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The greatest casualty of the recent furor over carbon pricing is not the Liberals, despite the blowback to their cynical and widely-panned exemption for home heating oil. Nor is it the NDP, who sided with the Conservatives in their failed motion to extend the exemption to other forms of home heating.
No, the greatest casualty, as is so often the case in these games of political football, is sound public policy in service of a better future.
Not because carbon pricing as a policy is perfect — far from it. It is an inherently conservative approach advocated mainly by economists that counts on the free market to solve the climate crisis on its own — an assumption that works far better in theory than in practice.
To make matters worse, the costs of carbon pricing are highly visible — we see it in the price of gas and home heating — without offering obvious benefits. A price on pollution may “nudge” corporations and investors in the right direction over the long term but for most households that can’t afford the upfront costs of an electric vehicle or a heat pump, it appears solely as an incremental expense.
For that reason, carbon pricing has always faced an uphill political battle. It doesn’t seem to matter that all the revenues raised through carbon pricing in most provinces are recycled back to households through rebates.
It also doesn’t seem to matter that carbon pricing accounts for a far smaller share of increased household costs than other factors, such as corporate profits and the global price of oil. People feel worse off because of the policy — even if, on paper, they are not — and that feeling is driving the latest political firestorm.
The Liberals threw fresh fuel on that fire with their exemption for home heating oil. It was a stunning admission, as the Conservatives have long argued, that the carbon price comes at an unacceptable cost to household affordability. And in voting with the Conservatives to extend the exemption, the NDP further corroborated that narrative.
And that’s what’s so dangerous about all of this. A political consensus is emerging that climate policy is not compatible with a fair and prosperous economy — and even more insidiously, that climate policy is responsible for our economic troubles — which puts Canada’s broader efforts to tackle the climate crisis at grave risk.
The truth is, we can continue to phase out the production and consumption of fossil fuels, whether through carbon pricing or other policies, without putting an undue burden on low-income households. In fact, moving from oil and gas to electricity generally saves households money.
Instead of trying to score political points, federal politicians should tell us how they plan to unleash the affordability benefits of climate action.
In addition, we need our politicians to keep their eyes on the prize of reducing emissions. A political narrative that foregrounds the inconveniences of transitioning away from fossil fuels — as so many of these recurring debates about carbon pricing seem to do — leaves us blind to the rising costs of a heating planet.
The bottom line is that the costs posed by climate change in the long term should worry us far more than the costs posed by climate policies in the short term.
To move forward, we need a narrative that pairs affordability and prosperity with a coherent vision for the net-zero economy. Offering subsidies for household fossil fuel use — which the Liberals, Conservatives and NDP have now all backed in one form or another — is not that solution.
To its credit, the government’s program to subsidize oil to heat pump conversions for low-income households is a step in that direction, but it is too limited. Low-income households across the country need financial support to retrofit their homes regardless of their current heating source.
And it’s not just about home heating. A lack of investment in public transit systems, for example, disproportionately hurts low-income households while pushing more people into emissions-intensive personal vehicles.
A lack of non-market housing in our cities similarly comes at the expense of the poorest households while promoting environmentally destructive sprawl. Not to mention the health effects of fossil fuel pollution that disproportionately affect marginalized groups in low-income communities.
In each of these areas and others, there are solutions that can make life better for people today while also pushing down emissions over the long term. As an added bonus, these kinds of highly visible public solutions are far more politically popular than technocratic regulations or consumer-facing fees.
Carbon pricing still has a role to play in all this, but it deserves far less attention than it receives. It’s time to relegate carbon pricing to an appropriate place in the climate policy discourse and refocus on the big ideas that will build a more prosperous and sustainable economy for everyone.
Hadrian Mertins-Kirkwood is a senior researcher with the Canadian Centre for Policy Alternatives.
Comments
Well said. The Liberals would do well to read this piece. Stop carbon tax carve outs and pump up the financial support for those who need it.
