher energy bills with fluctuations in crude oil prices adding 10 cents, and increased industrial emissions reduction transparency. Since 2019, the carbon tax has meant 17.6 cents more per liter of gasoline. In jurisdictions where the federal pricing system is in effect, Canada returns approximately 90% of fuel charge proceeds back to families in the province or territory collected, with the remaining 10% to Indigenous communities, farmers, and businesses to invest in increased energy efficiency and emissions reductions. Since last October, about one-third of households in the Atlantic provinces using more expensive heating oil were exempted from paying carbon pricing. Going forward, the federal carbon price continues to be revenue neutral.

The federal pricing system has two parts: a regulatory charge for over 20 fossil fuel sources covered under the Act and its regulations. For example, gasoline, propane, diesel, and natural gas used to generate heat or electricity have the distributor paying the levy, and the cost is passed on to consumers. Secondly, a performance-based system, the Output-Based Pricing System (OBPS), is used by industries such as oil producers, chemical manufacturers, automakers, and coal or gas power plants to pay for emissions above a certain threshold. One or both parts can apply in a jurisdiction.

The approach is flexible: any province or territory can design its pricing levy on emissions, ensuring national standards are reached or adopt the federal pricing system. The federal government published updated standards in August 2021 for the 2023 to 2030 period to make these systems more comparable across Canada and more effective in driving the reductions needed to meet Canada’s 2030 and 2050 targets.

The Canada Revenue Agency administers the fuel charge component. OBPS is an Environment and Climate Change Canada program to fund industrial emitters in cutting emissions and re-investing in cleaner technologies and processes.

Both parts of the federal pricing system apply in Manitoba, Nunavut, PEI, and the Yukon. The federal fuel charge applies alongside provincial carbon pricing systems for Alberta, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Saskatchewan industries. Alternative  British Columbia, the, and Quebec systems meet federal benchmark requirements. However, neither part of the federal pricing system applies in those jurisdictions.

By putting an explicit price on carbon emissions, the tax and other climate policies have reduced emissions by about 8% since 2019. Carbon pricing is estimated to contribute as much as one-third of Canada’s emissions reductions in 2030. A recent open letter (March) to the Prime Minister from hundreds of economists defended the carbon tax policy and its gaining results.

Lessons learned – Carbon pricing has a bigger impact over time. Still, it is difficult to quantify since it’s not the only climate policy in Canada, and the consumer changes people make as a result are not easy to measure. Behavioral studies show that people tend to have a more robust emotional response to losses than equivalent gains. As of the April 1 increase, many Canadians and seven provincial premiers opposed the increases, particularly Canada’s opposition party. To date, alternative policies to reduce emissions have not been presented or identified at the exact low cost of carbon pricing.

The National Observer states that dropping carbon pricing infrastructure would put Canada at odds with the vast majority of our major trading partners at the very moment when they will be accelerating their investments in clean energy and decarbonization. University of Alberta economics professor Andrew Leach notes in his recent book, “There is no option for business as before. Our choice will increasingly become whether to act responsibly on our initiative or have standards imposed on us by the rest of the world.”

This Post was submitted by Climate Scorecard Canada Country Manager Diane Szoller.


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