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The cost of carbon pricing in Ontario and Alberta

Claims that carbon pricing will lead to skyrocketing price increases throughout the economy are misplaced at best—and misleading at worst


 
Premier Rachel Notley unveils Alberta's climate strategy in Edmonton, Alberta, on Sunday, November 22, 2015. The new plan will include carbon tax and a cap on oilseeds emissions among other strategies. (Amber Bracken/CP)

Premier Rachel Notley unveils Alberta’s climate strategy in Edmonton, Alberta, on Nov. 22, 2015. The new plan will include carbon tax and a cap on oilseeds emissions among other strategies. (Amber Bracken/CP)

On January 1, Ontario and Alberta adopted broad-based carbon pricing policies. Alberta opted for a carbon tax while Ontario chose a cap-and-trade system. Alberta’s carbon tax is $20/t of carbon dioxide in 2017, while permits in Ontario’s cap and trade system currently trade at about $18/t of carbon dioxide. The idea behind these policies is to better align the prices of goods that cause greenhouse gas emissions with the social costs of producing those goods. The expectation is that, as the price of emissions increases, firms and individuals will emit less. However, many share an important concern that the policies will increase prices of goods for households, and reduce their standard of living.

Broadly, the policies affect prices in two main ways. First, they directly increase the price of gasoline, natural gas, and similar goods that are themselves a direct source of emissions. Second, the resulting increases in trucking, heating, and other input costs will propagate throughout the economy, indirectly slightly increasing the price of (almost) everything we buy. In this post, we provide estimates for these costs, discuss how such estimates are made, and explore some empirical evidence for recent policy changes in B.C. (their carbon tax) and Newfoundland (a significant gasoline tax increase).

Overall, for the average Alberta and Ontario household in 2017, direct costs will likely be on the order of $150 to $200 annually and indirect costs will add an additional $80 to $100 or so. To see how we came up with these figures, let’s start with something relatively simple: the direct costs.

Direct costs

Fossil fuels contain a known amount of carbon, so it is relatively straightforward to predict how much the prices of these goods will change when a carbon price is introduced.

Each litre of gasoline produces about 2.2kg of carbon dioxide when burned in an engine, and each gigajoule of natural gas produces about 50kg of carbon dioxide. (For emissions factors, see Table 1 of this.) With these, we quantify the effect of a $20/t carbon price on these two fuel sources. For a typical household that heats with natural gas, gas bills will increase by about $100 per year, and gasoline expenditures will increase by about $90 per year.

table

We can see an example of these price changes in action in two provinces. B.C. currently has a $30 per tonne carbon tax, so we can simply look up the effect of this on prices: for natural gas it’s $1.49/GJ; for gasoline, 6.7 cents/L.

In Quebec, which currently has a cap-and-trade system, things aren’t so simple. A cap-and-trade system does not explicitly tax gasoline like a carbon tax does. Instead, the price is reflected in a higher wholesale price that retail stations must pay. We can illustrate by looking at Quebec around January 1, 2015—when the cap-and-trade system first applied to fuel distributors there.

QCgas

For natural gas, Quebec consumers pay $0.93/GJ to cover carbon emissions in natural gas. That’s roughly equivalent to just over $18 per tonne of GHGs—the current prevailing permit price. Depending on the permit price, the cost of gasoline and natural gas can vary over time. So, based on these calculations, and the experience in B.C. and Quebec, we know how much prices will change in Alberta and Ontario.

How much will this cost a typical household? That depends on how much fuel is consumed. With data on average gasoline and natural gas use, we construct estimates of the annual total direct costs below. (For details, see this.)

direct_costs

The average household in Alberta faces just over $200 in new direct costs starting at the beginning of this year, while an average household in Ontario will pay about $150. The higher costs in Alberta are due to a combination of a higher carbon price and greater fuel use.

Indirect costs in our interconnected economy

While direct costs are most obvious, other prices in the economy will also change when these policies are implemented. Carbon pricing will raise the price of many other goods and services throughout the economy. Few concerns surrounding carbon pricing are as broadly shared and as poorly understood as this. To help inform the debate, we hope to carefully explain and quantify these costs below.