Mertins-Kirkwood: "[carbon pricing] is an inherently conservative approach advocated mainly by economists that counts on the free market to solve the climate crisis on its own — an assumption that works far better in theory than in practice."
Who says carbon pricing can solve the climate crisis on its own? Names, please.
Carbon pricing has always been one tool of many in the tool box.
Climate change is the greatest market failure in history. The market has fundamentally failed to price in the health and environmental costs of fossil fuels. Fossil fuel producers and consumers use the sky as a free dump. Every smokestack and tailpipe represents an invisible subsidy. Violating polluter-pay and free-market principles. Subsidizing our own destruction. Voodoo economics.
Whatever else we do, we need to correct the market failure. Price all goods and services properly, including energy. Polluter-pay and full-cost accounting. Price in all health, environmental, and climate costs. End the subsidies, visible and invisible, to producers and consumers.
On its own, carbon pricing is not enough. Too slow, and we do not have time to wait for prices to catch up with reality. Carbon pricing is one tool in the toolbox, but it is essential.
Carbon pricing and sustainable options with financial supports are not an either – or proposition. We need both.
Mertins-Kirkwood: "To make matters worse, the costs of carbon pricing are highly visible — we see it in the price of gas and home heating — without offering obvious benefits."
Visibility is carbon pricing's greatest virtue. Producers and consumers need to see and pay the real costs of fossil fuels. Of course, more sustainable alternatives must be made available. In a rational, fair, undistorted market, those alternatives will always be cheaper than the unsustainable systems they replace. The costs of unsustainable systems are prohibitive. The price tag should be astronomical.
If the market is dysfunctional, we must resolve the dysfunction. This step cannot be avoided. Realistic price signals are essential for markets to function properly.
Consumers need realistic price signals to guide them towards rational decisions. Realistic price signals price unsustainable goods and services and design — and excessive behavior (consumption, pollution, waste) — out of the market. And make sustainable options more attractive by comparison.
The costs of climate change and fossil-fuel pollution are prohibitive. An obvious mismatch between costs and price. An economic system that permits/ignores/rewards damage to our biosphere dooms us to extinction.
No real progress can be made unless the market failure is resolved.
Damage is not free. Environmental harms must be penalized. Where costs are prohibitive, price must reflect that reality. To transition to a more sustainable economy, the surest way to limit less sustainable goods, services, and design and make the alternatives more attractive is to gradually price the former out of existence.
In the case of fossil fuels, that system is called carbon pricing.
Indispensable.
"Realistic price signals are essential for markets to function properly. Consumers need realistic price signals to guide them towards rational decisions."
Nice in theory, but as a practical solution? What would be best, a 'carbon cost' stick or a 'cheap heat' carrot, i.e. a free heat pump. The offer of the latter seems to have been lost in the political football. Also the fact that there are, in absolute numbers, which is what counts, more oil-heaters to be replaced in rural Ontario than in the whole of the Maritimes.
A “practical” solution?
Our current economic system and market rules have enormous practical consequences.
Our current system and market are what got us into this mess. Market failure is the fundamental issue. To solve the problem, we need to resolve the market failure.
Alan wrote: “What would be best, a 'carbon cost' stick or a 'cheap heat' carrot, i.e. a free heat pump.”
Both. It’s not an either-or proposition.
As I wrote above:
“Carbon pricing and sustainable options with financial supports are not an either – or proposition. We need both. … Of course, more sustainable alternatives must be made available. In a rational, fair, undistorted market, those alternatives will always be cheaper than the unsustainable systems they replace.”
