The definitive guide to pricing carbon: New report provides detailed guidance to policymakers

CALGARY, Sept. 15, 2016 /CNW/ - Many Canadian economists, politicians and even environmentalists are lining up enthusiastically behind pricing carbon as the solution to controlling greenhouse gas emissions in this country. But getting agreement on how to do that is more contentious.  In order to work, certain rules must be observed in order for carbon pricing to have its intended effect of achieving the optimal balance between emission reduction and economic growth.

Today, The School of Public Policy with author and noted economist Ross McKitrick released a report that clarifies and provides a definitive guide to pricing carbon. It explains important details that are well-known in the academic literature but have been overlooked in much of the popular discussion, such as:

• A carbon tax or tradable permit system is only efficient if it is used instead of, not on top of, traditional command-and-control regulations
• Carbon prices need to be adjusted to take account of inter-provincial variations in the marginal cost of raising public revenue
• The presence of market uncertainty makes a revenue-neutral carbon tax more efficient than Cap & Trade
• Climate-economy models yield a wide range of estimates of the optimal carbon price, but empirical evidence favours numbers on the low end

According to McKitrick, "First and foremost, carbon pricing only improves economic efficiency in the absence of other emission regulations. If pricing is simply layered on top of an emission-regulating regime already in place (such as emission caps or feed-in-tariff programs), it will not make the existing system efficient, instead it is more likely to amplify the inefficiencies. Carbon taxes are meant to replace all other climate-related regulation, not add to them."

He adds, "Revenue from the taxes should be returned to taxpayers, not funnelled into green projects. The point of carbon pricing is to let the market identify the optimal green strategies. If the government uses the tax revenue to subsidize options the market rejected, it undermines the whole logic of the policy."

There may be many reasons to recommend carbon pricing as climate policy, but if it is implemented without diligently abiding by the principles that make it work, it will not yield the desired outcome, and the harm to the Canadian economy could well outweigh the benefits created by reducing our country's greenhouse gas emissions.

The paper can be downloaded at www.policyschool.ca

SOURCE The School of Public Policy - University of Calgary

Media Contact: Morten Paulsen, 403.220.2540, [email protected]