LASER TALK: The many ways to price carbon pollution

There are many ways to price carbon. They are listed here from least transparent to most transparent:

  1. The Status Quo: external costs of climate change are not internalized and the taxpayer is forced to pay for climate and health-related damages through their taxes and insurance premiums.
  2. Green Subsidies: Government subsidies of green technologies with taxpayer dollars is a populist idea not grounded in economics. It is a distortionary system that muddies the market signal and is thus inefficient. (1) However, sometimes energy subsidies for a limited time might be considered to help kick-start the transformation necessary.
  3. Regulation: sector by sector regulation of all the sectors in the economy that produce carbon pollution. Some regulations are complementary to carbon pricing and will be needed such as coal phase out. (2)
  4. Cap and Trade: put a mandatory limit (or “cap”) on a portion of national emissions, and allow firms to buy and sell rights to emit within the cap as well. This can be with or without offsets. A carbon offset is a reduction in emissions of carbon dioxide or other greenhouse gases made in order to compensate for an emission made elsewhere. (3) In the Western Climate Initiative, all cap and trade allowances collected by law are put into programs that reduce carbon emissions.
  5. Carbon Tax: a tax based on greenhouse gas emissions generated from burning fuels. The tax may or may not be revenue neutral. A revenue neutral tax is one that does not have a net increase in overall federal tax revenues. (4)
  6. Cap and Dividend: Same as cap and trade with one exception: 100% of the money collected by the government from the sale of allowances is returned to households and is not put into programs.
  7. Carbon Fee and Dividend: An incrementally increasing fee is placed on carbon pollution and 100% of the money is returned to households. The term fee is used deliberately to indicate clearly that it is a revenue neutral pricing system. Carbon Fee and Dividend, as proposed by Citizens Climate Lobby, is an upstream fee and is levied at point of production of fossil fuels. A downstream tax, on the other hand, would be levied at the point of consumption of fossil fuels and/or products dependent on fossil fuels.




(3) Quebec, California and the European Union are jurisdictions that have implemented cap and trade with offsets to mitigate their greenhouse gas emissions. (3) Ontario is in the process of exiting the cap and trade program with Quebec and California.
(4) British Columbia, Alberta,  Norway and Sweden have carbon taxes. On Monday, October 3, 2016, Prime Minister Justin Trudeau announced that Canada will establish a floor price on carbon pollution of $10 a tonne in 2019, rising to $50 a tonne by 2022.  It was passed into law in June 2018.

Go back to Laser Talks Page.