Nov. 18, 2019

Who on Earth will pay for climate change? "Less heat and more light" needed in carbon policy discussion

Carbon pricing is a hot-button issue across the country, yet experts seem to agree that some form of levies or taxes is inevitable as the world moves toward climate action. The question then becomes what policies Canada can adopt in order to avoid being left behind on the global stage.

As 100-year floods start happening every other year, hurricanes become more powerful and kids are stuck inside on summer days because of smoke from forests burning hundreds of kilometres away, we’re beginning to pay closer attention to the weather, watching climate change in action. Canadians are also talking more about what policy action — if any — their political and business leaders are taking to reduce greenhouse gas emissions (GHGs), meet international targets and lessen the effects of a changing climate.

There is no consensus about how best to proceed. Climate action incentives and carbon policies have become a political hot potato. Globally, policies to reduce emissions yo-yo with new party leaders and their governments. But like it or not, carbon policies are coming and they’re here to stay. “That’s where the world is going,” says Dr. Harrie Vredenburg, PhD, a professor and Suncor Energy Chair in Competitive Strategy and Sustainable Development in UCalgary’s Haskayne School of Business and a research fellow at the School of Public Policy. “Anywhere I go in the world — Japan, Europe, downtown Calgary — people talk about the global energy transition. And the driver of that transition is lowering our emissions.”

The move to reduce our reliance on fossil fuels won’t happen overnight. It’ll take decades for the engineering and infrastructure to catch up with the desire to use cleaner energy. For the foreseeable future, oil and gas will continue to power a big part of daily life from Canada to China. Even Costa Rica, which aims to use 100 per cent renewable energy by 2021, has a tourism-reliant economy that depends on millions of visitors arriving every year on carbon-spewing airplanes. “It's not simple stuff, and the answers are not simple either,” says David Wright, an assistant professor in UCalgary’s Faculty of Law and an expert in environmental and energy law. “It's unfortunate that there's a tendency to try to look for easy and simplified answers to complex issues.”

You'll have people who just don't think Canada should do anything.

In some quarters, one of those simple answers is that Canada, a relatively small contributor to global emissions, doesn’t need to implement any carbon policies at all. “You'll have people who just don't think Canada should do anything,” says Dr. Jennifer Winter, PhD, an assistant professor in the Department of Economics, and scientific director of energy and environmental policy at The School of Public Policy. “It's the classic collective action problem. Everyone would be better off if we all cooperated, but there's definitely a large incentive to free ride on the actions of other countries.” Still others try to defend the lack of action on climate by pointing the finger at laggard countries. “Digging in our heels and saying, ‘Well, Venezuela’s not doing this,’ is not helpful,” says Vredenburg. “Because Venezuela's not Canada. People don't look to Venezuela to be progressive and activists don’t target it for its environmental shortcomings.”

While some ignore Canada’s responsibility to lower GHGs and others question the science behind human-caused climate change, more meaningful conversations about climate policy are occurring in courtrooms and boardrooms across Canada. “For most people, we've moved past whether or not we should do anything,” says Winter. “And to me, that's really positive in terms of moving the public policy conversation.” For Canadians to have a productive conversation, it’s important to be informed on the options and consequences of climate action. As Wright puts it: “We need less heat and more light in the debate.”

Wither the carbon tax?

Over the years, the idea of a carbon tax as a policy instrument to reduce emissions has been both promoted and vilified in Canada and elsewhere. Some claim a carbon tax ruins household budgets, kills jobs and destroys the broader economy. Ample evidence, and economists, say otherwise. “If we think about the options that are on the table, carbon pricing is the least costly way to set us on a path for lowering emissions,” says Winter.

Other policy instruments to reduce emissions include cap-and-trade programs or increased regulation, or some combination of the two. With cap-and-trade, a cap is placed on the total allowable emissions in a jurisdiction, and companies get permits for emissions which they trade back and forth. While this system provides certainty about the amount of emissions, there is no certainty on price because that depends on the trading. Cap-and-trade has other issues as well. “There are limits on how large the cap-and-trade system can be,” says Winter. “Companies have to have a certain size to be able to handle the administrative burden. And the same holds true for governments. The capacity within governments for policy analysis is very different from say, Ontario to P.E.I. That's a consideration when choosing policy actions.”

