Background to Canada’s National Carbon Policy

The recent federal plan for a national Canadian carbon price – rising to $50/+ CO2e by 2022 – has increased interest in carbon pricing policies and has highlighted the need to go beyond an initial headline number to determine the effective price of carbon. In light of a forthcoming national price on carbon, business, individuals and government must understand the “all-in costs” associated with carbon pricing in order to make sound strategic decisions. Our federal government should be mindful of the different ways in which a carbon price may impact the different regions of Canada and how different carbon levels may impact consumer and business behavior in different regions of Canada.

Ecofiscal Commission Report

Canada's Ecofiscal Commission has issued a timely report – which raises questions about the complexity, transparency and fungibility of carbon pricing policies. The Commission suggests looking beyond the headline number in order to determine the collective price imposed under a proposed carbon tax or a cap-and-trade emissions trading system (ETS).

Marginal Carbon Price

As the Commission notes, the simplest way to determine the effective price of carbon is to look at the marginal carbon price. The marginal carbon price is the price payable for emitting an incremental tonne of carbon. In the report, the Commission identifies the marginal carbon price under existing and proposed carbon pricing policies, enacted or proposed by the various Provinces as at July 2016 – before the Trudeau government announced its federal carbon pricing plan. The analysis performed by the Commission illustrates the conceptual issues underlying any effort, by the federal government or otherwise, to ascertain the effective price of carbon in a specific jurisdiction, and that the goal of consistency of carbon pricing across Canada is complicated. Below is the margin carbon price for the stated Provinces at the estimated future time.

Marginal Carbon Price –
Provincial Carbon Pricing Policies (2020 estimate)

BC

Alberta

Ontario

Quebec

Marginal Carbon Price

$30

$30

$19.40

$19.40

The Commission makes it clear that these marginal carbon pricing numbers do not represent a conclusion as to the effective price of carbon.

Average Carbon Cost

Many carbon pricing policies do not levy taxes or fees or issue emissions allowances on a fully-priced and transparent basis. The Commission reviewed the various Provincial carbon pricing policies to determine the proportion of covered emissions that are fully priced – whether by virtue of being fully subject to tax under a carbon tax or levy or fully subject to paid-up emissions allowances under a cap-and-trade system. By taking the marginal rate and adjusting for variable tax rates, minimum thresholds, or for free emissions allowances, the Commission calculated the average carbon cost per tonne of CO2e for the specified provinces, as outlined in the below chart.

Average Carbon Cost –
Provincial Carbon Pricing Initiatives (2020 estimate)

BC

Alberta

Ontario

Quebec

Marginal Carbon Price

$30

$30

$19.40

$19.40

Fully Priced Covered Emissions

100%

39%

75%

75%

Other Adjustments

$0

($1.46)

$2.94

$1.03

Average Carbon Cost

$30

$10.24

$17.49

$15.58

The distinction between marginal cost and average cost is most apparent when comparing carbon pricing in BC and Alberta. In BC, the marginal carbon price and average carbon cost are generally the same because BC has adopted a relatively straight forward carbon tax. Whereas, in Alberta, the marginal carbon price of $30/tonne CO2e in 2020 applies to only 39% of covered emissions which, together with other adjustments, results in an average cost of just $10.24/tonne CO2e. The Commission's analysis makes it clear that understanding the specific detail as to how carbon taxes or fees are calculated or assessed (and industries or players that are exempted therefrom) and/or how emissions allowances are allocated (for free to certain players, for instance) is critical to assessing the effective price of carbon under any particular carbon pricing policy.

Coverage-Weighted Carbon Price

Similarly, the Commission notes that when assessing the effective price of carbon one must account for the per tonne rate applied to covered emissions and also make note of what percentage of carbon emissions are covered by the particular pricing policy in the first place.

The Commission's assessment of the effective price of carbon after adjusting for the proportion of covered emissions in each jurisdiction – which they refer to as the Coverage-Weighted Carbon Price – is as follows:

Coverage-Weighted Carbon Price -
Provincial Carbon Pricing Initiative (2020 estimate)

BC

Alberta

Ontario

Quebec

Marginal Carbon Price

$30

$30

$19.40

$19.40

Coverage

70%

78%

82%

85%

Coverage-Weighted Carbon Price

$21

$23.40

$15.91

$16.49

Sensibly, the Commission cautions that there are imperfections with any method of assessing the effective price of carbon, including their own. Still, having the ability to look at carbon prices using a variety of analytical approaches adds texture and perspective to any evaluation of carbon pricing. The Commission specifically states that "even imperfect metrics can be useful and can aid in developing smart climate policy." With climate pricing initiatives and the associated methodology for assessing them still in their infancy, governments are encouraged to take note of the Commission’s report when forming their own climate policy.