Our economy is a highly interconnected and complex web of activity. Output from any one sector is used as an input by many others. To help build intuition, we visualize these interconnections with the latest data from Statistics Canada. Below, each sector of Canada’s economy is a circle, and what they buy from each other are the lines. The bigger the circle, the larger the sector, and the thicker the line, the more flows between them. We further arrange the sectors according to their importance as input suppliers. At the center are sectors that are critically important suppliers to almost every other sector.

GIF_trans_house

Not surprisingly, we see Wholesale and Retail Trade are both large and central—cost changes in those sectors will therefore quickly cascade throughout the rest of the economy. They also serve as conduits that propagate cost changes in one area of the economy through to another, even if the two are not themselves directly connected. We illustrate the path of two shocks, one to residential construction (for fun, given concern around Canada’s housing market) and another to truck transport (more relevant for this post).

We explained earlier how carbon pricing increases the price of goods like gasoline (and diesel). These increased fuel costs may cause truckers to raise their price; for example Alberta’s truckers have already announced a 1 per cent price increase in part to offset increased fuel costs. This increased trucking cost indirectly affects sectors that use trucking as an input. For example, for each dollar we spend on food, roughly four cents goes to transportation. So, 1 per cent higher transport costs will directly raise food costs by about 0.04 per cent. Trucking cost increases also cascade through to other sectors and this feeds back upon itself through the economy’s web of interconnections. Adding this all up, food costs rise nearly 0.1 per cent for each 1 per cent increase in transport costs. (For math, see this.)

So, back to carbon pricing: How large will the indirect costs be? Conveniently, Statistics Canada maintains a social policy simulation model known as SPSM/D (details here). It combines tax details, household spending data, and a model featuring rich input-output relationships in Canada’s economy. Even better, the latest version incorporates Alberta’s upcoming carbon tax, making our job easy. Here’s the result.

indirect_costs

Overall, the average household in Alberta may face just over $100 in indirect costs in 2017, rising to nearly $160 by 2018. Ontario faces lower indirect costs due primarily to its lower carbon price.

Of course, these are model-based estimates with important shortcomings. For example, the model assumes that households and businesses continue to consume the same basket of goods before and after the policy change, and it imposes the strong assumption that all cost changes are passed forward to consumers as price changes. Nevertheless it provides useful guidance on the likely size of indirect cost impacts, though they should be viewed as upper bounds.

Beyond models, two real-world examples are useful to see how the policies may play out in practice. Both suggest the resulting indirect costs will be difficult to see—either in our day-to-day lives or in the data (absent more sophisticated analysis).

Example 1: The Newfoundland Gas Tax Increase

Newfoundland provides a unique opportunity to study the effect of a large gasoline tax change on the price of goods and services elsewhere in the economy. Effective June 2, 2016, Newfoundland and Labrador raised its gasoline excise tax from 16.5 cents per litre to 33—a 16.5 cent/L increase.

NLgasprices

The SPSM/D model from Statistics Canada predicts that non-gasoline prices in the province should rise by roughly 0.14 per cent. A 0.14 per cent price increase is sufficiently small that it may be hard to see in the data. But let’s look anyway. With Statistics Canada’s consumer price data, we look at prices before and after the tax increase, relative to the rest of the country. Below, we see Newfoundland saw no price increase relative to the rest of Canada in the months following the large gas tax increase. (We use SPSM/D to correct for the July 1 HST increase.)

NLgas

So, the effect of a large 16.5 cent per litre increase in gas prices is hard to see on the price of goods elsewhere in the economy. That doesn’t imply there wasn’t an effect, as we don’t know from this analysis how prices would have otherwise evolved in Newfoundland, but it is illustrative nonetheless.

Example 2: B.C.’s Carbon Tax

Next, consider B.C.’s carbon tax. Beginning in July 2008 at $10 per tonne, and rising by $5 each subsequent July until reaching $30/t by 2012, it provides an opportunity to explore the effect of broad-based carbon pricing.

Below, we plot the average change in consumer prices for all items excluding energy (gasoline, natural gas, electricity, etc.) for the months surrounding each carbon tax increase. We then average those changes across years to plot the overall effect.

BCprices

This interactive graphic shows the change in consumer prices for all years, individually reported.

