Options and Trade-offs in Recycling Carbon Pricing Revenues in Canada

1. 1
Choose Wisely:
Options and Trade-offs in Recycling Carbon Pricing Revenues
CANADA

2. 2
Overview
1. The issue: recycling revenue
2. The options: approaches to recycling revenue
3. The trade-offs:
• Household fairness
• Business competitiveness
• Economic growth
• GHG emissions
• Public acceptability
4. The various contexts: potential provincial priorities
5. The upshot: recommendations for governments

3. The importance of revenue recycling
1. Addressing challenges from carbon pricing
– Household fairness
– Business competitiveness (“leakage”)
2. Improving broader performance
– Environmental outcomes: GHG emissions reductions
– Economic outcomes: GDP growth
1. The issue
3

4. 4
Firms’ carbon costs
Households’ direct
carbon costs
Households’
indirect carbon
costs
Pass-through via
prices
Out of province
consumers’
indirect carbon
costs
Pass-through
via income
Pass-through via
export prices
Carbon Pricing Policy
Price on GHG
emissions
Price on GHG
emissions

5. Household fairness
1. The issue
5
Several separate effects on household budgets
from carbon pricing (before revenue recycling):
1. Prices rise — direct and indirect emissions
2. Incomes fall — employment and investment

6. Household fairness
1. The issue
6

7. 7
1. The issue
Competitiveness Pressures: British Columbia

8. 8
1. The issue
Competitiveness Pressures: Alberta

9. 9
Competitiveness Pressures: Ontario
1. The issue

10. 10
Competitiveness Pressures: Nova Scotia
1. The issue

11. Competitiveness / Leakage
1. The issue
11

12. The scale of potential carbon revenue
1. The issue
12
0%
2%
4%
6%
8%
10%
12%
14%
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
BC AB SK MB ON QC NS NB PEI NL
Shareoftotalprovincialrevenue
(2013-2014budget)
Annualrevenue($millions)
basedon2013emissions
Total provincial government revenue ($ millions)
Carbon revenue as a share of total revenues in 2013-14

13. Six options for revenue recycling:
2. The options
13
1. Transferring revenue to households
2. Reducing income taxes
3. Investing in infrastructure
4. Investing in clean technology
5. Reducing government debt
6. Providing transitional support to industry

14. Transfers to households
2. The options
14
Advantages Disadvantages
• Can address
fairness issues
— highly
progressive
• Highly
transparent
• Helps to build
support
• Forgone
revenue — no
economic or
environmental
benefits

15. Income-tax cuts
(personal income taxes and corporate income taxes)
2. The options
15
Advantages Disadvantages
• Can improve
economic
growth
• Can increase
“durability” of
policy
• Corporate tax
cuts can
increase
support from
business
• Tax cuts not
highly “visible”;
may not
increase public
support
• Personal tax
cuts may be
regressive

16. Investments in clean technology
2. The options
16
Advantages Disadvantages
• Can drive additional
emissions
reductions
• Can reduce cost of
long-term
reductions,
enabling more cost-
effective policy
• Could increase
public support
• Challenging to
implement well
(picking winners vs.
broad support)

17. Investments in public infrastructure
2. The options
17
Advantages Disadvantages
• Can improve
longer-term
productivity and
economic growth
• Could drive
additional
emissions
reductions in
some cases (e.g.,
grids, transit, rail)
• Could improve
public support
• Challenging to
differentiate
“additional”
infrastructure
spending due to
carbon revenue
• Economic
benefits depend
on precise
choices and
details of
implementation

18. Reducing government debt
2. The options
18
Advantages Disadvantages
• Addresses costs of
increasing high
debt (in provinces
with this issue)
• Could help avoid
future tax
increases to
service debt
• Improves inter-
generational
fairness
• Very intangible;
unlikely to garner
public support
(except in high-
debt cases)

19. Transitional support to industry
(output-based allocations or tax rebates)
2. The options
19
Advantages Disadvantages
• Can address
competitiveness /
leakage pressures
• Can give industry
more time to
reduce carbon
costs
• Can build support
in business
community
• Can increase
overall costs
• Can decrease
environmental
effectiveness

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Comparing options side-by-side
3. The trade-offs
Implications of recycling choices Analytical approach
Competitiveness impacts
Computable General Equilibrium (CGE)
modelling
GHG impacts
GDP impacts
Household fairness SPSD/M micro-simulation modelling
Public acceptability Opinion polling

21. 21
Implications for household fairness
3. The trade-offs
Province
Percentage of carbon-pricing revenues required
to fully offset carbon costs for households in the:
First quintile First & second quintile
Alberta 3.2 % 9.5 %
Manitoba 4.4 % 12.6 %
Ontario 3.9 % 11.6 %
Nova Scotia 4.0 % 11.8 %

