The Liberal government needs to boost its proposed price on carbon, while getting rid of subsidies to the energy sector.
The federal government’s recently announced national carbon price may be clever politics, but a credible, evidence-based climate change policy it most certainly is not. The government’s national carbon price, starting at $10 per tonne in 2018 and rising $10 per year until it reaches $50 per tonne in 2022, suffers from three fatal — yet fixable — flaws.
The first flaw is familiar: the price is far too low to matter. Yes, it will reduce greenhouse gas (GHG) emissions, but not enough to help us meet even our admittedly unambitious target of reducing emissions by 30 percent from 2005 levels by 2030.
To play a meaningful role in meeting our escalating obligations under the Paris climate change agreement, the price must approximate the true externalized social cost of carbon. Estimates vary, but that cost is likely between $150 and $200 per tonne. Even if supplemented by a host of flexible — but not cost-free — energy efficiency regulations, the price on carbon will still likely have to rise to at least $100 per tonne, if not higher. Why higher? Because we know that the longer we put off paying the true cost of carbon pollution, the more expensive pollution abatement becomes.
The second flaw is subtler and puzzlingly paradoxical: the government’s carbon price is designed not to meaningfully reduce GHG emissions as soon as possible but to allow for further oil and gas extraction in Canada. For years, Canadian oil and gas projects lacked social licence because of the Harper government’s failure to impose any legal regulations on the industry. The imposition of a price on carbon, even one as scientifically meaningless as the Trudeau government’s, provides cover for otherwise unsustainable and unjustifiable oil and gas projects to proceed.
While the timing of the government’s announcement may have rankled certain provinces, it was nonetheless strategic. On the one hand, the announcement followed on the heels of the government’s unpopular approval of the Pacific Northwest liquefied natural gas (LNG) terminal project in British Columbia, which, even with a GHG cap, will significantly increase GHG emissions, making it that much harder for the BC and federal governments to reach their GHG reduction targets. The timing of the government’s carbon price announcement, along with its rushed ratification of the Paris climate change agreement before it has even unveiled the rest of its climate policy, was clearly designed to help legitimize its LNG decision and reassure the world that Canada is still committed to combating climate change.
On the other hand, the carbon price announcement comes just in time to help pave the way for the federal government to approve Kinder Morgan’s equally controversial Trans Mountain oil pipeline, which the government will almost assuredly green-light in December.
What is the thinking behind this confused calculus of approving high-GHG-emitting oil and gas projects in return for provincial support for its carbon price, the express purpose of which is to reduce GHG emissions? Alberta Premier Rachel Notley expressed it best when she said that Alberta needs a pipeline to bring oil to tidewater in order to afford the eventual $50-per-tonne price on emissions. What Premier Notley and the oil and gas industry do not seem to understand, however, is that the main point of putting an escalating price on carbon is to phase out carbon emissions and the industry most responsible for them. While the Premier and the industry are focused on adapting to the eventual $50-per-tonne price scheduled to take effect in 2022, the government will review and presumably raise its carbon price as part of the global stock taking under the Paris agreement scheduled for 2023 if it is truly committed to transitioning as soon as possible to “a low-carbon economy.” That, however, is a big if.
Which brings us to the third and most perverse flaw: imposing a price on carbon while refusing to eliminate subsidies to the fossil fuels industry is like raising the tax on cigarettes while giving tobacco companies cash payouts and tax breaks to produce more cigarettes. In 2009, the G20 committed to eliminating fossil fuels subsidies. In 2015, the Liberal Party’s campaign platform promised, “We will fulfill Canada’s G-20 commitment to phase out subsidies for the fossil fuel industry.” But in the Trudeau government’s first budget, hailed as “the greenest budget ever,” the government actually locked in LNG subsidies until 2025 and otherwise refused to eliminate subsidies to the oil and gas industry, which in recent years have surpassed $3 billion and which exceed subsidies to the renewable energy industry by approximately 4 to 1.
What makes subsidies to the oil and gas industry even more perverse is that the industry’s major players don’t need them. They’ve been preparing for the imposition of a price on carbon for years by imposing their own “shadow price” on carbon. Shadow pricing is an investment and decision-making tool used by companies to manage their exposure to the risks associated with a carbon-constrained future by imposing their own internal, hypothetical surcharges on market prices for goods and services that entail significant carbon emissions. These shadow prices range from $15 to $68 per tonne, a further demonstration of the ineffectiveness of the government’s proposed carbon price.
While the government likes to trumpet the corporate sector’s support for carbon pricing, especially the support of the oil and gas industry, there is no evidence the industry would support a price that even remotely approaches the true social cost of carbon, which would be well above the industry’s shadow prices. While the oil and gas industry likes to say it supports a price on carbon because it produces a level, competitive playing field, it turns out that the costs of conventional energy production are approximately in line with the costs of generating wind and solar power, which have declined by 61 percent and 82 percent, respectively, since 2009. And that’s despite being substantially undersubsidized by governments.
Nevertheless, the oil and gas industry continues to accept generous government subsidies while decrying public investments in renewable energy. Writing in support of government-led carbon pricing, Shell Canada’s president, Michael Crothers, recently impugned the wisdom of the US government’s US$2-billion loan to the world’s fourth-largest photovoltaic solar farm, in California, while applauding the Canadian and Alberta governments’ C$865-million contribution to Shell’s carbon capture and sequestration project Quest, a potential but far from economically or scientifically established means of removing carbon emissions from the atmosphere.
The Trudeau government’s national price on carbon could still be the first step toward a credible, evidence-based climate change policy. In order to fulfill its potential, however, the government’s price must climb higher — and sooner. While it may be clever politics to defer difficult decisions to elections far down the road, credible climate policy it is not. Meanwhile, the government can no longer afford to prop up the oil and gas industry by providing it with financial benefits it doesn’t need and by approving unsustainable energy projects that are part of Canada’s past, not its future.
Photo: Chris Kolaczan / Shutterstock.com
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