Oh, come on. The narrative that carbon taxes (and cap-and-trade) = good, but all other actions = bad has been a very widespread one for some time. Go back a few years before there was that much threat of one really happening and that was the official Conservative position! You don't see it as much just in the last couple of years, because the general position that markets are efficient and can be trusted to solve everything has lost a lot of ground lately, starting gradually from the 2008 financial crisis, ironically gaining more momentum from Trump, so ignorant and arrogant that he ignored neoliberal orthodoxy and inadvertently opened space for people to question it who did know what they were talking about, and then more suddenly and drastically during the Covid lockdown period (I was going to say "during Covid" but of course Covid itself hasn't gone away). Since then you see both mainstream Democrats and, in a different and sillier way, many Republicans, embracing industrial policy and opposing free trade. But until the last few years the idea that regulation, subsidy and other government fiscal stimulus, or direct government action could be major approaches to climate change was attacked by most of the establishment whenever it was proposed. Your claim that this is not the case is drastic historical revision.
Even so, governments quietly did a bit of it, like with rebates to electric vehicle purchase or little subsidies to home efficiency or heating hidden behind mazes of websites and paperwork. But most were fig leafs which don't seem to have been intended to make any real difference, and those same governments have sometimes reacted with surprise and consternation when the programs happened to catch on and work. Most Canadian governments that proposed to do anything about climate change have, while not actually claiming that carbon pricing via tax or cap-and-trade were the only possible measure, certainly treated and talked about it as by far the main event. Again, this has started to shift, but only very recently.
I certainly agree that carbon taxes are a useful tool in the toolbox. I don't frankly think they're essential--certainly not any more. There are a few reasons for that. The primary one that makes me disagree with you is that I don't think price signals are nearly as efficient or contain nearly as much information as you appear to. Markets are not efficient. Sure, to some extent markets are not efficient because "externalities", such as the cost to the world of greenhouse gas emissions, aren't included in prices. But fundamentally, markets aren't efficient period no matter how well you jig the prices. They're not efficient because so many of the things that efficient market mathematics assume so the math will work, are not true. That is, information is not perfect and free (note that this would imply no advertising and no patents among other things), humans are not efficient maximizers who can calculate the best possible consumption no matter how complex, returns to scale do not decrease but generally increase, there are not an infinite number of small firms none of them capable of affecting prices, the future exists and is uncertain, utility is not the same as money. All these things are actually assumed in the basic neoclassical math, and changing the assumptions loses the efficient outcomes. Meanwhile in the real world markets are clearly not efficient because moving away from them so often improves outcomes; for instance, efficient market theory says that increasing the minimum wage must increase unemployment, but empirical research is pretty clear that it does not.
(Note that markets not being efficient does not imply that other forms of economic organization, such as central planning or anarchist decentralized planning, would be efficient--they can all be inefficient and in fact I find it unlikely that any method of organizing an economy could be efficient. It also doesn't imply that markets don't function at all; clearly they do some stuff and allow for some sort of allocation of resources)
At a somewhat subtle level, efficient market theory is the basis of the idea that price signals in some fashion convey all the information a consumer could need, everything there is to know about a product, and therefore if you get the price signals right everything will work. It's connected in some way to the "perfect information" assumption--efficient markets require perfect information, and since information is clearly not particularly perfect in the real world, free marketers have come up with the fallback of a sort of perfect information via price, with the price signal as the bearer of all or at least sufficient information, such that efficient maximizers can use it to make efficient markets. But the thing is, I think it's pretty clear that price does not in fact convey very much information. So no matter how right you get the prices, that still will not create efficiency because they will still not be enough information for perfect decisions, even if real people actually approximated the consumers in the models, which they don't.
A carbon price does do something useful; in a largely market-oriented society it does help create incentives pointing in less bad directions. I'm in favour of them. But free-market principles are bunk, and eliminating "market failures" does not lead to anything all that great, like markets would be oh-so-wonderful as long as they weren't "failing", and the price signal is not that useful.