Overall, B.C. systematically has lower consumer price increases than the rest of Canada in the months following carbon tax increases. Again, this doesn’t prove the carbon tax didn’t increases prices, as many other factors are also at play and the modest price increases might have been even smaller but for the carbon tax. But what it does show is that the dramatic price increases that some fear carbon pricing will cause are unlikely to be salient for most households.

In these early days of carbon pricing, detailed empirical analysis is necessarily limited. Our brief analysis shows that the direct effect of carbon prices will be about $150 (Ontario) to $200 (Alberta) per year for an average household. The indirect effect on carbon pricing on the goods and services we buy will be on the order of $100 for the typical household in 2017. Of course, even modest cost increases may be challenging for many households but rebates can effectively mitigate these concerns. In Alberta, lump-sum rebates will be sufficient to ensure low- and middle-income households aren’t (on average) made worse-off by carbon taxes. Ontario meanwhile has no explicit support program, but has a variety of other initiatives.

rebate_figure

While more detailed analysis is certainly needed, many researchers will take close looks at the experiences in Alberta, Ontario, and other provinces in the months and years to come. In the meantime, heated political rhetoric that suggests carbon pricing will lead to skyrocketing price increases throughout the economy is misplaced at best and misleading at worst. Climate change, and policies to cost-effectively lower emissions, is such a critical policy area that cooler heads will hopefully prevail.

Nicholas Rivers is an Associate Professor at the University of Ottawa. Trevor Tombe is an Assistant Professor at the University of Calgary and Research Fellow at the School of Public Policy.


 

The cost of carbon pricing in Ontario and Alberta

  1. The professor has produced some wonderful graphs which amount to the following: it is no big deal if every one of Canada’s 35 million residents pay $150, on average for the specious benefit of reducing carbon in Canada while China and India continue belching out carbon at a phenomenal rate. The professor sells this plan like a cable company sells a monthly service plan. It is “only” $150 per person. The total of over $5b is a bit harder to swallow. How many poor and homeless could be helped with this money, for example? All of this money will be spent based on the religious assumptions of those in the scientific community that additional carbon is bad or that a carbon tax will have any impact on global warming – assuming it is real. Big assumption.

    • First clean up your own backyard first. Second China just announced they will be spending $360 billion on renewable energy over then next 4 years. Third the US is installed over 17 GW’s of solar last yeasr alone which will produce clean energy for 30 years. As well 29 US States have Carbon Taxes called REC’s, Renewable Energy Credits, that are bought and sold and retired by gas and coal plants to meet their local mandates. Canada is installing almost near zero for solar in all of 2016. Germany just produced 20% more power then Ontario does from all its nukes, gas plants, and hydro, from wind and solar alone.

      • https://www.thestar.com/news/world/2016/11/24/scaffolding-collapse-at-china-power-plant-kills-at-least-67.html

        Wow! Where to start. Let’s start with China’s claims about planned expenditures are renewable energy over the next four years. Can you explain why at least 67 people died in when the scaffolding collapsed during the building of a brand new coal-fired electrical plant? Why would a country that is phasing out coal fired electricity be building new plants? Next is Obama and the US. The US has become under his tutelage, the largest oil producer in the world. Can you explain Standing Rock? Don’t worry, Ontario is selling its left over solar from expensive contracts to the US on the cheap, while some of their own citizens choose between electricity and putting food on the table. The US discovered billions of barrels of oil under Texas shale and you are trying to tell us they won’t frac those? What about the US oilsands in Utah? Will they be closing that down? Germany is also mining coal. The green alternatives have proven to be too expensive. Just ask Ms. Wynne what they cost.

  2. This is a wonderful analysis of something that has no reason to exist. Why is Canada taxing carbon? It’s because we signed the Paris Accord which is a UN feel-good initiative that demonstrates our intent to do something about climate change. It’s going to cost us billions of dollars and those dollars will all go into federal and provincial coffers. It is a tax disguised as noble endeavour but it’s still just a tax. In Canada, in particular, we don’t need to toss our money at this boondoggle. We aren’t a major polluter. If your government, whether provincial or federal, bought into this nonsense, kick them out. They haven’t done their homework and they need a time-out.

