School of Policy Studies

School of Policy Studies
School of Policy Studies

Carbon price vs. regulations: The better choice is clear

Don Drummond is the Stauffer-Dunning Fellow in the School of Policy Studies at Queen’s University and a member of the Ecofiscal Commission.
Nancy Olewiler is a professor in the School of Public Policy at Simon Fraser University and a member of the Ecofiscal Commission.
Christopher Ragan is an associate professor of economics at McGill University and Chairs the Ecofiscal Commission.

Special to the Globe and Mail -​ 
October 5, 2016

The past few years have seen a consensus emerging about carbon pricing. Four provinces have or will soon have carbon prices, a fifth is actively considering it and the federal government is now poised to fill in the existing gaps. Given this alignment of views, perhaps it is to be expected that something would suddenly appear to spoil the policy party.

Recently, newspapers across the country noticed a report from Simon Fraser University economist Mark Jaccard, a smart commentator on Canada’s climate policy. The stories suggested that Prof. Jaccard was a rebel, boldly bucking the carbon-pricing trend, suggesting instead that direct government regulations offered a more practical approach – despite their higher economic costs.

As often happens, however, the real story is less exciting than the headlines. Even though Prof. Jaccard called out the Ecofiscal Commission when making his pro-regulation arguments, the truth is that our agreements far outweigh our disagreements. To begin, we agree that climate change is a serious issue and that reducing greenhouse gas emissions is a sensible objective of public policy.

Second, we agree that the lowest-cost approach for reducing emissions is with carbon pricing. Either economy-wide carbon taxes or cap-and-trade systems reduce GHG emissions at a lower overall economic cost than “command-and-control” government regulations.

Third, we agree that carbon prices cannot do it all; there is a case for “complementary” regulations. The emissions from some economic sectors are difficult to incorporate into a carbon price, and some existing market features weaken the effect of carbon pricing.

On a related point, we also agree that some regulations are bad and should not be used: In particular, inflexible regulations that dictate specific technologies or methods for reducing emissions constrain private choice and increase costs.

Finally, we agree that in order to drive the kinds of emissions cuts deemed necessary over the next half-century, carbon prices will need to rise significantly, likely to $100 a tonne and even higher.

This seems like a whole lot of agreement – and it is. So where’s the problem?

In Prof. Jaccard’s opinion, the problem lies with the politics. He argues that no sane government would ever consider raising its carbon price to these required levels because incensed voters would kick them out of office at the next election. Is he right?

At the Ecofiscal Commission, we do our best to stick to the economic arguments that decision-makers need to do their job. That being said, Prof. Jaccard’s political assessment brings to mind a few important counterpoints.

First, even though he agrees that government regulations are more costly than carbon prices, he doesn’t see this as much of a problem. We disagree. The Canadian economy is currently facing considerable headwinds that are slowing economic growth. We therefore think it is incumbent on governments to seek out the lowest-cost approach to meeting our environmental objectives. To advocate a regulation-heavy approach that we all agree involves higher economic costs strikes us as undesirable.

Second, his argument about political feasibility was on much firmer ground 10 years ago, before any Canadian jurisdiction had implemented an economy-wide carbon price. But the policy landscape has evolved considerably since then. Most of Canada’s GHG emissions will soon be covered by a carbon price.

Third, the claim that governments cannot survive significant increases in a carbon price ignores the crucial point of what they do with the revenue. They could choose to follow British Columbia’s lead and make their carbon-pricing systems “revenue-neutral,” using the carbon revenue to reduce income taxes. Good carbon pricing isn’t actually about bigger government – it’s also about government that chooses to collect its revenues in smarter ways.

So, what is the bottom line? Carbon pricing offers the lowest-cost approach to reducing GHG emissions; there is remarkable agreement on this point. And nobody should believe the claims of its political infeasibility. Whenever people say, “We can’t have a carbon price that high!” try asking them, “Why can’t we have income taxes that low?”