Is the Price Right? A Comparison of Carbon Pricing
There is no real mystery to understanding what a carbon tax is – an amount deemed to be the value, or cost, of a tonne of carbon dioxide, which is a by-product of burning fossil fuel. In BC, policy makers have decided that the cost is CDN$30/tonne carbon dioxide equivalent (CO2e), which is then translated into an amount per unit of fuel. The tax is applied broadly to all fossil fuel combustion in the province and, in practice, covers a large majority of the fossil fuels consumed by businesses and households.
| Table 1 World Carbon Prices (US$/tCO2e) |
|
| Mexico (lower) | $1.00 |
| Poland | $1.00 |
| Guangdong Pilot ETS | $2.00 |
| Chongqing Pilot ETS | $2.00 |
| Kazakhstan ETS | $2.00 |
| Estonia | $2.00 |
| Shanghai Pilot ETS | $2.00 |
| Japan | $2.00 |
| Mexico (upper) | $3.00 |
| Norway (lower) | $3.00 |
| Tianjin Pilot ETS | $3.00 |
| Hubei Pilot ETS | $4.00 |
| Latvia | $4.00 |
| Shenzhen Pilot ETS | $5.00 |
| New Zealand ETS | $5.00 |
| Portugal | $6.00 |
| RGGI | $7.00 |
| Iceland | $8.00 |
| EU | $9.00 |
| Switzerland ETS | $9.00 |
| Korea ETS | $9.00 |
| Beijing | $9.00 |
| Alberta | $12.00 |
| CA | $13.00 |
| Quebec | $13.00 |
| Costa Rica (upper) | $14.00 |
| France (non-ETS) | $16.00 |
| Slovenia | $19.00 |
| Ireland | $22.00 |
| BC | $23.00 |
| Denmark | $25.00 |
| UK floor price | $28.00 |
| Tokyo | $36.00 |
| Finland (heating fuels) | $48.00 |
| Norway (upper) | $52.00 |
| Switzerland | $62.00 |
| Finland (transport fuel tax) | $64.00 |
| Sweden | $130.00 |
| Source: World Bank, September 2015. | |
CO2e is the chosen unit of measurement, as it normalizes the various greenhouse gases[1] thought to contribute to changes in the earth’s climate. Similarly, the US dollar is used as the currency to normalize costs. All of this allows policy analysts and decision-makers to compare emissions by country or region, and the relative prices of carbon for those jurisdictions that have implemented either a carbon tax or some kind of scheme to impose quantitative limits on emissions. Using the World Bank’s conversion rate of $0.7664,[2] in British Columbia the cost of carbon turns out to be US$23/tCO2e.
In its recent publication, State and Trends of Carbon Pricing, the World Bank[3] notes that a growing number of jurisdictions (often sub-national and local) have put, or have pledged to institute, a price on carbon. This raises the question of how BC stacks up in a comparative sense as the first North American jurisdiction to establish a broadly-based carbon price. Among the various global jurisdictions that have taken this step, the median carbon price is now US$9/tonne CO2e (Table 1). But that doesn’t tell the whole story, because not all jurisdictions have designed their carbon levies in the same way.
Let’s use British Columbia as the reference case. Here, the carbon tax is applied across the economy as a whole on purchases or uses of fuel. The average consumer pays at the pump, on his or her natural gas bills, when buying propane, etc. The tax is also embedded in the prices of BC-made products and services that local consumers buy, because industry in the province pays carbon tax on all fossil fuels, which are an input cost for most businesses. British Columbia is the only jurisdiction we know of that levies a single, widely applied carbon tax (i.e., the same tax rate applies to all households and businesses on all fossil fuels, adjusted for the carbon content). BC also recycles the revenue raised from the carbon tax via reductions in other taxes. The BC carbon tax “shift” is considered by some academic economists to be a text book version of what a carbon tax policy should look like.
Some environmental groups point to the Nordic nations as having higher carbon taxes. Table 1 would seem to support this view, but the true picture is more complex. Thirty-one EU nations participate in an Emissions Trading System (ETS), which only covers 45% of total EU greenhouse gas emissions. As of September 2015, these nations pay ~US$9/tCO2e[4] on emissions from power stations and other combustion plants, oil refineries, coke ovens, iron and steel plants and factories making cement, glass, lime, bricks, ceramics, pulp and paper, petrochemicals, ammonia and aluminium.[5] Each EU member state can designate certain exemptions as part of its national plans.