    • First clean up your own backyard first. Second China just announced they will be spending $360 billion on renewable energy over then next 4 years. Third the US is installed over 17 GW’s of solar last yeasr alone which will produce clean energy for 30 years. As well 29 US States have Carbon Taxes called REC’s, Renewable Energy Credits, that are bought and sold and retired by gas and coal plants to meet their local mandates. Canada is installing almost near zero for solar in all of 2016. Germany just produced 20% more power then Ontario does from all its nukes, gas plants, and hydro, from wind and solar alone.

  3. What isn’t shown is how this will even reduce fossil fuel usage. Most analysts agree that the tax needs to be painful before it even has an impact on our lifestyle. So either this tax is painful and reduces or fuel use (with no obvious benefit) or it isn’t and is just a tax grab. I understand this approach in Alberta where there is no PST but the heavily overspent provincial government desperately needs one. Same in Ontario.
    So the carbon tax is their way of sneaking in a provincial tax without having to call it one. Either way it’s all a bunch of BS.

    • Alberta at least has the excuse of no PST, but Ontario doesn’t (they have the provincial portion of the HST).

    • Right on. But then a carbon tax is a lame political solution in order to avoid somewhat more proactive carbon trading. In fossil fuel producer provinces this creates the impression of doing something without the appearance of supporting non fossil fuel alternatives. It’s win-win for politicians and their friends; as John Q Public should know “if you think they’re looking out for you, you ain’t even #2”.

  4. PLEASE lets call this what it is….an Energy tax. All the various “Liberal” governments NEED your cash to pay off their friends

  5. My experience has been that the general population does not really want to do anything meaningful to reduce or stop global warming becuase it is too inconvenient for them. Many people just don’t give a damn and or don’t “believe” in global warming as if it was something that requires belief to exist or not. People are crying about this is too expensive, we can’t afford it etc. etc. etc. and this will be the final straw for the general population and will likely elect another Conservative Government as Wynn has become Ontario’s favorite politician to hate. It is very sad that the majority of Canadians don’t think our melting Arctic, the extinction and endangerment of whole species of wildlife, acidification, warming and rise of the Oceans are worth enough to protect. Many have nothing but contempt of any efforts to do anything about something that they feel is either not real or just too much trouble to do anything about. Our civilization is like a car in a skid toward a cliff and in skid control you look where you want to go, not where you are skidding to. Most of the people in the car are arguing about what music to play on the radio.

    • Exactly what environmental benefit will Canadians get for $5 BILLION a year?

      • First soon as you raise the price of Gas and oil people use less. BC saw 17% drop. We waist so much power in Canada it should be easy to cut back.

        • I live in BC and have no issue with BC’s carbon tax – AFAICT it’s the only really honest, efficient, and sensible carbon policy in the country.

          Having said that, I wouldn’t mind seeing a citation for that 17% drop.

          TIA

        • A carbon tax is fine IF and the premier wise words to walk and take transit are great, as are our PM’s dire predictions about what will happen if we don’t change our way of life and be more cognizant of how we care for our planet. Where it all falls apart is when the premier of Alberta is chauffeured around in gas-guzzling SUV and the PM insists on taking emission intensive holidays with his family to exotic locations with regularity. Suddenly, the alarmist talk seems like hyperbole and people start to wonder what the true story is because surely our leaders would walk the talk and be role models were the situation so dire.

  6. This conversation would be unnecessary if Alberta and Ontario had done what BC did and made their carbon taxes/pricing revenue neutral – i.e., every dollar raised in carbon tax/pricing results in a one dollar reduction in other taxes. It’s difficult to argue that revenue neutral carbon pricing/tax is a tax grab (which it appears to be in Ontario and Alberta).

    • It is a myth that BC’s carbon tax is revenue neutral. Anybody believing it, and this is particularly true for those who live in BC, have got their brain at best stuck in neutral and at worst it is ceased working, period. All one has to do is fill his/her own tax return to realize that the carbon tax being revenue neutral is a poorly disguised fiction. The only people loving it are the government.

  7. A tax is a tax is a tax. It would not make any difference to the planet if everyone in Canada got a terrible disease and passed away, therefore not producing any carbon. As long as other huge countries continue to pollute like they do, what Canada does makes little difference. This is just a money grab. Cap and trade is even worse, as it rewards some countries at the cost of our country. Let us look after our own population and stop this nonsense about how terrible carbon is.

