SP's Alex Wood delivered this presentation on May 5, 2015 at the "Climate Change & Carbon Pricing: What You Need To Know" webinar by CBSR.

1. Carbon pricing and
climate policy
Alexander Wood
Senior Director, Policy and Markets
awood@sustainableprosperity.ca
613.878.7189
Twitter: @ALEXatSP

2. What is Sustainable Prosperity?
 Basic model is to take
research and translate it
for policy and business
audiences
2
 Very focused on economic case
for green economy
 Green economy think-
tank/do-tank based at
University of Ottawa

3. Climate policy –> why?
Environmental benefits of acting have been clearly established
by IPCC in successive assessment reports
Economic benefits are becoming increasingly clear:
 Avoided costs of direct climate change impacts ($55billion/yr.
by 2050 – NRTEE)
 Host of other economic benefits related to indirect impacts
(health care, agricultural productivity, etc.)
 Emerging markets for clean energy/low-carbon solutions

4. Carbon pricing - first principles
Why is pricing carbon consider “first best” climate policy?
 Because it directly address market failure at the core of
climate change
 Because it provides a transparent policy signal that directly
affects economic decision-making and behaviour
What does “market failure” refer to?
 Basically, the difference between the private price of an
activity and its social cost
 There is an optimal “social cost of carbon” that reflects the
marginal cost of the damage done to society by a tonne of
CO2
 Estimated SCC in Canada: $28.50 (in 2009$)

5. Estimates of the social cost of carbon (2007)

6. Carbon pricing - first principles
The case for carbon pricing rests on two factors:
 Its environmental effectiveness
 Its economic efficiency
A well-designed carbon pricing policy delivers emission
reductions at considerably lower price than command-and-
control regulation
The mechanism that creates this outcome is the flexibility the
policy allows for in response, and the incentive to innovation
(and how that lowers the cost of emission reductions) it
provides.

7. Carbon pricing – policy options
Three basic forms of carbon pricing – each in existence somewhere in Canada:
 A carbon tax (BC) sets a fixed price per unit of CO2e emitted. It can be levied
“upstream” at the point of production of the fossil fuel (based on its emissions
intensity), or downstream at the point of sale for the product (based on per
unit emissions)
 A cap-and-trade system (Quebec, and soon Ontario) caps total emissions for
regulated entities. Most commonly, the system issues a fixed number of
allowances, tied to the emissions cap, and requires sources to submit
allowances for each tonne emitted.The allowances can be traded among
entities, which will establish a market price
 A baseline and credit system (Alberta) establishes a target emissions rate per
unit of output or input, rather than an absolute limit on emissions. Sources
emitting below the target rate earn credits.Those emitting above the target
must buy credits equal to the volume by which they exceed the target.
Trading between these two groups will establish a price for those credits.
Can also have hybrid approaches, pulling in different advantages from each

9. Carbon pricing – policy options
Each pricing option has distinct advantages (and
disadvantages):
 Carbon tax provides price certainty (but not certainty in
physical GHG reductions)
 Cap-and-trade provides certainty in GHG reductions, but not
price certainty
 Baseline/credit does not provide certainty in absolute
reductions (i.e. if relative rate of reduction is offset in
absolute growth) or price. It does help manage emissions
from rapidly growing sectors

10. Carbon pricing – policy options
In practice, tendency is toward hybrid systems:
 Alberta baseline/credit system has a price floor (providing
some price certainty) through $15/t fee to CCMEC
 Quebec/California (and soon Ontario) have price collars
 On the downside, there is a floor price below which allowances will
not be auctioned. That price is announced and escalates over time
 On the upside, there is a price ceiling (again, announced). Above this
price, allowances kept in reserve will be released into the market
 The reserve is composed of allowances taken from the cap limit. This
preserves the integrity of the cap.

11. Carbon pricing – design considerations
Effectiveness and efficiency of a carbon pricing mechanism are
determined by following policy design considerations:
 Stringency, which refers to the level of change the policy
requires for those entities it covers.
 Generally speaking, a larger cap or a higher tax mean greater
stringency
 Coverage refers to what is subject to the carbon price. This
includes sectors and entities, but also the actual GHGs
 The extent of coverage is a major factor in the cost-effectiveness of
the policy.Greater coverage = broader burden/cost sharing.
 Revenue recycling refers to choices made in the (potentially
considerable) revenues accrued by governments from tax or
cap-and-trade auctions.

12. Carbon pricing – design considerations
Other policy design considerations are:
 Competitiveness impacts (particularly important for sectors
that are considered Energy Intensive-Trade Exposed)
 Distributional impacts (is carbon pricing regressive?)
 Jurisdictional linkages (are there gains from trade?)
 Offsets (should they be allowed? From which sectors?)
 Administrative issues

13. Carbon pricing in practice – the BC carbon tax
BC brought in a carbon tax in 2008,
and raised it by $5/t every year until
2012. Now at $30/t.
Revenue from tax has been used to
offset reductions in corporate
income and personal income tax
making the tax “revenue neutral”
Impacts have been positive, from
both economic and environmental
perspective
 BC emissions from those fuels
covered by the tax have been
reduced by 16%, while the rest of
Canada’s have risen by 3% over
the same time period
 BC’s economy (measure d by
growth in GDP) has kept pace
with the rest of Canada

14. Carbon pricing in practice – the QC/ON/CALI system
California and Quebec both
brought in cap-and-trade
systems in 2013. In both cases,
the systems initially covered the
power and industrial sectors
Starting January 1st, 2015
coverage has been extended to
the fuel distribution sector
Also, since 2014 the two systems
have been linked and since
November 2014 the systems
have held joint auctions
Ontario announced last month
that they would be joining this
system

15. Beyond carbon pricing – climate policy
If carbon pricing is a “necessary” policy for addressing climate
change, it should not be seen as “sufficient” to doing so.
Other policy tools may be required to secure needed GHG
reductions and sought-after economic benefits of climate
action:
 Standards and regulations for those activities for which
carbon price does not provide sufficient incentive
 Public support for those “public good”-type of investment
that yields both emission reductions and economic benefits
(i.e. infrastructure, R&D)

16. Beyond carbon pricing – climate policy
Ultimately, addressing climate change requires proper
integration of the issue into almost every aspect of policy and
business decision making. Some examples:
 Tax policy
 Energy
 Transportation
 Buildings and urban form

17. Roadmap to a greener economy