Carbon taxes have been poorly executed. 

Or governments could move away from the idea of pricing emissions with a carbon tax or cap-and-trade system and turn instead to regulation. For example, a government could require homeowners to upgrade their insulation and windows, or at some point, make a drivers’ license dependent on having an electric vehicle. “The more involvement the government has to have in regulation or the implementation and oversight of a cap-and-trade system, the costlier it is,” says Winter. “That’s why economists like me are arguing for carbon pricing, and specifically a carbon tax, because that minimizes the administrative burden associated with the policy.”

Many advocate that carbon taxes be revenue neutral, meaning the proceeds offset other taxes, ensuring it doesn’t become a tax grab. “In theoretical terms, a carbon tax is an incentive both to reduce behaviours that cause emissions and to innovate and create new lower-emitting energy production and consumption processes," says Vredenburg. "But carbon taxes have been poorly executed. Governments are now recognizing that you've got to give it back.”

Rehabilitating and rebranding the carbon tax

In parts of Canada, carbon taxes have a serious branding problem. Millions of voters have been convinced it's economically ruinous. The carbon tax may have a better chance if it was rebranded altogether. “Politicians need to win,” says Vredenburg. “But I think the smart politicians, will say okay, I won the election and now I'll have to find a way to soft-pedal this. I'll rename it something else that sounds nice.” In the U.S., a bipartisan group is promoting the idea of a “carbon dividend,” a name that makes it clear to the taxpayer that they get something back for reducing their emissions.

“I think ‘carbon tax’ has a couple of problems,” says Dr. Aseem Prakash, PhD, director of the Center for Environmental Politics at the University of Washington and keynote speaker at a recent Global Energy Challenge at the Haskayne School of Business. “First, the word ‘tax.’ People on the whole don't like taxes. And second, they may be okay with the gas tax that could repair the roads they drive on. But they're not happy with a tax for something that's global. People want to solve local problems. And if you tax them, they want to know what the money is going to do.”

Voters are increasingly skeptical of government, big business, institutions and people talking about climate change, says Prakash. Ordinary people are not always convinced they should “pick up the slack for a problem we can't solve.” He argues many are worn out by the “broad moralistic language” around climate change and are unable to relate to the endless policy debates. “If I was a politician and I wanted climate policy to move forward, I would not put bets on the carbon tax — at least in the short term — because there is so much backlash.”

Yet it’s important to invite more people into an informed conversation around carbon policies. Winter and her colleagues in the School of Public Policy, along with the University of Regina, are developing a website that will calculate the cost of a carbon tax for households across Canada. “We're going to calculate the costs across the income distribution,” she says. “In order to calculate the cost, we have to have certain assumptions about things like the fuel efficiency of vehicles and number of kilometres driven in a year. We want to be able to have that be adjustable. So people can change the assumptions, and it'll pop out a different estimate for them.”

Sharon Mascher, a professor in the Faculty of Law at UCalgary, is working on an infographic brochure to help people understand the Canadian approach to carbon pricing. “Given changing provincial governments, it’s a moving target,” says Mascher, an expert in environmental and climate-change law. “However, carbon pricing mechanisms are increasingly common and have become an essential tool in national and global efforts to mitigate climate change.” Alberta introduced North America’s first carbon price in 2007. Outside Canada, 18 jurisdictions collect at least one carbon tax and 55 have emissions trading schemes that price carbon.

As the debate continues about carbon taxes, Winter thinks citizens may warm to the idea when they have better information about the actual costs and can see the benefits of the policy in a more concrete way. “People don't necessarily understand how a tax changing behaviour helps the environment,” she says. “Whereas something like investing in renewables or investing in transit to help people switch from personal vehicles to public transit, that's a much more tangible action that is easier to grasp in terms of how it'll help.”

Climate action is good business

Climate change policy has been a hot topic in boardrooms for years. Investors and other organizations are demanding companies state how they’re moving to a lower-carbon economy. Many Canadian business leaders, including those in the oil and gas industry, have publicly expressed support for carbon policies because it’s in their corporate interests. “That's what investors want to see from Canadian companies,” says Vredenburg, “We want you and your jurisdiction to show that you recognize we're in a global energy transition and you are part of that transition.” Corporations are responding. Hundreds of the world’s biggest companies are already including carbon pricing in their internal accounting. “Even oil and gas companies are saying, ‘Look, we want a carbon price. We just want the regulatory certainty,’” says Wright. “Many oil and gas majors have been using shadow pricing in their own ledgers for quite a long time.”

