Climate Change – Efficient Policy Measures
Theme 1: Climate change – efficient policy measures Background: As part of its contribution to meeting the terms of the Paris Agreement on Climate Change, Canada has committed to reducing its greenhouse gas emissions by 30 percent below its 2005 level by 2030. In order to achieve this goal, the Canadian government has implemented a national carbon pricing regime, consisting of a federally implemented carbon tax in some provinces and provincially administered systems in others. These taxes / prices will feed through into increases in the sale prices of affected commodities such as petroleum products, natural gas, and coal. At the same time, Burniaux and Château (2014) discuss a list of 37 countries, not including Canada, which directly subsidize the consumption of fossil fuels (based on 2008 data). (Coady et al. (2019) updates the state of play regarding subsidization of fossil fuels with more recent data.) You should assume that you are the Deputy Minister of the Environment for the Canadian government, and your job is to provide advice to the Minister of the Environment. The Minister recently read Burniaux and Château (2014) and she is uncertain what lessons to take from it for Canadian policy. In order to clarify the issues, she has asked you to write a briefing note responding to the following question. Questions: Is it economically efficient for Canada to follow through on its pricing regime at the same time as other countries continue to subsidize the consumption of fossil fuels? What would a globally efficient policy look like? What are the obstacles to such a policy? Can Canada do anything to help overcome these obstacles? In responding to these questions, please make reference to the sources on the reading list. Keywords: fossil fuel subsidies 2 Theme 2: Climate change – efficient policy measures Background: In July 2018, the newly elected Conservative government of Ontario announced it would eliminate the cap-and-trade system of tradable permits put in place by the previous Liberal government to control the emissions of greenhouse gas emissions (GHGs). In a press release, the new premier, Doug Ford, promised that the elimination of this program would “result in lower prices at the gas pump, on your home heating bills and on virtually every other product that you buy.” Premier Ford insisted that “cap-and-trade and carbon tax schemes are no more than government cash grabs that do nothing for the environment…”. Questions : Do you agree with the decision of the Ontario government in 2018 to end the tradable permit system in the province? Explain your reasoning by making reference to sources you have read in the course. Keywords: tradable permit system Theme 3: Carbon tax – distributional effects Background: As part of its contribution to meeting the terms of the 2015 Paris Agreement on Climate Change, Canada has committed to reducing its greenhouse gas emissions by 30 percent below its 2005 level by 2030. In order to achieve this goal, the Canadian government implemented a national carbon pricing regime in 2019, consisting of a federally implemented carbon tax in some provinces and provincially administered systems in others. In response, during the federal election in the fall of 2019, the Conservative Party issued a press release claiming that the carbon tax “would hit Canadians hard, costing them hundreds of dollars per year”. Questions: Imagine you were an economic consultant working in 2019, and you were hired by a national citizens association to help them better understand the issues regarding the carbon tax. Your contract required you to prepare a written analysis evaluating the positions of the Canadian government and the Conservative opposition from an economic perspective. Which position was more credible? Justify your conclusion by referring to sources you have read in ECO 4136 (sources on the reading list). Keywords: lump-sum transfers 3 Theme 4: Competitiveness concerns with incentive-based mechanisms Background: The country of Indecisivia is considering whether to implement an incentive-based mechanism (IBM) to control greenhouse gas emissions (GHGs). But there is concern that an IBM will create a large cost burden for domestic companies which must compete with goods from countries that are not implementing policies to control GHGs. You are the Deputy Minister of the Environment of the country. Your job is to write a briefing note to educate and advise the Minister of the Environment, as she prepares to make a presentation to the cabinet next week. Questions: If an IBM is implemented, will it necessarily result in a large amount of carbon leakage, as consumers substitute less expensive imported goods for more expensive domestically produced goods? What are the options for Indecisivia? In responding to these questions, make reference to the sources on the reading list for the course. Keywords: carbon leakage
Climate Change Policy
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Theme 1: Climate change – efficient policy measures
Is it economically efficient for Canada to follow through on its pricing regime at the same time as other countries continue to subsidize the consumption of fossil fuels?