Secondarily, carbon prices, while a good thing, are not essential because you can get what you want without them. Sure, a carbon tax is handy in that it sort of touches everything at once all through the economy, and you might think that with all the complexity of the economy that's absolutely essential. But I don't think that's the case. Most of the complexity is, for purposes of eliminating fossil fuels, more apparent than real. So for instance, even if you had all electric cars and long haul trucks, in theory there could still be internal combustion engines in fire trucks and motorcycles and tractors and buses and mining vehicles and so on and on. But that's not how it would work. If dominant forms of land transportation go electric, fairly soon so will all the corner cases, because the overall nature of motor production will have changed; nobody will want to maintain separate factories with separate expertise just for fire trucks--and anyway it's not that hard to regulate other cases in a fairly blanket way, especially since after the big areas go electric the little niches will have no political power. So, deal with cars and trucks, and lots of emissions from agriculture and mining and so on start to take care of themselves because the overall technological base is shifting. So, deal with the big issues in a few sectors and the smaller complicated issues will begin to disappear, or will be easier to ferret out and deal with. Overall, the list of things to promote and get rid of is very finite, not even all that big; you can, and people often have, contain all of the major ones in a short policy paper.
Finally, the carbon tax is not as huge a deal any more because in the big fundamental areas of energy production and land transportation the new technologies we want to move to are already cheaper even with externalities ignored than the old ones we want to stop using. And so far, continuing to get cheaper.
Again, I still favour the carbon tax. But it could be effectively substituted with other policies, and there is nothing fundamentally efficient about it. Mind you, it represents a sort of socially decided value, which is interesting.
Great demystifying of "classical economics" and supposed "market efficiency" - thank you, thank you, thank you. Agree that the ball might be rolling fast enough now that the carbon tax can die - but politically, I would hate to give Poilievre that victory.
Any thoughts on Donut Economics as an alternative?
Mertins-Kirkwood refers to the present. Who argues today that carbon pricing can solve the climate crisis on its own? Names, please. List the climate economists and experts who advocate carbon pricing alone and reject all other possible solutions.
RP wrote: "But until the last few years the idea that regulation, subsidy and other government fiscal stimulus, or direct government action could be major approaches to climate change was attacked by most of the establishment whenever it was proposed. Your claim that this is not the case is drastic historical revision."
The establishment has been long opposed to most climate policy — carbon pricing, above all. Not least, U.S. Republicans, which represent mainstream corporate America. Which is why the U.S. still does not have a federal carbon price.
"U.S. President Barack Obama proposed in early 2016 a $10 per barrel fee on oil, which received blistering criticism from Republicans, who called it 'dead on arrival' and a 'horrible idea.'"
Speaking of historical revisionism.
In Canada, conservatives considered Preston Manning a renegade when he expressed support for carbon pricing. But Manning too saw the need for other forms of climate action:
1) "One of the biggest issues will be the question of how much of current revenue from non-renewable resources should be saved and how those savings should be invested. More needs to be spent on conservation, human capital, education and training. And a portion has to be invested in non-renewable (sic; sc "renewable") energy so that, if the day ever comes that oil and gas isn't as significant as it is now, there's something to replace it."
2) "Of course there is a major role for government policy and regulation in environmental protection and conservation, but let's sharpen our definition and exercise of that role. For starters, let's see governments lead more by example - after all, they are some of the country's largest consumers and resource owners. Let's see governments focus on macro-regulation, rather than trying to micro-manage individual or corporate behaviour."
In Canada, SFU energy economist Mark Jaccard has long advocated for a mix of both carbon pricing and regulation. Indeed, Jaccard is extremely sceptical about relying on carbon pricing alone:
"Carbon taxes and caps may be most effective in economic theory, but smart regulation will produce better climate policy for our political reality." (Policy Options 2016)
"The reality is that significant emissions reductions will happen only if we rapidly switch to zero- and partially-zero-emissions technologies. Fortunately, these are now commercially available. But they won’t be widely adopted unless technologies that burn coal, oil and natural gas are phased out by regulations or made costly to operate by carbon pricing.