Moving from hydrocarbons to cleaner forms of energy won’t happen overnight. Take, for example, the electricity sector. While wind turbines and solar farms hold much promise to produce massive amounts of electricity for grids around the world, significant engineering obstacles remain. “In the electricity sector, it’s really tricky to have a high share of renewables right now because of the intermittency of renewables,” says Dr. Lucija Muehlenbachs, PhD, associate professor in the Department of Economics and research fellow at the School of Public Policy. “For every second of the day, you need electricity supply to equal demand. But that’s really hard when the sun doesn’t always shine or the wind doesn’t always blow. The big game changer would be storage. If storage technology became cheap at a massive scale, then bingo, it would be a very quick transition.”

There's a lot of innovation going on in the Canadian oil industry that has reduced emissions.

That “bingo” moment will come, but in the meantime, there are important steps being taken toward reducing emissions in the electricity sector. China wants to buy Canadian liquefied natural gas (LNG) to replace coal. Electrical grids across North America are moving away from coal to using natural gas, which means when you plug in your electric vehicle at night, it’s charged with a far cleaner form of energy. “When natural gas prices in the U.S. dropped, we saw emissions in the electricity sector drop too, as providers moved off coal to natural gas,” says Muehlenbachs.

The oil sands industry has also taken steps toward “decarbonizing” their barrels of oil by producing more efficiently and with fewer emissions. In fact, Canadian heavy oil is now producing at close to the equivalent emissions to a conventional barrel. “There's a lot of innovation going on in the Canadian oil industry that has reduced emissions,” says Vredenburg, who has studied this using a metric called energy return on investment. We've become very efficient, because efficiency not only reduces emissions, it reduces cost, which is, in this competitive market, a very good thing.” And, these innovations can be exported to help increase efficiencies globally. “The Canadian oil industry has a long history of introducing new technologies overseas, often through direct foreign investment and operations.”

Reducing investor risk and corporate liability

As the energy transition continues, and as renewables and electricity battery storage improve and energy companies reduce their emissions, capital markets want to do everything possible to reduce their risk. Investors don’t like uncertainty. And they’re looking for energy companies that are proactive about a lower-carbon future. “If you're going to be investing in oil sands, you don't want to be investing in something that's risky that's going against where the whole world is going on global energy transition,” says Vredenburg. “You want to invest in companies and jurisdictions that are responsible about this and that won’t come back and bite you.”

Legal scholars have drawn parallels between the tobacco industry and disease caused by smoking to the fossil fuel sector and effects of climate change. Mascher and her colleague Martin Olszynski have considered potential legislation for recovering damages over events caused by a changing climate. “Significant costs are associated with adaptation measures needed to prepare for events such as flooding,” says Mascher. “At some point the costs become too big for cities or provinces or even the federal government to bear alone. We believe when this happens, they’ll begin looking to companies that have made a lot of money from the development of products that have contributed in a significant way to climate change and the associated extreme weather events to make a contribution.”

A bar graph illustration

According to UCalgary experts, taking action on climate change makes good business sense.

Companies that are reducing their emissions and trying to mitigate the effects of climate change “may well be less culpable in the future,” says Mascher. In the U.S., more and more, municipalities and states are taking big emitters to court. “They are very much test cases. None has been successful. But there's potential exposure there.” And that potential liability means there is increasing attention on what investors are being told about a company’s “carbon exposure” before they put their money down. “The insurance companies know that the costs of climate change are accumulating,” says Mascher. “There is a question of who will pay.” Eventually, we may even see litigation expand beyond the producers of fossil fuels to companies with products that burn carbon. “There has been some litigation in the States against car manufacturers,” says Mascher. “It's a very, very interesting question.”

Vredenburg, who sits on the boards of several energy companies, has heard first-hand corporate concerns about a lack of climate action. “Refusing to do anything about climate change just gives us a bad name and wrecks Canada's reputation internationally,” he says. “And the reputation does matter. It matters with financial markets, particularly in places like Europe, where if you're not doing something about climate change, they're not going to touch you.”

