Skip to Content (Press Enter)

FARE-talk is to provide an enduring conversation about contemporary topics relevant to food, agricultural, and resource economics.

How Does Canada Put A Price On Carbon? - November 21st, 2019

[Introductory music]

Brady Deaton: Welcome to Fare Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture, and the environment. My name is Brady Deaton Jr. of The Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host. [music ends]

Brady Deaton: Hello, it's November 21st, 2019 and my name is Brady Deaton of the Department of Food, Agriculture and Resource Economics at the University of Guelph. Today we'll be talking to Ken Poon, the Director of Analytics for Blackstone Energy about generally speaking, how Canada puts a price on carbon, but with a bit of a focus on what we call the federal government's carbon tax. Ken, welcome to Fare Talk.

Kenneth Poon: Oh, thank you for having me.

Brady Deaton: Ken is also an alumni of our program and we're very proud of Ken. Ken, I thought you might, I guess, I don't know... You graduated around 2006 from the undergraduate program and then were in the master's program and today you're the director of analytics. I thought you could maybe talk a little bit about your journey to this point and how your role at Blackstone Energy gives you a unique insight into the programmatic and industry perspective about the carbon tax.

Kenneth Poon: All right, sounds good. Thank you Brady. So yeah, I graduated around 2007. At that point I was still in a environmental sciences program focusing on ecology and water resources. I think kind of through circumstance, met brady, who I took a course with, and that kind of really got me interested in environmental economics specifically. I thought, two years of a master's program seems like a good idea at the time, especially when it was during the recession. So I kind of went in there and I really kind of fell in love with economics and really just understanding the concepts of how can I tie economic theory together with kind of applied situations.

So once I graduated, I went on to work with the department for about five years or so, doing various papers and a number of policy and regulatory research and looking at their economic impacts on the agricultural industry. Then four years ago moved into this Blackstone Energy services company, where I focused a bit more on carbon pricing and cap and trade, and now I'm focusing more on analytics. So to backup a little bit, what my company does is we're generally an energy management company, at least that's how we started out. We focused on helping our clients procure natural gas and electricity, helping them manage their energy portfolio. So no surprises in terms of understanding cost, market implications and how that would impact their energy expenditure. Over the years, I think what we found was that environmental regulations and carbon pricing was starting to become a bigger thing for all our clients and for them to understand, because really even five years ago, I think knowledge on how these pricing system apply to industry, it was fairly muddy. It hadn't really been tried in a lot of places at that point, especially not in Ontario.

So when cap and trade came along, we really took on the mental of helping our clients understand and walk them through the regulatory process, how to participate in these programs and ultimately how these policies impact their organization. Not really just in terms of specifically on only their pricing, but also helping them figure out a management strategy. So for example, if they are going to have to renew their facility or do maintenance on a piece of land that they really have been neglecting due to lack of funding, rather than just buying a new boiler, could they do something where they put in solar energy or they put in geothermal, to really make that energy switch to more green source. I think what we saw was that these kinds of pricing policy really did help them push that kind of a transition, not only because of the price itself, but really getting our clients to help their organization understand how these kinds of policies really impact them in the longer term.

That's great. Now for the listeners out there, this podcast is happening in our land economics class and one of the key things that we try to work on in land economics and in economics in general is not only how to answer questions but how to ask them. So for the majority of the remainder of this podcast, the questions are going to be asked by students in this class and I'll begin.

Speaker 1: Hi Ken. I just wanted to thank you again for coming to talk to us today. We wanted to take a minute to discuss the actual structure of carbon pricing at the provincial and federal level. So the next couple of questions will be focused on this area. I understand that both provincial and federal governments can place a price on carbon dioxide. Can you explain the different responsibilities between the provincial and federal governments with respect to carbon tax?

Kenneth Poon: Yeah, sure. I think before I really go ahead to answer your question, I want to break down the term carbon tax a little bit, and help our listeners understand what carbon means and what tax means. From a carbon perspective, I think it's important to note that the federal government's not just putting a price only on carbon dioxide, but in all greenhouse gases. The reason carbon dioxide keeps coming up is because that's generally the benchmark in how we would measure different types of greenhouse gases and their impact to the environment. So for example, greenhouse gases that are under this regulation would be methane, nitrous oxide and a number of hydro fluorocarbons as well. And they all have differing impacts in terms of how long they would stay in the atmosphere and what we call global warming potential, would be on a per molecule basis.

