Prime Minister Justin Trudeau has announced that Canada will implement a revenue-neutral carbon tax from 2019. The tax will be levied on suppliers of fossil fuels and on emission-intensive industries, which will pass through the cost to end consumers. The plan is described as revenue-neutral because revenue from the tax will be recirculated to citizens and will also be invested in emission reduction schemes for schools and hospitals.
Canadian provinces were given two years to design their own climate plans, to include putting a price on carbon. Measures have already been taken by some regions, such as British Columbia, Alberta, and Quebec. The newly announced federal carbon tax will be applied in the remaining provinces. It will start at $20/tonne in 2019 and reach $50/tonne in 2022. As the government announcement states, “A price on pollution gives people the incentive to make cleaner choices and gives businesses incentives to find clean solutions”.
A report from the OECD, published last month, found that few countries are pricing carbon high enough to meet climate change targets. Under the Paris Agreement, countries agreed to reduce emissions with the aim of holding the rise in global average temperature to “well below 2 °C above pre-industrial levels” and to pursue efforts to limit it to 1.5°C. Placing a price on carbon is considered by many economists to be the most effective approach to reducing emissions. Real climate costs are estimated to be €30/tCO2, and this level is, therefore, considered to be an effective price for carbon.
In the UK, the Treasury refers to a “Total Carbon Price”, which is comprised of the UK’s Carbon Price Floor (CPF) plus the price of EU Allowances (EUAs). The CPF, currently set at £18/tCO2 until 2021, taxes fossil fuels used in electricity generation and was intended as a top-up to the price of EUAs that historically were trading at low prices. The approach has brought about significant emission reductions in the UK power sector.
However, EUAs are currently trading at three times the levels seen a year ago, at around €19/tCO2, taking the UK’s Total Carbon Price significantly higher. An announcement on the future of the CPF could be made in the government’s Autumn Budget, although campaign groups are calling for it not to be diluted.
The UK’s future inclusion in the EU ETS will depend upon Brexit negotiations and whether a deal is reached.