"… This is why, if he has survival instincts, Trudeau won’t depend solely on carbon pricing. Instead, he will do what serious jurisdictions do: regulate. And this is what we’ve done in Canada, although many fail to see it.
"… Yes, encourage emissions pricing. But heed the evidence on the effective and relatively efficient role that well-crafted regulations can play in driving the major technological and energy transition we so desperately need."
Roger Gibbins, president and CEO of the Canada West Foundation, a public policy research group based in Calgary, 2009.
"If consuming fossil fuels poses a threat to the environment, then use carbon taxes as a deterrent, and the new revenues to develop less energy-intense forms of resource extraction and consumption."
RP wrote: "Even so, governments quietly did a bit of it, like with rebates to electric vehicle purchase or little subsidies to home efficiency or heating hidden behind mazes of websites and paperwork. But most were fig leafs which don't seem to have been intended to make any real difference, and those same governments have sometimes reacted with surprise and consternation when the programs happened to catch on and work."
Revisionist. Jaccard again:
"When asked which climate policy in Canada reduced the most CO2 emissions over the last decade, many people guess BC’s well-publicized carbon tax. They’re wrong. It was Ontario’s ban on coal-fired power, which reduced annual emissions by 25 Mt.
"Surely, then, BC’s carbon tax must have caused the most reductions in that province. Wrong again. The 2007 'clean electricity' regulation forced BC Hydro to cancel 2 private coal plants and its own gas plant. This cut BC’s projected annual emissions in 2020 by 12 to 18 MT. The carbon tax is slated to reduce 2020 annual emissions by 3 to 5 MT.
"It’s the same in any jurisdiction that has significantly reduced emissions. Experts show that the carbon pricing policy in California, which Quebec has now joined, will have almost no effect by 2020. 90% of that state’s current and projected reductions are attributed to innovative, flexible regulations on electricity, fuels, vehicles, buildings, appliances, equipment and land use. Even Scandinavian countries, famous for 2 decades of carbon taxes, mostly used regulations to reduce emissions. For example, the greatest CO2 reductions in Sweden happened when publicly owned district heat providers were forced to switch fuels.
"… Many economists — who, I repeat, never face voters — argue that regulations are economically inefficient compared with carbon pricing. This is true, especially if the regulations are poorly designed. Too bad that so few of these economists are willing to apply their intelligence and creativity to the design of relatively efficient regulations that also overcome the huge blockade of political acceptability. Fortunately, some have.
"The history of California’s vehicle emissions standard is illustrative. Since 1990, that state has required vehicle manufacturers and retailers to achieve rising market shares for zero-emissions vehicles (ZEVs) and partial-zero-emissions vehicles (PZEVs)." (ibid)
Under the NDP, Alberta decided to retire its coal fleet by 2030. PC Premier Jim Prentice had already agreed to phase out coal in 2014.
RP wrote: "Finally, the carbon tax is not as huge a deal any more because in the big fundamental areas of energy production and land transportation the new technologies we want to move to are already cheaper even with externalities ignored than the old ones we want to stop using. And so far, continuing to get cheaper."
And despite that, fossil fuel production and consumption have yet to peak. We need to move much faster. Use all the tools in the tool box.
Realistic price signals are essential for markets to function properly.
Consumers need realistic price signals to guide them towards rational decisions. Realistic price signals price unsustainable goods and services and design — and excessive behavior (consumption, pollution, waste) — out of the market.
We need to price all goods and services properly, including energy. Price in all health, environmental, and climate costs.
Wealth that degrades our life-support systems is illusory. The costs of climate change and fossil-fuel pollution are prohibitive. An obvious mismatch between costs and price. An economic system that permits/ignores/rewards damage to our biosphere dooms us to extinction.
The speed at which we shift away from fossil fuels largely depends on economic signals. Price in the damage, and fossil fuels become a losing proposition overnight. The fossil-fuel industry and system must cease to be a profitable enterprise.
Until then we subsidize our own destruction.