For example, when it comes to methane, over a hundred year's time span, methane's impact is generally about 36 molecules of carbon dioxide. So what we would convert that impact into what we call a carbon dioxide equivalent. So when we put a price on carbon, it's really putting a price on greenhouse gas in general. But I think it's just a lot simpler to talk about it in terms of carbon, because it rolls off the tongue a little bit better. In terms of tax, it's also not really a tax. So the way, if you kind of read into the regulation, they really talk about it as a regulatory charge. There are legal ramifications in the differences. But I think for a lot of the consumers it's okay to call it a carbon tax because the end result is the same. We're putting a price on carbon. So generally I'll be using these terms interchangeably throughout the podcast. It's easier to kind of call it a carbon tax. So even if the terminology isn't exact, I'll continue to call it that.

Now in terms of the different structures and the different responsibilities between the federal and provincial government, under the environmental concern is a shared jurisdiction between the province and the federal government. In this case what we've seen previously was that there were a number of provinces that have kind of gone ahead and enacted their own carbon policy or greenhouse gas emission reduction policy. So we see in policies coming from BC as early as 2008. We've seen Quebec having their own cap and trade policy. Ontario also had their own cap and trade policy as well. Alberta also had a program in place before this federal program came into place.

Now what happened two years ago around that point is, the federal government came in and said we need to have a minimum standard on our carbon pricing program, and that's when they enacted what we call the Pan-Canadian framework, which is a national wide program that covers all the provinces. The terminology there is that it's a backstop. So the federal government would impose a minimum standard on all the carbon pricing programs across the provinces and the territories. Those that are able to meet or exceed that standard are able to keep their program. Those that falls short or that don't have a program falls under the federal standard.

Speaker 1: Thanks Ken. I'd like to ask you a little bit more about the nuts and bolts of the federal carbon tax, in regards to levels. My understanding is that the federal carbon tax is broken into two different structures, fuel charges and output-based pricing. Can you please explain the two programs and how they're implemented?

Kenneth Poon: Yep. So you're exactly correct. There are two sections of the program. The fuel charge one is something that we're pretty familiar with, as regular day users of natural gas and fuel. What that is, is really just a flat tax on per unit off consumption of natural gas or any kind of fuel there. So that program from that perspective, what we see is generally an escalating price on a per unit of molecule of natural gas or fuel, that escalates over time. So that really covers a lot of the general fuel consumption across the country.

Now the more detailed and the more intricate aspect of this program is the second piece, which is the output-based pricing system, the OBPS and for that piece that's specifically for what we consider to be large emitters. So anyone that are over 50,000 in emissions on a per annual basis, 50,000 tons of CO2 equivalent. And for that program, what it really aims to do is allow some flexibility for these larger emitters to manage their carbon exposure and also in some cases actually reduce it, some of the effective carbon prices as well.

Speaker 1: Okay, thanks Ken. So our question is about large emitters, but you kind of answered that. The followup question was how does the tax apply to the agricultural sector?

Kenneth Poon: Yeah, so there's two ways that the tax currently applies to the agricultural sector. So I'll talk in general first. In the agricultural sector, there's generally a field tax exemption, but that's really only for truck and tractor use and not for personal vehicle use. Anything that are used for buildings or industrial machine like [inaudible 00:11:00] as well, that's also not part of the exemption. But in order to get that exemption, you really just need to fill out a form with Canada Revenue Agency and to be able to apply for that credit. But the second piece of that is greenhouses within the ag. sector also have a specific exemption, which is that they only really pay 20% of the fuel charge, but they also have to apply for an exemption certificate.

Speaker 1: And then our next question is, if I was to tell someone what the present price of carbon was in Canada or Ontario, what would I tell them and how could they expect it to evolve over time?