    • Give it a rest! Canadians are among the worst per-capita energy users in the world – we can’t even compare to California. The fact is that energy costs money and our profligate energy use is a substantial drain on our economy making us less competitive in global markets. Kvetching about the cost of energy we waste hardly makes us look good while pointing fingers is childish. As for international carbon certificate trading, every good child deserves fudge!

      • Actually. California along with Quebec are our official trading partners in C02 credits. It’s actually one of the big laughables in this whole scheme. Ontario can trade 100 credits with California and under the current set of rules it will be double counted. Both Ontario and California will have reduced C02 by 200 units. The general public are fools believing this scheme.

  8. What an infinitesimally small financial burden placed on the taxpayers in Ontario and Alberta in order to prevent the certain imminent annihilation of planet Earth due to climate change!!
    What a bargain!!
    What’s a few extra dollars spent on such a noble cause?!
    We should all rejoice at our good fortune.
    Hallelujah.

    • LOL Eleanor, You live in a world of Unicorns and rainbows. The cap and trade scheme is nothing but value signaling by our Liberal elites trying to establish their “progressive” credentials no matter what the cost to Canadians who do not get guaranteed indexed pensions. Exactly what environmental benefit will Canadians get for $5 BILLION a year?

    • If there was ironclad proof that climate change was going to destroy the planet, and that Ontario and Alberta’s carbon pricing schemes would prevent it, nobody would be begrudging $200 or $300 a year. Heck, people would be lining up to pay more.

      But that’s not the case, is it? Even if both schemes work as intended, they’d hardly make a dent at the global level. It’s physically impossible for modest CO2 reductions by 2 Canadian provinces to “save the planet”.

    • https://www.thestar.com/news/world/2016/11/24/scaffolding-collapse-at-china-power-plant-kills-at-least-67.html

      Eleanor, if there is threat of imminent annihilation then what is China doing building new coal-fired electrical plants and what is our Prime Minister doing flying off on a jet plane that carries on he and his family on a vacation to an exotic location owned by a guy who has his own yacht? Shouldn’t the premiers and MPs all be in electrical cars instead of SUV’s? I love it how Notley told us to walk to work and take transit and she is riding around spew emissions in her govt provided, chauffeured SUV. Great role models we have as leaders in this green conversion.

  9. How has financialization of energy worked in Liberal Ontario under McGuinty/Wynne/Butts?

    Fat 1%’er and Bay Street windfall profits for eternity on alternative energy (and asset stripping of Hydro One via privatization). Massive electricity bills for you and your neighbour. Manufacturers fleeing south.

    Phase II begins with the carbon taxes in whatever form it takes, and Trudeau’s asset stripping privatization bank.

  10. Interesting that a litre of gasoline “produces 2.2kg of carbon dioxide”.. when a litre of gas only weighs 0.74 kg to begin with ….. #MathIsHard for socialists!

    • Cal Amun Nomen….really glad you called them on that assertion which was a pure nonsense easily discernible by any smart high school graduate. It just goes to show that our media will say anything to pull wool over our eyes if it’s for their benefit. They are really bent on supporting the entitled one who is as inept at what they gave him to do as he is ignorant and insincere.

    • Not a fan of Ontario Liberals nor the cap & trade.

      When the fuel burns is not one of the by-products carbon? That carbon atom combines with 2 oxygen atoms — creating CO2. Thus you are effectively creating 3x the mass.

    • More the fool you! CO2 is comprised of carbon and oxygen … duuuh; carbon is only 27.3% of the mass of CO2. Mathematically, 0.74 Kg of carbon would produce 2.74 Kg of CO2; however, gasoline is a hydro-carbon so only the majority of it by weight is carbon and water is another combustion result.

      One of the primary components of gasoline is octane, which is made up of molecules that have eight carbon atoms and 18 hydrogen atoms. Octane weighs 114 g/mole while carbon contributes 96 g/mole which expands to 352 g if completely combusted. As any mathlete can see, octane combusts into 3.08 times in CO2. Yeah science … you not so much.

