Analysis ‘It’s tricky’: Why there’s no magic number for an effective carbon tax

It’s Day 3 of Alberta’s new carbon tax regime. Are you driving less? Putting on a sweater and turning down the thermostat? Considering solar panels, perhaps?

Because a carbon tax, after all, is supposed to make us change our behaviour and lead less carbon-intensive lives.

But will it work?

Fortunately, there’s 25 years of history to help us answer the question.

Finland introduced the very first carbon tax in 1990. The share of the world’s greenhouse gas emissions that are taxed has since increased to 13 per cent, having roughly tripled in the past decade.

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But evaluating and comparing the impact of different carbon taxes is complicated for several reasons.

First, governments charge very different prices for carbon dioxide emissions. Sweden, for example, charges $150/tonne, while Japan charges just $3/tonne.

Secondly, it’s not always possible to compare the carbon prices of different governments because some charge a tax, others use emissions trading systems and many European countries do both.

And finally, different governments charge different sectors of their economy. B.C.’s carbon tax, for example, covers 70 per cent of CO2 emissions, while Alberta’s will cover 78 per cent by 2020.

With all that in mind, the evidence does suggest it’s easier to change the way people heat their homes than how they get around. The examples also show it’s definitely possible for a government to grow its economy while imposing a carbon tax, but it’s tricky to lower emissions with a growing energy sector.

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Sweden and its $150 tax

Sweden puts the highest price on carbon. It first levied a tax in 1991 and the price has risen to $150/tonne. Swedes pay around $2 for a litre of gas — roughly 35 cents of which is carbon tax — but it hasn’t stopped them from driving. Emissions from the transport sector are down five per cent since 1990.

The major shift has come in the way Swedes heat their homes, with a move away from the burning of fossil fuels to the use of hydro- and nuclear-powered electricity and the burning of wood fibre and household waste.

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Sweden’s annual direct greenhouse gas emissions dropped by 22 per cent between 1990 and 2013. At the same time, its economy grew by 58 per cent, which shows you can grow your economy and still decrease emissions.

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The Norway example

Norway is close to Sweden geographically, but is more similar to Canada and Alberta in that its economy depends on fossil fuel extraction.

Like Sweden, it imposed a carbon tax in the early 1990s, but has kept its tax quite a bit lower. It was recently increased to around $64/tonne on the energy industry, but just $8/tonne for fisheries, while some other industries are exempt. Drivers pay 14 cents tax per litre of gasoline.

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Norway hasn’t been as successful in lowering its emissions, in part because of the rapid growth of its energy industry, which saw emissions increase by more than 80 per cent between 1990 and 2015. Manufacturing and mining emissions are down nearly 40 per cent and heating emissions by nearly 60 per cent. But transportation emissions from road traffic are up 32 per cent since 1990.

As a result, Norway’s overall greenhouse gas emissions have grown by four per cent in the past 25 years. That’s quite a bit better than Canada, which saw its emissions increase by 20 per cent over the same period, but it does show the difficulty of controlling emissions with a growing energy sector.

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The debate over B.C.’s tax

B.C. is often offered up as shining example of a carbon tax done right. It’s simple and broadly applied. At $30/tonne, it covers 70 per cent of the province’s emissions.

But there is a debate as to whether it actually works. The tax has been in place since 2008, so the province uses 2007 as its base of comparison. That year, B.C. emitted of 66.3 megatonnes of greenhouse gases. In 2014, that number had dropped nearly three per cent to 64.4 megatonnes. It’s interesting to note that Canada’s emissions dropped 3.4 per cent over that same period, which included the 2009 recession.

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The B.C. example shows how hard it can be to isolate the impact of a carbon tax. The province’s population grew over that period, as did its natural gas industry. Overall emissions from road transportation were higher, but less energy was used for home heating.

“What we’d like to do is compare a B.C. that implemented the tax to the exact same province in which everything is exactly the same, but they did not implement the tax,” said Nicholas Rivers, Canada research chair in climate and energy policy at the University of Ottawa.

Nonetheless, Rivers says estimates suggest the tax, which equals less than ten cents per litre of gasoline, contributes to a 5-10 per cent reduction in gasoline consumption.

So far, B.C’s carbon tax hasn’t caused a large-scale shift to public transit, but Rivers says his research shows carbon taxes are more likely to encourage people to move closer to work or to buy more fuel-efficient cars.

He says the bigger impact of a carbon price, particularly in Alberta, will be in electricity generation and heating, specifically a move away from coal.

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Search for a magic number

History shows the higher the tax, the more incentive there is for people and industry to use energy more efficiently. While it’s difficult to compare jurisdictions, it will come as no surprise that Japan’s emissions have gone up with its $3/tonne tax, while Sweden’s have gone down with its $150/tonne tax.

Having said that, it’s hard to come up with a magic number for a price on carbon, according to Janet Milne, director of the University of Vermont’s environmental tax policy institute.

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“It’s tricky for the economist to figure out why people’s behaviour changed,” she said. “In countries like Sweden, they’ve seen a significant improvement in their emissions profile, but you have to question whether that’s because of the tax or other policies.”

“In Japan there’s a very low-level tax, but the revenue is all dedicated to green energy or energy conservation purposes. It’s not a behavioural tax, but it’s pinning a cost on something that’s environmentally damaging and using the revenue to try to address the problem.”

‘It’s tricky for the economist to figure out why people’s behaviour changed.’ – Janet Milne,University of Vermont

Alberta’s tax starts at $20/tonne and will increase to $30/tonne in a year. If the federal government follows through on its commitment to impose a tax nationally, Canadians will pay $50/tonne by 2022. Other measures have also been promised to reduce emissions to meet our 2030 commitment of a 30 per cent reduction below 2005 levels.

We’ll need them, Rivers says. Without other policies, $50/tonne is probably not enough to reach our targets.

“You’d need a pretty high price,” he said. “We would want a price somewhere between $100 to $150 … to get us to our goal.”

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