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Ministers face a fundamental dilemma in adopting a national carbon price

The only certainty going into next week's meeting of federal and provincial environment ministers is that carbon prices must rise far beyond current or contemplated levels to meaningfully reduce Canada's emissions.

Despite all the happy talk about British Columbia's carbon tax, Alberta finally seeing the light and the advent of cap-and-trade in Quebec (and soon Ontario), the truth is that the impact of such measures on CO2 levels will continue to be marginal without charging emitters significantly more to pollute.

Federal Environment Minister Catherine McKenna vows to plow ahead with a minimum national carbon price, but just how much actual environmental good (as opposed to political good) it will do is an open question. If Ottawa only matches the $16 a tonne that emission credits have fetched in recent Quebec-California cap-and-trade auctions, it won't make a difference. Even matching British Columbia's $30 a tonne won't move the dial much, and it's unlikely Ottawa will dare top B.C.'s price.

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B.C.'s carbon tax adds less than seven cents to the price of a litre of gasoline. Yet "climatecrats" and cheerleaders insist the tax is responsible for curbing fuel use in the province. More sober observers have exposed the wishful thinking involved in such analyses. Non-carbon-related provincial and federal gasoline taxes add about 25 cents a litre at the pump without deterring many drivers. How does adding seven cents meaningfully change the equation?

Indeed, the implied carbon price of gas taxes in Canada – which were not conceived as climate-change measures – approaches or exceeds $100 a tonne in almost every province. Perhaps the most interesting environmental experiment under way is in cash-strapped Newfoundland, which just doubled its gas tax to 33 cents a litre; combined with the 10-cent federal gas tax, that adds up to an effective carbon price of more than $180 a tonne, far exceeding any explicit carbon tax. But it may take a price that high to actually change behaviour.

The Organization for Economic Co-operation and Development "conservatively" estimates that carbon prices need to be set at a minimum of €30 a tonne (about $45) to offset the damage caused by climate change. By that measure, you might argue that Canada's transportation sector already assumes more than its fair share of the burden in the form of gas taxes.

The problem is that carbon prices are far too low in other sectors. An OECD report released this week concludes that 90 per cent of global carbon emissions "are not priced at a level reflecting even a conservative estimate of their climate cost." The study, based on data from 41 OECD and G20 countries, adds that "road transport has relatively high effective carbon rates," with almost half of the sector's emissions priced above €30 a tonne, mainly by way of gas taxes. The overall "carbon pricing gap" – the amount global emissions are underpriced – exceeds 80 per cent.

Even a global €30-a-tonne carbon price would not be high enough to meet the Paris climate accord goal of holding increases in global average temperatures below 2 C. More muscular measures, such as hard caps on industrial emissions, would be needed to get there.

The cap-and-trade scheme that Quebec and California jointly run, and which Ontario is set to join next year, has been a dud so far. The two most recent quarterly emissions auctions were woefully undersubscribed – just 10 per cent of available emission credits found buyers in the May auction, and about a third in the August sale. The latest $12.73-(U.S.)-a-tonne auction price actually overstates the true value of such credits, since it reflects a minimum floor price set by regulators. Prices on the secondary market are well below that level.

Governments have also failed to come close to realizing their revenue projections from cap-and-trade, with California raising only $10-million (U.S.) in the May auction and $8-million in August – a far cry from the hundreds of millions the state was banking on.

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California's long-term participation in the scheme is clouded by a court case alleging the auction process constitutes an illegal tax under state law, which requires that all tax increases be approved by a two-thirds majority of the state assembly. And the legislature has yet to green-light California's participation in the scheme beyond 2020, raising more questions about its survival.

All this underscores the fundamental dilemma facing Canada's environment ministers as they gather to forge a national climate strategy. They cannot raise carbon prices high enough to reach Canada's emission targets without leading to economically damaging carbon leakage or the displacement of economic activity to jurisdictions with low or no carbon prices.

The result is that, once the politicians are finished congratulating themselves, the adoption of a national carbon price will likely be a symbolic step that gets us little closer to our climate goals.

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About the Author

Columnist Konrad Yakabuski writes on politics, policy and business for The Globe and Mail’s Comment section and Report on Business. More

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