Frank talk on climate change: Politics and policy of pricing carbon

Frank talk: The politics and policy of pricing carbon

Is pricing carbon the future or the past?


Stephen Harper wants to be frank about climate change policy. And, last week, we attempted to look frankly at the questions surrounding the regulation of Canada’s oil and gas sector.

But any frank discussion of climate change policy requires a frank consideration of carbon pricing—the option whereby emitters are able to pay a certain fee or penalty for the emissions they are responsible for.

Munir Sheikh, Canada’s former chief statistician, wondered aloud last week what two prime ministers, Stephen Harper and Australia’s Tony Abbott, understand about taxing carbon that economists do not. Harper and Abbott might want it noted here that they both studied economics in university. And Sheikh is obviously being facetious. But what the two politicians understand is, of course, politics.

Sheikh summons some evidence to suggest that environmental taxes do not quite have apocalyptic results. Similarly, Ross Beaty, Richard Lipsey and Stewart Elgie recently touted the success of British Columbia’s carbon tax. But, on the occasion of Australia repealing its carbon tax, Reihan Salam, one of the leading public commentators of the American right, suggests this week that carbon pricing’s moment may have passed.

In surveying the political and policy landscape, Salam notes the apparently educational example of Stephane Dion’s run as Liberal leader:

What Taylor and Hoyle neglect to mention is that in 2007, Canada’s centre-left Liberal party ran on a domestic agenda centred on a “green tax shift,” and the Liberals were decisively defeated by the Conservatives, who explicitly opposed a carbon tax.

Of course, it’s not really that straightforward. First, it oversimplifies the Dion experience to equate his carbon tax with his defeat. His signature proposal likely didn’t help his cause, but elections are complex matters. His party was underfunded, and he was something less than traditionally charismatic. Maybe a better politician, leading a better campaign at a better moment, could have led his party to a winning election result with a commitment to price carbon.

For that matter, a politician did lead his party to a winning election result with a commitment to price carbon. While they were very much explicitly opposed to a carbon tax, Stephen Harper’s Conservatives committed in 2008 to “work with the provinces and territories and our NAFTA trading partners in the United States and Mexico, at both the national and state levels, to develop and implement a North America-wide cap-and-trade system for greenhouse gases and air pollution, with implementation to occur between 2012 and 2015.” Stephen Harper’s Conservatives had spent the previous two years talking about pricing carbon. They just didn’t call it a carbon tax. Indeed, it wasn’t until 2012 that the Conservatives decided that cap-and-trade was the same thing as a carbon tax.

Now the Conservatives might be said to be against carbon pricing. But then, it has been reported that there was, at least previously, some willingness to expand Alberta’s carbon levy (and when I asked last fall, a levy was not explicitly disqualified as an option).

The situation in Australia is also complicated. As Julia Baird explains in the New York Times this week, former prime minister Julia Gillard’s government implemented a carbon tax after Gillard had explicitly said she would not. That is, generally speaking, a less than optimal way to go about doing anything.

That said, one can imagine some fairly straightforward challenges to running on a carbon tax, or any sort of carbon pricing policy that could be described as a carbon tax. Taxes aren’t generally considered to be super-popular, and faith in the ability of government to conduct itself competently is not particularly abundant.

So, other than being touted by an eloquent champion who hasn’t previously dismissed the policy, how else might a carbon tax proposal be successfully sold?

A new public opinion survey in the United States raises interesting questions about policy design. A majority of respondents opposed the idea of a carbon tax. Fair enough. An overall majority supported a carbon tax, though, when the revenue was said to be returned to the public via rebate cheques—but Republican voters remained opposed. A majority of Republican voters were brought onside when the revenue was committed to research and development.

As Christopher Favelle writes, the sample size for Republican voters is small. But the overall results do mirror the general support for a revenue-neutral carbon tax found in a Canadian survey in 2012. This does get to to a central question of any discussion about putting a price on carbon: What should be done with the revenue that is derived from a carbon tax or cap-and-trade system?

Several months after his government started loudly complaining about the NDP’s Job-Killing Carbon Tax™, Peter Kent ventured that the debate about pricing carbon was lacking in subtlety. Kent argued there was a difference between a tax that went toward general revenues and a tax that went toward a dedicated technology fund:

“There are those carbon taxes where the revenues go into general revenue and do not guarantee the reduction of a single ton of greenhouse gases. [But] Alberta has a tech fund, wherein their revenues are focused only, and in isolation, on technology to achieve further greenhouse gas reductions than the emitters in that province are already able to achieve.”

The revenue question was something that complicated Stephane Dion’s carbon tax proposal: A portion of the revenue would have been directed to lower wage earners for the purposes of reducing poverty.

The Canadian Association of Petroleum Producers stresses the need for technology and innovation, and a technology fund was reportedly part of a proposal from Peter Kent in 2013. Reihan Salam also looks to innovation as a solution; he sees a “technology first” approach as preferable to a carbon tax or cap-and-trade system.

One such technology is carbon capture and storage—essentially a process for storing underground the carbon that would have otherwise been emitted into the air—something the New York Times recently sent a reporter to Estevan, Sask., to investigate. Carbon capture and storage has been a focus for federal and provincial governments here in Canada, with sizable commitments of funding.

But, as the New York Times notes, progress and motivation are of concern:

“There’s no market,” said Edward S. Rubin, a professor of engineering and public policy at Carnegie Mellon University, unless governments impose “a requirement to substantially reduce emissions.”

Announcing funding for a carbon capture and storage project five years ago, Stephen Harper was apparently asked what incentive companies would have to adopt carbon capture and storage. His answer? A price on carbon:

During questioning, Harper was asked what incentives exist for large CO2 emitters to implement the new technology. “There will be compliance mechanisms that set a price on carbon, but, obviously, that will come into effect when we have continental, or perhaps even an international, cap-and-trade regime,” he said.

Three years later, the project Harper was touting was abandoned.

Five years later, the federal and Alberta governments are saying they need to wait for the United States before acting any further in the oil and gas sector.

The NDP, as they did in 2008 and 2011, will propose a cap-and-trade system in their 2015 election platform. Liberal Leader Justin Trudeau has mused vaguely of putting a price on carbon. It’s unclear what, beyond waiting, the Conservatives will commit to.

So maybe a price on carbon is the answer, or part of the answer. As for what economists know and understand about a carbon tax, Jesse Jenkins, a researcher at MIT, argues that they need to understand the “political economy constraints” of pricing carbon. My colleague Andrew Leach made a similar argument last fall: Putting an explicit price on carbon might be the most cost-effective way to reduce greenhouse gas emissions, but the primary concerns in this debate should be the effectiveness of the policy in reducing emissions and the political feasibility of implementing that policy.

Beyond that is a discussion about what, precisely, is the practical difference for voters between a price on carbon and a regulatory system that offers no such option. While cap-and-trade and a carbon tax offer a more explicit cost on emissions, simple regulations of the sort the Harper government has so far imposed on some sectors carry costs for industry and consumers—billions of dollars in costs, in fact. Ultimately, there are two primary considerations that have to be applied to any proposal: how much it will cost and how much it will reduce emissions.