Four Charts on Canada’s Carbon Pollution Pricing System

IMF News, March 18, 2021

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Author: Ian Parry, IMF Fiscal Affairs Department; March 18, 2021.
Canada has pledged to cut greenhouse gases by about 30 percent below current levels by 2030 and to achieve emissions neutrality by 2050.
To be carbon neutral, emissions would need to be cut by one-third below current levels by 2030, and by two-thirds by 2040.

The federal backstop establishes a carbon price “floor” while allowing provinces and territories flexibility to develop their own systems.
The federal price will progressively rise from CAN$40 per ton in 2021 to CAN$170 per ton by 2030.
Expected impact: help cut nationwide carbon dioxide (CO2) emissions about 33 percent below business-as-usual levels, in line with Canada’s targets.
Without such mitigation, Canada would be the tenth largest emitter in absolute terms in 2030.

A drawback of carbon pricing is higher energy prices affecting households, especially lower-income families who spend a greater proportion of income on energy.
Under the current plan, the burden for the average Canadian household in 2030 will be about 2 percent of consumption.
Canada returns carbon pricing revenues to households in the form of a tax rebate or through investments, offsetting about 80 percent of the burden.
This revenue recycling is highlighted as especially important during the COVID-19 recovery.

Energy-intensive firms competing in global markets (e.g., metals and chemicals) face competitiveness concerns.
Even a CAN$50 price would raise costs 1-5 percent for these firms.
Policy in Canada: these firms are required to reduce their emissions per unit of production but are not required to pay taxes on their remaining emissions.

Momentum for carbon pricing is building globally: carbon prices in the EU have recently risen to US$45 per ton; China and Germany have introduced pricing schemes.
Scaling up mitigation is difficult when countries act alone because of international competitiveness concerns and uncertainty about other countries’ commitments.
Proposal: an international carbon price floor where large emitting countries agree to implement a minimum price on carbon emissions and meet mitigation commitments.
- Design considerations: could be equitable with stricter requirements for advanced economies and assistance for lower-income economies.
- Flexibility: could accommodate alternative approaches and be applied flexibly across countries.
- Effectiveness: argued to be more effective than border carbon adjustments.
Canada’s approach—governments having flexibility to meet a higher-level pricing requirement—is presented as a prototype for global application.

Source: Four Charts on Canada’s Carbon Pollution Pricing System, IMF News (Ian Parry), March 18, 2021.