A Quick Update on Carbon Pricing

Basic economics: when the price of something rises, demand falls and people look for alternatives that cost less.

For carbon pricing in Canada, the Pan Canadian Framework calls for a minimum price of $10 per tonne of carbon dioxide in 2018, rising to $50 per tonne in 2022 with no commitment after that. In Ontario the effective price under their Cap & Trade program is a bit over $18 per tonne until about 2023.

Let’s put this in perspective. At $10 per tonne, since burning a litre of gas emits 2.3 kg of carbon dioxide, the effective price increase for gas is 2.3 cents per litre. After five years this will have risen to 11.5 cents per litre. In Ontario at $18 per tonne the impact is about 4.2 cents per litre. What’s the price signal this sends? Some people might buy an electric car and reduce emissions. Some people might drive a bit less and car pool a bit more or bicycle sometimes, reducing emissions.

A bit more perspective. On my drive into town I pass 4 gas stations. Usually the most expensive one is about 5 cents per litre more than the least expensive. They all fluctuate quite widely, often with a jump of 10 or 12 cents per litre overnight followed by a slow drift down. In the last three weeks the lowest price I saw was $1.099, and the highest was $1.269. This difference of 17 cents is smaller than the change that will be seen when the federal carbon price rises to its 2022 level. And the rise in price at the pump because of the carbon price will be predictable and so will more likely cause people to change their behaviour. As for me I will buy an electric car.

Finally, the rising gap between the effective Ontario price and the federal price starting next year (see the chart on the right from the Ontario Climate Commissioner’s 2017 Report ) will lead to an interesting conflict between the two jurisdictions. I can hardly wait to see if the federal Liberals will have the courage to take this seriously. And buckle up if the Ontario Progressive Conservatives win the election in Ontario on June 7 and cancel the existing Cap and Trade program as their new leader has claimed he will.


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