Granting that Canada's carbon pricing regime will be less effective in reducing global greenhouse gas emissions if other countries continue to subsidize fossil fuel consumption, there are still several reasons why it is economically efficient for Canada to maintain its carbon pricing regime.
First, while Canada's carbon pricing regime effectively reduces greenhouse gas emissions within its borders, it is essential to consider the broader international context. Burniaux and Château (2014) highlight that many countries worldwide continue to subsidize fossil fuel consumption, which has the opposite effect - encouraging wasteful energy use and increasing emissions. Still, even in this context, Canada's carbon pricing regime is economically efficient. The tax incentivizes Canadian consumers and businesses to switch to cleaner alternatives or reduce their energy consumption, which will reduce emissions even if other countries are not taking similar steps. Moreover, by pursuing an effective climate policy, Canada can provide international leadership and encourage other countries to take more decisive action.
Second, there is an element of global leadership involved. By pricing carbon, Canada is taking an important step to address climate change, which may encourage other countries to follow suit. As Burniaux and Château (2014) argue, removing subsidies can reduce greenhouse gas emissions and provide economic benefits by leading to a more efficient allocation of resources. From this perspective, Canada's carbon pricing regime is crucial for environmental and economic reasons. Additionally, Canada is demonstrating global leadership on climate change by continuing to price carbon. This may encourage other countries to follow suit and reduce or eliminate their fossil fuel subsidies. If Canada abandons its pricing regime because of the actions of other countries, it would be relinquishing its leadership role on this issue.
Third, other countries' subsidies for fossil fuel consumption are unsustainable in the long run. They are costly for governments, exacerbate climate change, and encourage wasteful consumption. Burniaux and Château (2014) point out that subsidies for fossil fuel consumption are not sustainable in the long run. They create economic distortions, exacerbate climate change, and incentivize wasteful consumption. Thus, even though some countries continue to subsidize fossil fuels, many others are phasing out these subsidies, and this trend will likely continue. By implementing a carbon pricing regime now, Canada is not only taking steps to meet its Paris Agreement commitments. Still, it is also positioning itself in line with global best practices as they evolve.
Finally, by reducing emissions, Canada's carbon pricing regime will help to reduce the adverse effects of climate change on the Canadian economy. As Burniaux and Château (2014) discuss, these subsidies can have significant environmental and economic consequences. For example, they can lead to increased greenhouse gas emissions, which in turn can exacerbate climate change. As such, while Canada's carbon pricing regime is economically efficient in reducing emissions and mitigating climate risks, it is vital to consider the broader international context and the implications of other countries continuing to subsidize fossil fuel consumption.
What would a globally efficient policy look like?
One of the most critical aspects of a globally efficient policy to minimize greenhouse gas emissions would be the implementation of carbon pricing. By placing a monetary value on emissions, this strategy would incentivize polluters to alter their behavior to avoid costly penalties. There are multiple potential avenues for carbon pricing; a carbon tax, for example, would involve levying a direct tax on emissions. A cap-and-trade system would set an overall emissions limit and allow companies to buy and sell emissions permits as needed. Either approach could be practical, depending on the specific circumstances and policy goals.
Another critical step in formulating a globally efficient policy to reduce greenhouse gas emissions would be the removal of fossil fuel subsidies. These subsidies distort the market, incentivizing the consumption of fossil fuels over cleaner alternatives. Burniaux and Château (2014) explain that this leads to wasteful consumption and exacerbates emissions. By eliminating these subsidies, governments worldwide could help promote low-carbon technologies and pointedly reduce greenhouse gas emissions.
Equally, formulating a globally efficient policy to reduce greenhouse gas emissions is international coordination. Countries must work together to implement measures such as carbon pricing and removing fossil fuel subsidies to avoid undermining each other's efforts. When such policies are enacted in isolation, the result can be "carbon leakage" - the shifting of emissions from one country to another as polluters move to less regulated environments. International coordination would help to create a level playing field, ensuring that all countries are doing their part to address climate change.
