Pricing Carbon, Canada-Style

Pay up.

Photographer: Scott Olson/Getty Images

By the end of the year, Canada could demonstrate the power of market forces to reduce greenhouse gases -- or the tendency of politically expedient half-measures to turn even the most promising schemes into mush. It all depends on the details of a proposal to make people and companies pay more of the true cost of carbon emissions.

Canada's left-leaning Liberal Party won election last year while promising to put a price on carbon, by encouraging the country's 10 provinces to adopt either direct tax or cap-and-trade systems. The government is now negotiating with the provinces, and it may impose a national system if some refuse to adopt one.  

QuickTake The Cost of Carbon

The most efficient approach to cutting emissions is to set a single, national tax on carbon. That would be the least complex and cumbersome; businesses operating across the country can more easily navigate a single system than 10.  

But the Canadian government has shied away from a national policy, for both practical and political reasons. The alternative -- a patchwork of provincial approaches -- can still be effective, by meeting some basic criteria.

First, the government should set a national minimum price for carbon that is high enough to spur meaningful reductions. Canada has pledged to cut its emissions 17 percent from 2005 levels by 2020, and 30 percent by 2030. The country is nowhere near meeting those commitments; by one estimate, getting there will require a price on carbon equal to $160 per ton by 2030. British Columbia's tax, now the nation's highest, is just $30 a ton.

Granted, even the most aggressive government might shy away from imposing such a price right away, and reasonably so. So another requirement for an effective policy is that the price for carbon increases over time.

Finally, the federal government needs a transparent standard for comparing the effective price on carbon in each province. That's not as easy as it sounds -- the auction price for pollution permits under Ontario and Quebec's cap-and-trade schemes, for example, could vary day to day. 

Whatever the final shape of the system, the federal government should resist the temptation to simply announce that each province has adopted some sort of carbon pricing and declare victory.

A well-designed carbon price is the best way to reduce emissions and slow down global warming. Canada's new government has an electoral mandate for change, and its citizens seem open to a more aggressive climate policy. It's a rare opportunity.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.