Kenneth Poon: Yeah. So there's generally two ways to talk about carbon prices. The first way is what the government have generally, really published a lot is on a per ton of carbon dioxide equivalent basis. Right now, what that is is $20 a ton in 2019 starting in April and that would go up $10 per ton every year until April, 2022, when that price is going to stabilize at $50 per ton. Now that kind of pricing isn't very useful for everyday users. So generally what we like to talk about with industry as well is, in a term of either an energy or a volumetric perspective. So on a per cubic meter of natural gas that you would consume, what would that charge look like on a per liter of gasoline you would consume? What would that charge look like? So in the way that the regulations we're in right now, they're actually prescribed that way, in these volumetric or energy units.

So for natural gas right now that's about four cents per cubic meter consumed, and that would go up to about 10 cents per cubic meter in 2022. Then for gasoline, that's about four and a half cents per liter, going up to 11 cents per liter in 2022. So the good thing about this kind of this pricing program is that those pathways are fairly prescribed. We don't really expect a lot of changes between now and 2022. Now in the future, once we hit that point, currently the plan is for that carbon pricing to stay level, but it could be the case a couple of years down the road once they review the program and look at the efficacy and the efficiency of how they're doing things, we could see some of that carbon price change as well, or other areas of the program could also change.

Cody: Oh, hi Ken. So I'm just following up on the federal carbon tax. So one crucial question that people usually wonder about the carbon tax is, how the revenue will be collected and where the revenue would be allocated afterwards.

Kenneth Poon: Yeah. So right now the revenue are generally collected by the field distributors for the fuel charge portion of it. What that is, is on your natural gas bill, you are going to start seeing lines if you pay your utilities. You're going to see the lines under a specific line called a federal carbon levy, and that's kind of collected by the natural gas utility or fuel distributors, which then is going to get remitted back to the government. So that's the collection process. In terms of the distribution and how it's redistributed to Canadians is that 90% of what's collected actually goes back to your individual tax returns as a tax credit. That's the idea of revenue neutrality, is that they are collecting the tax to implement a price signal, but generally no impacts in a wealth perspective.

Now they do keep 10% of that money back and that actually goes towards public sectors. So municipalities, universities, schools and hospitals generally. What we consider and what we call them [mush 00:14:59] sector. So the reason this program came into place is that these public sector entities can also have a fairly large carbon footprint, just because they have a fairly large building portfolio, but because they're not industrial, they're not really participating in any industrial activities. They're not able to participate in the industrial [inaudible 00:15:26] program. What that means is that they are left to their own devices in figuring out how to reduce their emission or managed carbon costs. So that 10% is meant to help them look into different ways to reduce their carbon emission and reduce the energy usage.

The other piece of this is that, as that carbon price goes up on an annual basis, the rebate also goes up. So that 90% also increases, and the refund and the fund into the mush sector into the public sector also increases as well.

Speaker 2: So to build on Cody's last question, I want to build a better understanding of the consequences of the carbon tax. We discussed earlier that some provinces have their own plans, but for those who don't, there is a national plan. Do differences between provincial and federal plans influence industry level decisions? For example, might certain industries prefer one province to another depending on how they are regulated?

Kenneth Poon: Yeah, so I think what you're referring to here is the idea of leakage, which we talk about a lot and which is a major concern when they design these programs. To give the listener a little bit detail on what leakage means is exactly what you just talked about. If you implement some kind of a carbon pricing program and they take their businesses and move it elsewhere with a less stringent or no carbon pricing, or no carbon policy at all, then really you're not any better off in implementing carbon pricing because globally you're still generating the same amount of admission, meaning that the policy's ineffective. So in order to-

PART 1 OF 3 ENDS [00:17:04]

Kenneth Poon: Meaning that the policy is ineffective. In order to kind of address that concern, that's one of the key components of the output based pricing system, the OBPS program for industries, which is meant to address that leakage risk. In this program, when a large industrial user is in the program, they don't necessarily pay the carbon cost on a per unit of natural gas or per unit of energy use basis. They actually pay in comparison to a national benchmark that's been set. Let's say for a cement company or a cement factory, if they are admitting on a per unit of output basis, if they're better than the benchmark, they actually get to generate some credit and they get to keep that credit for future use. It's only if they exceed that benchmark, they pay the difference between what they've admitted versus the benchmark. It's really that marginal impact of carbon pricing that they need to pay.

