Europe must learn from Canada's 'price on pollution' debacle

Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭

If you haven’t already subscribed please click on the link below, or try a 7-day free trial giving you full access. By subscribing you’ll join more than 3,000 people who already read Carbon Risk. Check out what other subscribers are saying.

You can also follow my posts on LinkedIn. The Carbon Risk referral program means you get rewarded for sharing the articles. Once you’ve read this article be sure to check out the table of contents.

Thanks for reading Carbon Risk and sharing my work! 🔥

---

Estimated reading time ~ 10 mins

Photo by Hans Eiskonen on Unsplash

As governments seek to ramp up efforts to meet their climate commitments, attention now turns to sectors hitherto not exposed to the full force of direct carbon pricing: buildings and transportation. By quirk of the high proportion of their income spent on the fuel necessary to heat their homes and travel to work, poorer households are increasingly having to bear the cost of decarbonisation.

Policymakers are of course trying to shield those same citizens (their voters) from shouldering the full costs. However, the experience that befell the Canadian government last year is salutary to any jurisdiction looking to introduce such a regressive carbon policy.

In 2018 the Canadian government passed the Greenhouse Gas Pollution Pricing Act. The law (first applied as of 1st April 2019) required provinces and territories to either establish a levy on greenhouse gas emissions or adopt the federal minimum carbon price system.

There are two components to the policy. The first was a “fuel charge” that is applied to 21 different fuels and is levied on the fuel distributor who may then pass on the charge to households, businesses and motorists. The second component is the “output-based pricing system”, and applies to large industrial producers on their non-fuel based production emissions.

The carbon price is the same whether you are a household or a large chemical producer. It started at C$20 per tonne CO2e in 2019 and has increased by C$10 per tonne each year until the price reached C$50 per tonne (€34) in 2022. From 2023 onwards it began increasing by C$15 per tonne (€10) each year, and is set to continue at that rate until it reaches C$170 per tonne (€116) in 2030.

The federal government requires that 90% of the proceeds from the carbon price are returned to households in the province or territory where they are collected. Households receive a refund every quarter directly into their bank account, with the sum based on where they live (provinces consume a very different fuel mix), and the size of their household. The other 10% is used to fund programs that help communities and institutions (e.g., schools, hospitals, municipalities) reduce their fuel consumption.

Canada’s government managed to get broad support for its carbon tax by calling it a ‘price on pollution’. Fuels with a higher carbon intensity should be more expensive than those with a lower carbon intensity, and so, in theory, consumers should react to that incentive by switching or at least becoming more efficient in their consumption. By refunding the majority of the proceeds the government reasoned that the carbon price would deliver all of the benefits, but with none of the costs - politically, financially or otherwise.