22. 22
CGE modelling scenarios
Scenario Stringency Revenue Recycling
1
In every province,
carbon is priced at
the same,
increasing rate:
2015-2020: $30
2021-2026: $50
2027-2032: $100
Transfers to households
2 Reductions in provincial CIT
3 Reductions in provincial PIT
4
Transitional support to industry
(Output-based allocations / tax rebates)
5
Low-carbon technology investments
(Investments in renewable electricity, energy
efficiency, targeted technologies)
3. The trade-offs

23. Competitiveness implications
23
3. The trade-offs

24. Implications for GHG emissions
3. The trade-offs

25. 25
Implications for economic growth
3. The trade-offs

26. 26
Implications for public acceptability
3.The trade-offs

27. 27
Summary of trade-offs
3. The trade-offs

28. 28
The BC Context:
4. The contexts
• 3rd lowest debt-to-GDP of Canadian provinces in 2014/15
• Economic growth well above Canadian provincial average
• Relatively low tax rates
• Lowest corporate tax rates (large corporations)
• Lowest personal income tax rate for first income bracket
• 3rd lowest per-capita GHG emissions by province
• Clean electricity – 91% of generation capacity from hydro
• Very aggressive target for GHG reductions
• Limited exposure to competitiveness pressures
• 2% of GDP and 22% of GHGs are from emissions-intensive, trade-exposed sectors
• Recent infrastructure spending for 2010 Olympics and Pacific Gateway
• Carbon tax since 2008; now at $30 / tonne

29. 29
The Alberta Context:
4. The contexts
• Lowest debt-to-GDP of Canadian provinces in 2014/15
• Economic growth strongly affected by price of oil
• 18% of provincial GDP and 48% of GHGs from emissions-intensive, trade-exposed
sectors
• 2nd highest per-capita emissions of all provinces
• From 1990 – 2014, contributed 63% of growth in national GHGs
• Coal (43%) and natural gas (40%) main sources of electricity generation
• Young infrastructure, but growing demands
• New climate policy in 2017:
• Carbon tax on combustion emissions
• Flexible standard with output-based allocations for large emitters
• Price rising to $30 / tonne by 2018 (and then beyond)
• Support for renewable electricity, coal phase-out

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The Ontario Context:
4. The contexts
• 2nd lowest per-capita emissions of all provinces
• Low-carbon electricity
• Diversified economy
• But ~ ¼ of Canadian GHG emissions overall
• Moderate existing income-tax rates
• Relatively robust clean-technology sector
• Youngest infrastructure, but fiscal constraints
• Relatively high levels of public debt (~ 40% of GDP)

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The Québec Context:
4. The contexts
• Largest provincial net debt-to-GDP ratio in Canada (50% )
• High income taxes relative to other provinces
• Lowest per-capita emissions of all provinces
• 95% of electricity generated from hydro
• Only 1% of provincial GDP and 17% of GHGs from emissions-intensive,
trade-exposed sectors
• 36% of Canadian clean energy investments in 2014 were in Quebec
• Current policy: cap-and-trade system linked with California, Ontario

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The Nova Scotia Context:
4. The contexts
• Economic growth low relative to other provinces
• Declining population, particularly working-aged individuals
• 7th highest debt-to-GDP ratio, 4th highest debt-per-capita
• High marginal income tax rates relative to other provinces
• Nearly half of provincial GHG emissions come from electricity (coal = 60% of
generation) and heat generation
• 4th highest per-capita emissions by province
• 2% of provincial GDP and 36% of GHGs from emissions-intensive and trade-
exposed sectors (though often these sectors are single facilities)
• Existing policy:
• Hard cap on GHGs from electricity generation: 25% below 2010 levels by 2020
• Renewable portfolio standard: 40% of generation from renewables by 2020

33. 33
Comparing provincial contexts
4. The contexts

34. Conclusions
• Carbon pricing is the way forward for Canada, but it
generates two clear challenges for:
1) Household fairness
2) Business competitiveness
• Revenue recycling can address both challenges
• Revenue recycling can also support broader economic and
environmental objectives
• Different provincial contexts lead to different priorities for
revenue recycling
5. The upshot

35. Recommendations
1. Governments should use revenue recycling to address
fairness and competitiveness concerns.
2. Governments should clearly define their objectives for
revenue recycling.
3. Governments should use a portfolio of approaches to
revenue recycling.
4. Revenue recycling priorities should be adjusted over
time.
5. The upshot

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Extra Slides

37. 37
More on competitiveness

38. 38
Fairness with full dividends

39. 39
Fairness and income tax cuts