As part of the efforts to combat climate change, governments around the world are putting a price on carbon, making polluters pay for the greenhouse gas (GHG) emissions they pump into the atmosphere.
Let’s be clear – carbon pricing isn’t a silver bullet solution. But it is catching on as a market-based tool to lower GHG emissions, with 40 countries now using it in some form. Here’s a quick summary of what you need to know.
Why on earth would carbon need a price on it?
You probably already know that greenhouse gases like CO2 are building up at an alarming rate, causing increasingly catastrophic climate change. This is no longer theoretical: atmospheric carbon has reached its highest level in 800,000 years, and the impacts are already causing starvation, disease, death, and other very bad things.
To stop this from getting worse and killing literally everything, we need to drastically cut carbon emissions. We can’t cut carbon emissions on this scale by asking people to stop polluting out of the goodness of their heart – we need system-wide tools to gradually, but meaningfully, shift away from fossil fuels to a cleaner economy without causing economic chaos.
How does carbon pricing actually work?
In a nutshell, putting a price on carbon means that it costs something to pollute. This cost ensures that polluters don’t get a free pass to emit carbon. Without a price on carbon, society is left to foot the massive bills for the impacts of climate change, including more extreme weather, increased disease, and a host of other costs we’re already paying. That doesn’t sound fair, does it?
Pricing carbon also gives companies, governments, and individuals an incentive to reduce their carbon emissions and move towards cleaner energy. Since fossil fuels become more expensive, the price gap shrinks between clean energy sources like solar power and cheap polluting sources like coal.
Let’s be clear: the main goal is not to raise money, but to discourage pollution by making it more expensive. A perfect carbon pricing system would ultimately yield no profits, because it would effectively change behaviour to reduce carbon emissions to zero. There are many ways to use carbon pricing revenues, like incentive programs to reduce emissions, or tax rebates. But in most systems, bringing in revenue takes a backseat to the goal of reducing polluting behaviour by making it more expensive.
Can you give me an example of how a carbon price could reduce emissions?
Let’s take diesel, for example. Company A is a commercial trucking company that operates in a province with a carbon tax, which adds a small amount to the price of diesel. Company A is facing an increase in fuel costs, and so has an incentive to find ways to cut down on fuel consumption. Company A decides to introduce driver fuel efficiency training, resulting in a 10% improvement in fuel efficiency. Company A also decides to invest in a small test fleet of electric trucks for shorter hauls, much cheaper, and cleaner to fuel and maintain.
In this scenario, the carbon tax has given Company A the necessary push to reduce their carbon emissions, and to choose the most cost-effective way to do so. This is a very simplified example, but you get the idea.
How is carbon pricing implemented?
Governments can choose from a few different systems – a carbon tax, cap-and-trade, carbon fee and dividend, or their own home-cooked combination of these. There’s no simple answer to which system is best, but evidence is emerging as to the economic and carbon reduction impacts of each. More on that here.
In most systems, the price rises over time, gradually approaching the price it actually costs society to emit that tonne of carbon (which, not surprisingly, is hotly debated). Fun fact: current carbon prices in Canada are hovering around $20 or $30 per tonne, far below what these emissions cost society to deal with, and even farther from the much higher price needed to influence behaviour enough to reduce carbon emissions and meet Canada’s climate targets if a carbon price is the only tool being employed (closer to $200 per tonne – yikes!). Going that high would be too politically risky for most current governments, which is why many environmental organizations support a whole range of actions in addition to pricing carbon.
Will carbon pricing mean I pay more for things like gasoline and electricity?
Carbon pricing makes using fossil fuels more expensive. That’s the whole idea – to shift behaviours away from polluting actions that cause climate change. Whether or not you pay more depends on how you react to this gradual increase in price. Ideally, you find ways to use fewer fossil fuels. Maybe you install a smart thermostat to stop wasting energy in your home. Maybe you think twice about idling your car in the school parking lot. Maybe you ride a bike to work instead of driving when it’s nice out.
The price on carbon is not meant to break the bank for average energy users. For example, Ontario’s cap-and-trade system has added about 4 cents per litre to gasoline bills, and about $6 per month on the average natural gas bill. Since electricity in Ontario is over 90% carbon free after ditching coal power, cap-and-trade’s price impact only applies to the tiny slice related to natural gas, making it pretty close to zero. Many argue that these small increases aren’t enough to drive behaviour change. Hence our next question….
Is carbon pricing enough?
Absolutely not. Unless prices rise drastically, carbon pricing will not reduce greenhouse gas emissions enough to avoid catastrophic climate change. This is like trying to renovate a house with a screwdriver. A useful tool, but not up to the job without a whole box of other tools. In addition to carbon pricing, we need strong regulations, forward-thinking policies, comprehensive programs to encourage and incentivize behaviour change, and much more action from governments to fight climate change.