In fact, this actually reduces their carbon cost by quite a bit and it helps kind of really alleviate that concern that they may just really go elsewhere and pollute. And a lot of cases also I think it's difficult to really think about carbon pricing programs as its own. You really got to think about it as a wider context of that pan-Canadian carbon policy framework as well. Because there are other kinds of levers that the government do poll in terms of trying to keep the industry away from moving to kind of less regulated jurisdictions. For example some of these industries would see incentives for them to further reduce their energy use or for them to manage their carbon processes a little bit better. Yes, I think there is always kind of some concerns and some considerations when it comes to carbon pricing differences between one province versus another but I don't think that difference is as stark as what I think the media makes it out to be.

Brady Deaton: Thanks Ken. You talked earlier, about some of the emission levels and how they're kind of regulated. Going at this in terms of reductions, what are the government's target emission reductions? And how do the government accurately assess whether these targets are actually met in the end?

Kenneth Poon: The major target that we've kind of put in place now and that we've submitted as part of the Paris agreement is 30% below 2005 levels. And interestingly enough that was actually set by the Harper government, before the Liberals came into play. And in order for us to, for the federal government to really measure how well they are meeting that target, there's always kind of been discussions about what is the best approach in terms of capturing the total emission from a country. Currently, and this is standard practice in most countries is they look at kind of their economic activities. They basically source what we call the input output tables and that really captures the inflows and outflows of the country in terms of economic activities. And they assign carbon, they basically assign carbon emissions based on those activities rather than from a consumption or from a production perspective. And overall when it comes to kind of national measures in terms of how well the country is doing against a target, that's the information they would use.

Brady Deaton: Very good. Thanks. Another thing that I would say a lot of consumers and maybe even the listeners that would be curious about is how this affects their other product prices in the market. What is the impact to the consumers in terms of raising prices of other consumer goods? And does the rebate actually effectively mitigate this concern of how they allocate different prices?

Kenneth Poon: Yeah, I think this question always comes up, so I think this is a great question. Yes, I do believe it is meant to raise the prices of certain consumer goods, but I also think that's the point of having a carbon price is what you essentially want to do with a carbon price is provide a price signal for capturing really negative externalities that certain decisions you would make in purchasing will lead to kind of negative environmental impact. That yes, that is the point and it is supposed to make certain things more expensive. Now there are two kind of, when we kind of take a look at this pricing, we do usually find two different, I guess kinks to the idea. The first one is usually what we find is that pricing because it is tacked on, on a per fuel basis, the underlying commodity price also shift up and down and a lot of times that's actually more volatile and compared to what the carbon price would be.

For example, this is something something we looked into about a week or two ago, is that if we take a look at natural gas prices with carbon pricing in 2022 you were actually, even with that carbon pricing at $50 a tonne, we're actually hitting around the the average natural gas prices we would have seen over the last 15 years or so. There is kind of questions about where as a pure price to know how well that works, just on its own. But one thing to really keep in mind is that it's supposed to be a relative price against other goods you would buy now. For example, your carbon price would increase kind of the cost of owning a car with an internal combustion engine over its lifetime compared to an EV or electric vehicle that you would get today. What that carbon pricing is meant to really signal is reduce that gap in prices between the two different type of products.

It makes a carbon intensive purchasing choice more expensive and makes a carbon efficient or a lower emission choice, more kind of more attractive in kind of purchasing decisions. And we're actually seeing that a lot in terms of kind of longterm procurement of really energy and as well as kind of the way that our clients manages their buildings, et cetera. Instead of looking at a cogeneration unit which uses natural gas to generate their own electricity to offset electricity costs et cetera, they're now looking at solar, they're now looking at geothermal. I think kind of it's difficult to really just look at the price itself on the commodity basis. You really want to look at it in terms of a, you really want to understand it in terms of how it impacts and the different business decisions. Because a lot of these changes are going to be longer term changes and that's the point is that we were putting in a price now, but we do kind of start shifting that analysis and shifting our thinking to making decisions that are more carbon neutral or more green so to speak, over a longer term of time.

