Richard G. Lipsey is emeritus professor of economics at Simon Fraser University and has been an economic adviser to federal and provincial governments. This piece is adapted from an open letter signed by more than 250 economists.
As an economist, I have spent much of my career studying economic growth. Now, with climate change posing a significant environmental and economic threat, I support climate policies that reduce emissions at a low cost, address affordability concerns, maintain business competitiveness and support the country’s transition to a low-carbon economy.
Canada’s carbon-pricing policies do all those things.
There is a lot of debate – and misinformation – about carbon pricing in Canada. Let’s examine some of the critics’ claims and compare them with the evidence.
Claim: Carbon pricing won’t reduce greenhouse gas emissions.
The evidence clearly shows that pricing does reduce emissions at a lower cost than other approaches. Carbon pricing works because when something costs more, people use less of it.
Since federal carbon pricing took effect in 2019, Canada’s GHG emissions have fallen by nearly 8 per cent. A recent study by the Canadian Climate Institute shows that carbon pricing for industries and consumers is expected to account for almost half of Canada’s emissions reductions by 2030.
Carbon pricing is the cheapest approach because it gives people and businesses flexibility to choose the best way to reduce their carbon footprint. Other methods, such as regulation, are usually more intrusive and inflexible, and cost more.
The more we use low-cost policies to achieve our climate goals, the more resources we will have for other things such as health care and education.
Claim: Carbon pricing drives up the cost of living and is a major cause of inflation.
The evidence shows that Canadian carbon pricing has had a negligible impact on inflation.
The sharp increase in inflation from 2021 to 2023 was caused by factors mainly related to the COVID-19 pandemic and the Russia-Ukraine war. These factors are global, which is why most advanced countries – even ones with no carbon price – have experienced similar inflation. According to the Bank of Canada, carbon pricing has directly caused less than one-twentieth of Canada’s inflation in the past two years.
That is because the policy is designed to avoid raising the cost of living. About 90 per cent of federal carbon price revenues are given back to households. Most families receive more in rebates than they pay in carbon pricing, particularly those with low or medium incomes. Rural residents get an additional rebate.
Climate change, though, does threaten Canadians’ economic well-being – for example, by increasing the risk and severity of natural disasters. These consequences will cost our economy at least $35-billion by 2030.
Claim: It makes little sense to have both a carbon price and rebates.
The evidence shows that the price-and-rebate approach gives an incentive to reduce carbon emissions, while maintaining most households’ overall purchasing power.
Carbon pricing raises the cost of carbon-intensive products, so consumers and businesses are encouraged to adopt lower-carbon options, such as smart thermostats, heat pumps or hybrid/electric vehicles.
Giving back most of the carbon-pricing revenues in rebates doesn’t undermine this goal; consumers still have the incentive to reduce emissions. The rebates ensure that most households come out ahead, because they receive an amount back that is slightly above what the average household spends on carbon pricing.
Claim: Carbon pricing harms Canadian business competitiveness.
The evidence shows that Canada’s carbon-pricing scheme is designed to help businesses reduce emissions at low cost, while competing in the emerging low-carbon global economy.
Large emitting industries, such as oil, steel and cement, have an “output-based” carbon pricing system. It gives firms a strong incentive to reduce emissions, while maintaining their international competitiveness, so they can stay profitable and generate jobs in Canada. Pricing also stimulates innovation, by encouraging the development and adoption of low-carbon technologies.
Claim: Carbon pricing isn’t necessary.
The critics are right on this point, at least in part. Canada could abandon carbon pricing and still hit our climate targets by using other types of regulations and subsidies – but it would cost much more.
The most vocal opponents of carbon pricing, though, are not offering alternative policies to reduce emissions and meet our climate goals – let alone ones that would do so at the same low cost as carbon pricing.
In a world of scarce resources, it seems unwise to abandon carbon pricing only to replace it with more costly methods of reducing emissions – or, worse, take no measures at all.
In short, carbon pricing is the lowest-cost way to reduce emissions, drive green innovation and support Canada’s transition to a clean, prosperous economic future. Public debate about carbon pricing is good, but it must be based on sound evidence.