This means that a majority of economy-wide GHG emissions is not covered by the EU’s ETS scheme – contrary to what Canadian environmental groups sometimes claim. In BC, all GHG emissions – apart from certain “process emissions” that do not involve fossil fuel combustion -- are covered. That is, BC’s carbon pricing system is considerably more comprehensive than the systems found in Europe.
While Sweden, Norway, Finland and Denmark also maintain carbon taxes on certain fuels which are not covered by the EU’s ETS, their industrial sectors pay only ~40% of what British Columbia industry pays for emissions because they also participate in the ETS. In competitive markets where producers are seeking to sell similar or identical goods, industries in the Nordic countries have a price advantage over those in BC which face carbon tax on all of their GHG emissions.
Why should that matter? Well, 45% of Sweden’s GDP, 38% of Norway’s, 37% of Finland’s and 53% of Denmark’s are derived from exports. BC also gets a sizable share of GDP from exports of goods and services, including exports that rely on energy as an input into the production process and/or that use energy for purposes of transport. An effective price differential of US$14/tCO2e means that BC producers are at a competitive disadvantage even relative to those in northern Europe, even though posted carbon taxes there are higher than the current levy in British Columbia.
Now let’s compare the BC carbon price with the prices in other North American jurisdictions, which are the province’s closest competitors in most markets for traded goods (and also for capital investment). Most Canadian provinces and American states have no carbon price or emissions caps at all for their industrial sectors. Alberta and California do, however.[6] Alberta has a performance standard based on “emissions intensity” for some types of industrial activity. Its posted rate of $15t/CO2e (or ~US$11.25/tCO2e) is the cost of non-compliance if a covered industrial facility fails to meet the net emissions intensity limits set out in Alberta’s regulation. In other words, Alberta’s carbon fee is only applied to that portion of a facility’s emissions which is above the facility’s specified intensity target.[7] This means that the industries subject to Alberta’s regulatory scheme do not pay carbon tax on all of their GHG emissions, unlike their counterparts in British Columbia. This is an important difference, one that may not be understood by BC policy-makers and media commentators.
California, like the EU, has a cap and trade program that covers emissions from a number of industry sectors, including electricity generators and large industrial emitters that produce at least 25,000 MTCO2e annually. The program was expanded in 2015 to include distributors of transportation, natural gas, and other fuels. Some 450 entities are now covered, with about 4/5 of California’s GHG emissions captured.[8] This means one-fifth of combustion-based GHG emissions in the state are not covered (unlike in BC). As of late September 2015, the market price per tonne of CO2e emissions in California was US$12.65.[9] This is well below the comparable carbon tax (~$US23) charged in British Columbia. Moreover, BC’s carbon levy has been in place for seven years, whereas the economic impact of California’s cap and trade policy really only began to be felt in 2013.
So, it turns out that not only does BC have by far the steepest carbon levy in North America – the province’s current “carbon price” is actually among the highest in the world. Against that backdrop, the Business Council believes the BC government should keep the carbon tax as it is and resist pressure from environmental groups to increase the tax rate or expand the scope of the tax.
[1] Other non-CO2 gases include methane, nitrous oxides, ozone and chlorofluorocarbons. Water vapour is also a greenhouse gas.
[2] State and Trends of Carbon Pricing, World Bank, September 2015, p. 73.
[3] State and Trends of Carbon Pricing, World Bank, September 2015, p. 10.
[4] September 25, 2015 allowance trading price.
[5] Only plants producing at least 25,000 tonnes of CO2e emissions are covered by the ETS.
[6] Ontario is moving to institute caps on GHG emissions for some industry sectors, but is well behind BC in terms of establishing an overall price for carbon.
[7] Specified Gas Emitters Regulation, part 2, section 4, p. 7.
[8] http://www.arb.ca.gov/cc/capandtrade/guidance/cap_trade_overview.pdf
[9] Http://calcarbondash.org/