Speaker 3: Hello Ken. Some people are concerned about the effect of a tax on firm competitiveness in Canada. I imagine this varies depending on the industry or sector being examined. From your experience, can you tell us how do the different industry sectors feel about this tax?

Kenneth Poon: Yeah, that came up a lot. Especially I think kind of around the time when cap and trade came along in Ontario. Cap and trade went away and then the kind of federal pricing came back. I think working with industry closely, it's very difficult to paint kind of the industry's opinion within this with just the same brush. A lot of times when we talk of industries, they're generally different actors even within industrial emitter where they would be championing more environmentally conscious decisions and I think kind of a lot more businesses are starting to do that now. Now in terms of kind of the, in terms of the how industry generally feels, I think they are generally for carbon pricing. Actually kind of something that we found recently is that when the federal pricing came along, Shell Energy was actually very, very supportive of it.

And I think the main reason is that the way that the pricing policy is structured, it's very transparent and there's a longer term horizon for them to really understand and consider when they make business decisions. Generally what industry doesn't want is kind of shifting policies year to year or something that is very difficult for them to understand. If they can see the cost and if they can understand it and understand how it applies to their operations, they can plan around it, they can make decisions that would work with the pricing rather than worry about what changes may come up along later on that would kind of reverse some of their plans. And I think the other piece why industry is generally supportive of it is that the government have done a fairly good job in terms of consultation with industry when they were setting up and they were designing these policies. And you see that in terms of that output based pricing system, the industrial benchmark program.

And that program is generally meant to provide relief to kind of large facilities in the country that would generally be what we consider trade exposed. If you input a carbon pricing, they're more likely to move their operation elsewhere. Because of that stakeholder consultation and because of a fairly robust communication process, we found that the industries generally got what they want in terms of stability and in terms of fairness, when kind of these benchmarks are put into place. And that really did kind of help, that really did kind of push industry to really support these pricing. Because without industry support, it's very easy for us to see them really lobbying for different types of pricing programs or laxer pricing programs or more relaxed regulatory regimes. And we're not really seeing that at this point. I think it's a good thing at this point that we do have the industry support and I think that's also global too, it's not just Canada that we're seeing the support. Kind of across the world we're seeing more industry kind of signing up and understanding carbon pricing and really incorporating it into their business strategies.

Speaker 1: You mentioned earlier how British Columbia implemented their carbon tax in 2008 which made it the first comprehensive and substantial carbon tax in North America and ultimately resulted in reduced emissions in the province. What lessons can the rest of the country take from BC's experience so far?

Kenneth Poon: Yeah, so I kind of, do you want to give a quick background first on the carbon BC carbon tax? I just mentioned it in passing. The tax itself is not unlike what we see in our federal fuel charge system now. It is priced on a per carbon dioxide equivalent basis. What we have right now is about a $30 a tonne since 2008 but that price haven't really been changed for a long time. It will eventually go up to 50 by 2021 and that tax is also similar to the federal system in that it's a revenue neutral. You would pay the tax on your fuel bills, but you also get that money back in terms of your tax return.

I think kind of two major lessons from BC, first one is due to a negative unintended consequence coming out of this BC program. And the second one is a positive consequence of the BC program. In terms of that kind of negative consequence was that when they put that price on carbon in BC back in 2008, the leakage concern wasn't really top of mind at that point. What we actually did see for the cement industry was that the carbon tax was actually applied to them and we fairly quickly saw that the cement industry actually disappeared in BC. And what we actually came back with was a lot of imports of cement from China. In that sense, the policy itself didn't work as intended because yeah, they apply the tax on carbon but globally we're actually still really, we have the same impact in terms of emissions when it comes from the cement industry and now they can't really regulate or they don't really have visibility on that kind, on that source of emission.