  11. Instead of shooting ourselves in the foot again with a new strategy to reduce carbon emissions, Canada should take a pragmatic approach to global warming. Research published in Nature, entitled “Global non-linear effect of temperature on economic production” http://www.nature.com/nature/journal/v527/n7577/full/nature15725.html found that Canada along with Russia and Mongolia have the most to gain from global warming. This research concluded that the most beneficial annual temperature for maximum productivity in an economy is 13 degrees Celsius. Canada, Russia and Mongolia are well below this threshold. China, United States, India, Japan, Brazil, Indonesia, Mexico and South Korea are at this threshold or have exceeded it.

    China, United States, EU, India, Russia, Japan, Brazil, Indonesia, Mexico and South Korea produce more than 75 percent of the worlds green house gases. Canada contributes approximately 1.5 percent of the worlds green house gases. If the above-mentioned countries are not able to come to terms on measures to decrease green house gases, then the affects of global warming will cause mass migration to countries least affected by global warming. Those countries are Canada, Russia and the EU.

    China, United States, India, Japan, Brazil, Indonesia and Mexico have the most to gain by replacing fossil fuels with renewable energy such as wind and solar. As they do this, the demand for fossil fuel will decrease. Alberta’s oil sands will become too expensive to develop and will no longer emit as much green house gases as they did in the past. As the earth warms we will use less natural gas to heat our homes and work places. These two examples will be Canada’s greatest contribution to reducing the worlds carbon footprint and have nothing to do with the carbon tax.

    Instead of punishing the Canadian economy with a questionable carbon tax, we should be planning for the consequences of global warming. With a strong economy, we will be able to absorb global warming refugees. With a warmer climate, our agricultural sector has the potential to increase output and may help to replace the food production lost in countries negatively affected by global warming.

    To prove that this new carbon reduction strategy is accomplishing its stated goals of reducing emissions, I would expect that those businesses and individuals that take measures to eliminate their use of fossil fuels will be rewarded from the revenue collected from carbon emitters. Otherwise this is just a new tax.
    For instance, commuters who use electric cars should be able to re-charge their vehicles, in reserved parking spots at GO, TTC or Green P parking lots while they are at work for FREE. According to the cap and trade philosophy the cost of recharging electric cars in public parking lots should be funded by revenue collected from drivers of fossil fuel vehicles. No one wants to be walking across a dark wind swept sub-zero parking lot in January after work, wondering whether or not their electric car has enough juice to get them home that evening. Try to imagine what it would feel like when your electric car runs out of power because you are stuck in a traffic jam caused by a late afternoon snowstorm in Toronto.

    Similarly, those households and businesses that disconnect their natural gas service should be rewarded for decreasing their carbon footprint. I would suggest they be able to sign a long-term contract, possibly ten years, for electricity that puts a CAP on all future rate increases. This contract would be legally binding on all future governments. This would provide some re-assurance to those households or businesses that invest in low carbon technologies such as geo-thermal heating and cooling that their investment will get paid back in 10 years.

    • Genius: what’s the value of Vancouver real-estate already at or below sea level and what’s your estimate of the cost of raising and extending the dikes? Okay, let’s, for the sake of convenience, just zero out the low parts of Halifax and Saint John and/or describe the benefits of treading water.

  12. So far, all of the estimates have been made on a business as usual basis when the intent is to cause a reduction in fossil fuel use; however, given the findings of the article, it appears that this is a rather lame effort given its low impact. The article makes some effort, though incomplete, to differentiate between a carbon tax and carbon trading: trading has a multiplier effect as it transfers wealth from polluters to non-polluting alternatives.
    All of this is rather short-sighted thinking as the opportunity is that the cost of new technologies is rapidly declining to the point where they are out-competing traditional technologies and driving energy costs down. Even advanced fossil fuel technology greatly reduces fossil fuel consumption per unit of useful energy. More importantly, in the panoply of carbon reduction methods, the lowest cost method is conservation and the second is efficiency; some countries are far ahead of us with the development of net zero buildings, appliance efficiency and the like. For the majority of Canadians concerned about electricity bills, we can look at Quebec where 99% renewable generation is concurrent with lowest rates.

  13. Lots of charts and graphs can’t hide the fact that Cap and Trade is a tax grab. Where is the transparency as to the disposition of all those $s?

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