A comprehensive policy to curb greenhouse gas emissions must consider multiple facets. Perhaps most importantly, such a policy would require significant investment in low-carbon technologies. A concerted effort to fund and develop renewable energy sources, promote energy efficiency, and advance carbon capture and storage technologies will be necessary to transition to a low-carbon economy. As these technologies become more widely available and cost-effective, they will help drive down emissions further.
To effectively reduce greenhouse gas emissions on a global scale, any policy must be multi-faceted. A key consideration should be the importance of a just transition. Such a transition is mindful of the social impacts of moving to a low-carbon economy. As such, it acknowledges that certain workers and communities will bear the brunt of the changes. For example, those in regions that are highly reliant on fossil fuels may be disproportionately affected. A globally efficient policy would include measures to support these employees and societies, ensuring they are not abandoned in the transition to a low-carbon future.
What are the obstacles to such a policy? Can Canada do anything to help overcome these obstacles?
The obstacles to a globally efficient policy to reduce greenhouse gas emissions are varied and complex. Political will is often the biggest challenge, as many countries are reluctant to implement carbon pricing or phase out fossil fuel subsidies out of fear of economic consequences or public backlash. Coordinating policy across multiple countries is also tricky, as each nation must agree on various details, such as the level of carbon pricing and the timing of subsidy removal. Another obstacle to consider is the power of vested interests. Fossil fuel companies and other industries negatively impacted by climate policies may wield considerable political influence in some countries, lobbying against carbon pricing or removing subsidies. Concerns about equity and the disproportionate impact on low-income households can discourage countries from adopting these policies. Nevertheless, Canada can take steps to overcome these obstacles. By implementing a nationwide carbon pricing regime and phasing out fossil fuel subsidies, Canada can lead by example and demonstrate that these policies are feasible and practical. Also, Canada can use its voice on the world stage to encourage international coordination on climate change. Finally, by supporting low-income households and communities, Canada can help address concerns about equity and promote a just transition to a low-carbon economy.
Theme 2: Climate change – efficient policy measures
In 2018, the Ontario government decided to finish the cap-and-trade system that had been put in place by the previous Liberal government. This system was designed to reduce greenhouse gas emissions by limiting the number of emissions companies could produce and allowing companies to trade permits to stay within those limits. The decision to end the cap-and-trade system was controversial, with supporters and detractors making solid arguments for and against the move.
Despite the fact that it is undoubtedly true that the cap-and-trade system increases consumer costs in the short term, the Ontario government's decision to end the program needs to be revised. As discussed in the Baumol and Oates article, a tradable permit system is one of the most efficient ways to regulate pollution because it allows the market to allocate emissions reductions amongst polluters. The Ontario government is preceding a powerful tool to combat climate change by eliminating the cap-and-trade system. In doing so, it is putting its citizens' long-term health and prosperity at risk. Furthermore, Premier Ford's assertion that cap-and-trade arrangements are "no more than government cash grabs" ignores the fact that the revenue generated from these programs can be used to invest in cleaner technologies and shift to a low-carbon economy.
Supporters of the Ontario administration's decision to end the tradable permit system indicate that it is ineffective in reducing greenhouse gas emissions. However, the broader academic literature does not support this argument. As Baumol and Oates (1988) discuss, under conditions of certainty, a tradable permit system and a carbon tax are equivalent in reducing emissions. Both policy instruments can incentivize companies to transition to cleaner technologies by internalizing the costs of carbon emissions. Still, under conditions of uncertainty, a tradable permit system may be preferable to a carbon tax in some circumstances. For example, if the regulator is unsure about the cost of abatement, a tradable permit system will guarantee a ceiling on emissions regardless of the associated costs. In contrast, a carbon tax will not necessarily lead to the desired level of emissions reduction if the price of abatement is higher than anticipated. I...