When I think kind of what came out of that lesson is the output based pricing system, the OBPS where they were able to address kind of leakage concerns. They are able to consult industry and they do listen and kind of make sure that they are considered in terms of kind of this economic and trade exposure impact. The second lesson is a positive one is the longevity I think of the carbon system over in BC. That system's been in place for 11 years now, almost up to 12 and that's actually lasted through three general elections. And I think kind of from a global perspective when different countries and different foreign governments look at the BC program, they really point to the longevity of the program due to the revenue neutral aspect of the tax. And that kind of did gain kind of sustaining support of a pricing system when the voter base really knows that it is a pricing signal, not necessarily a wealth impact overall. I think that's, and I think kind of both lessons really have a strong hand in designing what we saw as the current federal policy today.

Speaker 1: Many other countries have opted for cap and trade policies instead of carbon taxes. It's my understanding that Australia and Canada have comparable energy and natural resource industries, but Australia also chose a cap and trade policy instead. What do you think the advantages and disadvantages are of choosing a tax over cap and trade?

Kenneth Poon: This is one of my favorite topics because I had to really learn and dive deep on both the cap and trade system as well as the tax system that we currently have now. Stepping back a little bit, we haven't really talked about kind of mechanics of cap and trade. I'm going to kind of flip your question around and talk more about cap and trade first, the advantages and disadvantages we see in terms of cap and trade compared to the current tax system. Just a brief explanation on cap and trade. It's like the name suggests, it comes in two parts. The cap is where the program itself actually limits the number of emission allowances that can exist in any given year within the system. And that's really meant to fix the amount of emissions that any participant in the program in total can emit.

It's a fairly strong cap in that under these kinds of programs, you generally don't see emission exceeding this cap. Or even if they do, it might be very minor because the cap is generally very strong. Now the trade aspect of it more have to do with once these emission allowances are distributed to the participants of this program, they have the ability to freely trade these allowances. Which means that kind of if a participant is fairly green or they're really good at controlling emissions, they're able to kind of find measures to further reduce energy usage or change their production to emit less carbon, they're able to kind of bag those allowances and sell it to another facility where maybe they don't have that choice. They don't necessarily have a way to limit their emissions yet.

PART 2 OF 3 ENDS [00:34:04]

Kenneth Poon: ... a way to limit their missions yet. So in that sense, when that kind of market trading mechanisms happen, what we generally see is lower carbon prices in order to meet that cap. And so what you see in a Quebec system, and that's why it's able to exist under the federal program, is that Quebec has cap and trade. Even though its common prices is generally lower, it still meets that federal standard of reducing emissions because they are able to put that hard cap on the entire province, or at least in conjunction with California. So we talked about the advantage, which is that it's generally lower costs per a unit of admission because of the free trade and there's more flexibility and compliance option as well. So a facility can hold on to that emission limit and use it later.

They can sell it now or they can, in some cases, set procurement plans to really buy these allowances off the system. Or they could say, "I only want to buy allowances when it's only below a certain level, because above a certain price, I am going to go do something about it, in terms of figuring out a mitigation strategy, et cetera." Now, one of the issues with cap and trade that we found was that it's fairly complex in terms of understanding the program, participating in the program, and also in terms of the way that markets are driving the prices as well. So I'll talk about the complexity piece of it first, which is that a lot of these participants in these programs, it takes a long time for them to understand the program for them to implement a cap and trade strategy to go to markets to auction for these allowances or to really come up with a procurement plan that have a set budget.

So with cap and trade, because the prices tend to fluctuate, it's difficult for them to grasp what that cost of carbon would be, and in the end actually makes it a little bit more difficult for them to plan in terms of making a business case for emission reduction strategies, et cetera. Now the second piece that I find have been at a disadvantage compared to a more simple tax, is that there are external forces that could also drive prices. What we seen in 2007 when Ontario had tap trade along with Quebec and California, was that California all of a sudden got hit with the lawsuit, really crushing into the legality of the cap and trade system. Lawsuit's been settled, so it is legal. California still have this program, but at this time, because there was a risk to the system as a whole, we really did see these emission unit price plummet, one, because a lot of companies are really just holding back and say, "Well, I don't know if this program is going to still be in place. I'm just going to hold back and do nothing for now and wait until we can better assess the risk, in terms of our portfolio, in terms of whether this program is still going to be in place, or do we need to do something else?"