Clarity from the courtroom

Climate change is creating a flood of court cases at home and abroad. In one case being watched by legal scholars, a farmer from Peru is suing a German company over flooding in his community. Some jurisdictions across North America are threatening to sue oil and gas producers for damages caused by climate change. And in Canada, Saskatchewan and Ontario, joined by other provinces, have launched legal challenges against the federal government’s plan to impose a carbon tax in provinces that don’t create their own. “These cases will probably proceed to the Supreme Court of Canada in the next year or so,” says Wright. “We'll have clarity from the courts as to whether the federal government has jurisdiction to impose carbon pricing. If most legal scholars are correct, we will know for sure that the federal government, if it has the political will to do so, can legislate and impose carbon pricing across the country.”

A Supreme Court decision will help with the “patchwork” of inconsistent laws and policies across the country regarding climate action. “There's a need for the federal government, in particular, but provincial governments as well to take a more consistent approach to integrating carbon pricing or at least some kind of monetary value of carbon pollution across their different law and policy levers,” Wright says. Mascher has explored how the federal government has tried to make existing carbon pricing mechanisms achieve a comparable level of stringency.

In his research, Wright is examining the “social cost of carbon” — an estimated dollar value representing the damages from a tonne of carbon pollution — and how that factors into regulatory and project-level decision-making in Canada. Typically, a project review would consider factors including GDP growth, job creation and reclamation costs to return the area to a natural state. But generally, project-specific assessments don’t consider the costs attached to emissions. “The social cost of carbon is a tool that can express those greenhouse gas emissions in terms of the cost,” he says, “so you get closer to an apples-to-apples comparison of project benefits and project costs.”

That tool can be particularly helpful in environmental impact assessments (EIA). Before a drop of oil is extracted from a reservoir, a company’s plans for production undergo a thorough assessment by the regulator. But regulators across the country have different ways of doing EIAs and considering the cost of emissions. “There's been a lot of uncertainty and a lack of clarity, a lack of guidance on how to integrate climate change considerations into major project assessments and approvals,” says Wright. “I'm finding there's a lot of incoherence across existing law and policies.”

Litigation will continue to wend its way through courts providing much needed clarity on individual policies and laws around climate action. Meanwhile on the international stage, a growing number of multilateral agreements, such as the Paris Accord, promise action on reducing emissions. “There are more than 1,000 multilateral environmental agreements around the world,” says Wright. “Those have really proliferated over the last three or four decades, but for the most part, on average around the world, nature is losing and human health is losing, and ecosystem services are suffering. Despite these fancy laws and agreements, we're slipping backwards.”

Yet, taking action on climate is “an absolutely unstoppable force,” says Mascher. It will come. “It's coming from pressure internationally, from other countries that are affected or that are spending a lot of money to transition their economy.” And it will come from ordinary Canadians demanding their governments take action on climate. In the end, we may see a carbon tax, cap-and-trade system, increased government regulation or some mix of the three. “One should not get hung up on any policy instrument,” says Prakash. “No matter what the colour of a cat, as long as it catches mice, it's fine.”

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ABOUT OUR EXPERTS
Dr. Harrie Vredenburg, PhD, is a professor in UCalgary’s Haskayne School of Business, the Suncor Energy Chair in Competitive Strategy and Sustainable Development, and a research fellow at the School of Public Policy. Read more about Harrie
David Wright is an assistant professor in UCalgary’s Faculty of Law and an expert in environmental and energy law. Read more about David
Dr. Jennifer Winter, PhD, is an assistant professor in UCalgary's Department of Economics, and scientific director of energy and environmental policy at The School of Public Policy. Read more about Jennifer
Dr. Aseem Prakash, PhD, is director of the Center for Environmental Politics at the University of Washington and keynote speaker at a recent Global Energy Challenge at the Haskayne School of Business. Read more about Aseem
Sharon Mascher is a professor in the Faculty of Law at UCalgary. Her research focuses on legal issues relating to climate change law, environmental law, property law and laws affecting Indigenous peoples. Read more about Sharon
Dr. Lucija Muehlenbachs, PhD, is an associate professor in the Department of Economics and research fellow at the School of Public Policy. Read more about Lucija
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