The State of Carbon Pricing in Canada

Canada’s long road to achieving carbon emissions reductions has resulted in a remarkably diverse set of policy instruments implemented at the federal, provincial and territorial levels. Carbon pricing is a key component of pan-Canadian efforts to achieve deep emissions reductions.

The first independent expert review of carbon pricing across Canada indicates jurisdictions are making progress. But changes will be necessary to ensure federal, provincial and territorial systems are effective in reducing greenhouse gas emissions in the long term.

The Canadian Climate Institute was commissioned by Environment and Climate Change Canada to undertake this assessment to fulfill a commitment under the Pan-Canadian Framework on Clean Growth and Climate Change.

In addition to the detailed technical assessment report, the Institute independently produced and published a complementary summary report. It identifies five challenges with carbon pricing in Canada and offers recommendations for ongoing improvement. Our assessment focuses on five areas: emissions reductions, a long-term and transparent price signal, competitiveness outcomes and emissions leakage, vulnerable businesses and households, and Indigenous peoples.

Five challenges for carbon pricing systems in Canada

Multiple emissions sources are covered in some carbon pricing programs, but not all. Differences go from an uneven application of exemptions from the carbon price in Canada based on the design choices of the various jurisdictions.

Across Canada, we estimate the marginal cost incentive ranges from a low of $16 to a high of $41. This uneven price signal occurs despite the presence of the federal backstop carbon price.

Large emitter carbon pricing programs across Canada grant large quantities of emissions for free. They also grant sectors different cost treatment. Differences in costs have implications for both international and domestic competitiveness risks.

Most carbon pricing systems show a lack of transparency about key design choices. This means the true marginal cost incentive cannot always be easily determined, nor how revenue is recycled back to emitters or used to support government spending.

Expectations of future carbon prices in Canada can increase effectiveness. 

Five ways to improve carbon pricing in Canada 

To support effectiveness and address competitiveness and fairness issues, federal, provincial, and territorial governments should work towards developing a common standard of emissions coverage for carbon pricing. Such a standard would set a minimum level of coverage for emission sources. It would factor in best practices for emission coverage currently applied within Canadian jurisdictions. At a minimum, such a standard would remove existing exemptions. It would ensure that energy, process, and fugitive emissions in the industrial sectors receive common treatment.

Point-of-sale rebates should be removed and replaced with an alternative method to address concerns regarding consumers’ income. Any rebates that are directly tied to fuel purchases or the level of emissions should be replaced with other approaches to revenue recycling such as direct rebates, income tax reductions, or abatement technology subsidies.

Large emitter programs have successfully addressed competitiveness concerns by reducing the average cost of the policy. Aligning benchmarks and limits on emissions sources across jurisdictions, scaling back the level of free emissions granted, and enabling credit and emissions trading across jurisdictions can improve implementation. 

Three priorities emerge for the large emitter programs. The first one consists in making the approaches more transparent to setting benchmarks that determine the limit on emissions sources. It has to align the benchmarks across jurisdictions and sectors. This is likely a multi-year challenge given the constant evolution of pricing systems. Second, the formulas used to grant free emissions have to be updated to include factors that reduce the quantity of freely granted emissions. Third, it is recommended to move to enable credit and emissions trading across jurisdictions. As average costs for domestic emitters increase, a move towards better trading links between domestic jurisdictions would help reduce costs.

Carbon pricing systems across the country do not treat Indigenous Peoples in a uniform way. Some Indigenous communities in some jurisdictions are exempt from carbon costs, while others face the full carbon cost. Further engagement is needed to ensure potential policy changes explicitly consider the treatment of non-status and self-governing First Nations, Inuit, and Métis communities, as well as Indigenous Peoples who reside in non-Indigenous communities.

Enabling continuous improvement requires more transparent collection and sharing of carbon pricing data and information from all jurisdictions, developing common methods to compare average costs on large emitters, collecting empirical data on system performance, and holding routine independent reviews of carbon pricing systems aligned with jurisdictional reporting and policy review cycles.

Canada’s carbon pricing patchwork is not necessarily a risk to cost-effective and fair emissions reductions. Deepening of federal, provincial, and territorial cooperation that has emerged under the Pan-Canadian Framework should be central to these improvements. Regional variations can and should be accommodated, but only if they do not undermine the effectiveness of carbon pricing.  

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