So I think that's the difficulty with cap and trade. Yes, it's more efficient, but it's generally harder for businesses to grasp. Now with the tax though, it's easier to understand, but it does take a bit of a higher price compared to the cap and trade system for it to be effective. So if looking at pure price signal itself, I think the general consensus is it's about $65 per ton to about $100 per ton in order for that price signal to really drive changes and consumer choices. So it's the efficiency argument, "Hey, it's kind of expensive. It's kind of expensive compared to a cap and trade auction where it's more market efficient." But I think along with that, that revenue neutrality of the current system really does help address some of that, because it's still a price signal but it have much less wealth impact on everyday consumers.

Speaker 1: All right. So this question is about the potential for international cooperation. Canada contributes less than two percent of global greenhouse gases. So my sense is that Canada's actions have to be coordinated with other countries' reductions to have a substantial effect. Do you think that this will happen? And what happens if Canada were to go it alone?

Kenneth Poon: So yes, you're correct. Canada makes up a very small percentage of global emission, but I think it's very interesting to see that they actually have a very large presence in the global stage. That far outside [inaudible 00:38:56] is the admissions that we would control. And I think a lot of that is because Canada intentionally became a leader internationally in carbon pricing strategies, setting carbon pricing policies, and really took on the mantle of really driving this change. So, for example ... well, previous Prime Minister Catherine McKenna, minister of environment, she was the inaugural chair of the Carbon Pricing Leadership Coalition. So this was an organization, nonprofit, backed by the World Bank where governments internationally came together to share learnings about what's the best way to implement common pricing strategies, sharing lessons about what strategies work in terms of implementation, what strategies work in terms of communication, and in terms of setting these kinds of policies that are robust, that makes sense to each of the governments, and that are long lasting.

So Blackstone and myself, we've participated in a lot of these calls as this group evolved, and we've really seen a lot of changes in terms of the membership countries really starting to take action on understanding and implementing carbon pricing policies, because it's a lot easier for them to learn from leaders rather than to go at it themselves alone. Now we are also a leader on really reducing our reliance on coal from our consumption, not just nationally but internationally as well. So Canada along with the UK is leading on the Powering Past Coal Alliance, which now has about 80 governments across the globe to really help phase out coal power and accelerate clean growth. I think as examples of what we've done as provinces, in terms of what we saw in Quebec with the cap and trade system, and with BC, those are key lessons that we can share with the world to for them to learn, "Hey, here are some of the things that work and some of the things that don't work."

And I think in terms of whether if Canada is going to go at it alone, I think maybe if we were to ask the question five years ago, I think possibly there could be a chance. But now, given the Paris agreement with really the world signing on in terms of agreeing to mitigate carbon emissions and agreeing to work together globally, I don't think there's much of a chance now. So one of the major key pieces in this coming up agreement, I guess in December would be in Spain now would be really working out the details of what's called article six under the Paris agreement, which in simple terms is really a common set of rules for all governments across the globe, and tracking emissions and tracking how they're reduced. And in this piece, what they're really working out is how do they really work out the sinks and balances between countries into this mechanism called ITMO, Internationally Transferred Mitigation Outcomes. And I think this piece is meant to help governments link their efforts together and avoid double counting for one, but also to make sure that everyone's going to be able to keep their promises and what they submitted to the Paris agreement in terms of their stated intentions to reduce. So yeah, I think now there's very little chance of Canada going it alone, which is a good thing.Speaker 1: Okay. So just bringing it back into the Canadian context a little bit more, we've learned that economists have focused on the efficiency involved in setting a constant carbon price across Canada. And I wondering if you could elaborate on this issue.

Kenneth Poon: Yeah. As an economist we always love efficiency. So I think really the way that we think about efficiency in terms of coming up with a constant carbon price, if we think about achieving the most bang for the buck, or really making sure that we're setting these carbon prices at a point where we don't really need to set them up too high, in order to drive certain kinds of actions and certain reductions. Now, because if it's a pure pricing signal, generally what we find is that, like I've said before, it's less efficient compared to a cap and trade system where the market dictates the prices. You generally need a much higher pricing signal to drive the same type of emissions. But I think the general consensus is that when it comes to efficiency, what we found was that we can't really just look at it from an academic or a conceptual perspective.

