Closing the gap: carbon pricing for the Paris target (Revised June 20, 2019)

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Summary

This report provides an estimate of the additional carbon price that would be needed to achieve Canada’s greenhouse gas (GHG) emissions target in 2030 under the Paris Agreement, as well as an estimate of the corresponding impact on the Canadian economy.

The scope of this report is limited. For instance, the report does not assess the policy merits of carbon pricing or alternative approaches to reducing GHG emissions; nor does the report attempt to account for the economic and environmental costs of climate change.

Canada’s GHG emissions and the Paris target

The Paris Agreement builds upon the United Nations Framework Convention on Climate Change (UNFCCC). Under the Paris Agreement, Canada has committed to reduce its GHG emissions by 30 per cent below 2005 levels by 2030, to a level of 513 megatonnes (Mt) of CO2 equivalent (Summary Figure 1).¹

Under current policies and measures that have been announced, but are not yet fully implemented, Environment and Climate Change Canada (ECCC) projects that Canada’s GHG emissions will decrease from 704 Mt in 2016 to 616 Mt in 2030. Current policies and measures include the federal carbon pricing system under which the fuel charge rises to $50 per tonne of CO2 equivalent in 2022.

Accounting for the contribution of the Land Use, Land Use Change and Forestry (LULUCF) sector lowers Canada’s projected GHG emissions to 592 Mt in 2030.

According to Environment and Climate Change Canada’s current projection, announced policies and measures are not sufficient to achieve Canada’s emissions target in 2030.
There is a gap of 79 Mt of GHG emissions relative to the Paris target in 2030 under current policies and measures.²

Estimates of additional carbon pricing for the Paris target and the impact on the Canadian economy

Using the computable general equilibrium (CGE) model ENVISAGE, we estimate the additional carbon price that would be needed to reduce Canada’s GHG emissions by a further 79 Mt in 2030, closing the gap between the Paris target and baseline emissions projected under current policies and measures.

PBO estimates that an additional carbon price rising from $6 per tonne in 2023 to $52 per tonne in 2030 would be required to achieve Canada’s GHG emissions target under the Paris Agreement.
This charge would be in addition to the $50 per tonne federal fuel charge that is scheduled to be in place in 2022.
Combined with the $50 per tonne federal fuel charge, households could face an explicit carbon price of $102 per tonne in 2030.

However, the additional carbon pricing in our analysis differs significantly from the existing federal fuel charge under the carbon pricing backstop, which applies in four provinces and two territories. We assume that additional carbon pricing would apply more broadly, covering all sectors except agriculture and would be applied to all provinces and territories.

Similar to the federal fuel charge under the Pan-Canadian Framework, we assume that revenues from additional carbon pricing are returned to households in lump-sum payments.

PBO estimates that the level of real GDP in 2030 would be 0.35 per cent lower than the level of real GDP in 2030 projected under current policies and measures.
This translates into a reduction of 0.04 percentage points in annual real GDP growth, on average, over 2023 to 2030.

To put our estimates in context, we compare them to ECCC’s fall 2018 estimates of the impacts of carbon pricing over 2018 to 2022 (Summary Figure 2).

ECCC’s fall 2018 analysis finds that carbon pricing would reduce GHG emissions by 50 Mt to 60 Mt in 2022 with the federal fuel charge rising to $50 per tonne in 2022, in addition to including other current federal, provincial and territorial policies. ECCC estimates that achieving this reduction in GHG emissions would lower Canada’s average annual real GDP growth by about 0.1 percentage points over 2018 to 2022. PBO calculates that this would translate into an impact of approximately 0.5 per cent on the level of real GDP in 2022.

PBO’s estimates of the impacts of additional carbon pricing needed to achieve the Paris target suggest a larger reduction in GHG emissions at a slightly lower cost to the Canadian economy than ECCC’s estimates of the impacts of carbon pricing over 2018 to 2022.

PBO’s analysis uses a carbon tax as the policy instrument to achieve the Paris target. Nonetheless, any number of policies could be introduced to close the GHG emissions gap, all of which would impose either an explicit price on carbon (a levy/fuel charge or a cap-and-trade system), or a hidden price on the cost of goods and services (regulatory measures or subsidies).

Revised - June 20 2019
Revised 20 June 2019 to remove references to Environment and Climate Change Canada’s Technology Case.

Unless otherwise noted in this report, all measures of emissions are expressed as CO₂ equivalent. All carbon prices in this report are expressed in nominal terms (that is, not adjusted for inflation) unless otherwise noted.
In its 2018 GHG emissions projections report, ECCC notes that “[f]urther reductions are expected from the investments made by federal, provincial, territorial and municipal governments in public transit and clean technology, which have not yet been modelled.”

21 April 2016

Canada’s Greenhouse Gas Emissions: Developments, Prospects and Reductions

PBO looks at Canada’s commitment at COP21 in Paris and reports on its potential economic impact, both in aggregate and by sector. PBO estimates the reduction in emissions needed to achieve the 2030 target by combining historical trends in intensity of emissions with the PBO’s projection of the economy to 2030. We discuss how major sources of GHG emissions such as cars and trucks will have to be made at least a third more fuel-efficient, as will the electricity generation sector (almost two thirds), and oil & gas extraction (about a quarter), in order to meet the targets. The technologies to achieve those reductions are already available, but deploying them will lead to a mildly slower rate of income growth as cheap sources of energy will have to be replaced by moderately more expensive ones.
25 April 2019

Fiscal and Distributional Analysis of the Federal Carbon Pricing System (Revised May 23, 2019)

This report provides a fiscal and distributional analysis of implementing a federal carbon pricing system in Ontario, New Brunswick, Manitoba and Saskatchewan. PBO estimates that the federal government will generate $2.63 billion in carbon pricing revenues in 2019-20. The vast majority of revenues ($2.43 billion) will be generated through the fuel charge; the balance, roughly $197 million, will be generated by output-based pricing. Households will largely bear the cost of the pricing system through their consumption of energy used for residential and transport purposes, and carbon charges embodied in non-energy products. Regions currently using carbon-intensive energy can expect higher costs. The federal government has stated that all proceeds from the fuel charges will be returned directly to households and particularly affected sectors in Ontario, New Brunswick, Manitoba, and Saskatchewan. Except for the richest 20%, most households will be better off on a net basis because the amount of the rebate will exceed their average carbon cost.
22 May 2018

The Impact of a Pan-Canadian Carbon Pricing Levy on PBO’s GDP Projection

This report provides additional detail related to the economic impact of the carbon pricing levy presented in PBO’s April 2018 Economic and Fiscal Outlook.