When we had cap and trade and when we were working with clients who really understand how this type of system works, a lot more costs came up than we would have anticipated. Then a lot of our clients have anticipated it's the cost of really understanding the program. It's the time that's needed to allot to really making sure that the companies are compliant with this kind of complex system. And I think in some cases, we've even found some industrial clients actually creating positions purely to manage our cap and trade policies alone. So when it comes to efficiency, I think we need to look outside of just transfer efficiencies between pricing signals and really think about from a more holistic perspective, whether an intended piece of policy that's meant to be efficient, whether there's additional costs that we haven't really thought about.

A lot of cases, I think that's why carbon tax policies are becoming more and more popular, because there are generally less that you need to learn and less that you need to do. The process is a bit more transparent. A carbon price is a carbon price that you can apply, and it's generally pretty static and we're not expecting a lot of volatility and understanding the economic impact or financial impact to an organization. And I think the second piece that twist that efficiency argument is the longevity of the program. So from a cap and trade perspective, what we saw was that because the program was so complex, it wasn't just the companies having difficulty wrapping their heads around it. The media was, and I think a lot of everyday consumer was as well.

And what ended up happening was that there were a lot more room for misinterpretation, which I think from our experience led to the risk. And eventually what happened was the cap and trade program went away, because there's more ways to attack that program. Now, I think with the way that it's currently set up now with the fuel levy being revenue neutral, I think stability is really key. There's no point of having an efficient program that goes away in two years, rather than having a less efficient program that we know will generally stand the test of time. So over the last five, 10 years, until we really figure out something better. So it's really one of those things that I think really need to be kept in mind when we put our economic lens on understanding policies and programs.

Brady Deaton: I've already learned a great deal, so I just want to thank you on behalf of our class for clearly your prepared and thoughtful answers to the class questions. I did want to before ... I'm conscious of the time ... before ending, give you an opportunity maybe if ... I don't know if there was something that we haven't touched on, or are there other issues that listeners might want to be aware of moving forward, if you wanted to touch on any of those?

Kenneth Poon: Yeah. First of all, just want to say the questions were really amazing and I think the way that they're asked, I think they really get at the different aspects and perspective of this. It's more simple than cap and trade, but still a really complex set of programs and policies in place. And I think with the podcast, I think you really teased out the really important pieces for people to know. So some of the things that we really didn't have time to talk about is, I just really want to address the fact that we can't really look at a single piece of policy in a vacuum. So it is a Pan-Canadian framework. Within this framework, there are more than just the carbon pricing policy. So even just think about the fact that a tax is a tax until it's not, when you can consider different ways that you can implement that tax.

The key piece here being revenue neutrality being a key reason why we are seeing more longer term carbon policies and more politically stable policies. And I think in terms of a suite of policies, it's really important to also understand the other things that may entail when it comes to limiting or regulating emissions. And it's kind of a carrot and a stick as well. So the tax is kind of the stick, but we also see a lot of incentive programs in place that can drive further emissions down. And then I think the last point I want to make is that ... just something to keep in mind is don't just think about policy and don't really measure policy only on efficiency.

I think there are many more pieces to really think about whether a policy is good or not. I think economic frameworks is very useful in terms of really distilling the key information and the key drivers in any given policy. But that's not the only thing. I think with what we've seen in Canada is that communication matters, transparency matters. And I think public opinion on a program also matters a lot. So there is a whole suite of constraints and really political considerations that we need to think about when designing a piece of policy. And I think right now we're doing a fairly good job, but we'll see over the next couple of years and how this will evolve.

Brady Deaton: Ken Poon, thank you very much.

[music begins]

Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcast.

[music ends]


Click the following link to listen to the audio recording of How Does Canada Put A Price On Carbon?.

Podcasts sponsored by The Institute for the Advanced Study of Food and Agricultural Policy.