Grant Bishop is the Calgary-based founder of KnightForkwhich builds data-driven tools for CO2 pricing and energy conversion.
You would be hard pressed to find an economist who does not support a carbon tax. Greenhouse gas pricing ensures that businesses and consumers internalize the costs of climate change. This pushes production and consumption decisions closer to what is economically efficient and socially optimal.
Of course, Ottawa has already won the battle to introduce a nationwide CO2 price, and last week’s federal budget goes far beyond just pricing emissions. But while not an unqualified approval, this budget launches important initiatives to accelerate efforts to decarbonize the Canadian economy while addressing the inevitable upheaval of energy conversion.
Some economists may be in doubt about the budget’s spending on climate change – in particular its subsidies for electric vehicles (EVs) and CO2 capture, use and storage (CCUS). Grants can be a waste of money by helping fund actions that would have happened anyway, and the actual step-by-step effects of Canada’s climate spending will no doubt be fodder for debate in the coming years.
Nevertheless, a carbon price cannot cope with all the heavy lifting by decarbonizing Canada. First, although it will rise to $ 170 per. tons of greenhouse gases by 2030, our current price is $ 50 per tonne. tonnes well below the likely social costs of carbon – that is, the economic toll of the damage that unreduced emissions are likely to inflict. through climate change. Second, there may be value in accelerating emission reductions, even at higher costs, especially for building key networks for long-term decarbonization.
Continuing to subsidize electric vehicles helps speed up the transition of Canada’s vehicle stock – which, because an average car can be kept on the road for more than 12 years, can not happen overnight. A new car with an internal combustion engine represents a decade or more of emissions.
In a paper on decarbonisation of Canadian transportation last year for the CD Howe Institute, my co-authors and I estimated that zero-emission vehicles would have to steadily climb to 70 percent of passenger car sales by 2030 just to reach about 30 percent of stock and reach the federal government’s transportation emissions target. While battery-powered and plug-in hybrid cars grew to more than 5 percent of new vehicle registrations in the third quarter of 2021, much larger electricity market shares are needed to reach Ottawa’s goals.
Subsidies will cause some waste and we should not pretend that car dealers will not adjust their prices up. But this will get more electric cars on the road faster and no doubt pay off in accelerating emission reductions for transportation.
The budget investment tax deduction for CCUS is another annoyance to some economists. Some question whether it is really necessary given the incentives from carbon prices to reduce industrial emissions – especially from the extraction and processing of oil sands. Instead of expensive subsidies, Blake Shaffer and Dale Beugin wrote in a note to CD Howe Institute last year, proposed that the Canada Infrastructure Bank help incentivize decarbonisation investments by “extending contracts” with project advocates to remove industry uncertainty about the carbon price.
Talks about CCUS also largely ignore the likely huge incentive to invest under the upcoming Clean Fuel Standard, which involves credit rates up to an inflation-adjusted $ 300 per share. hit the cap).
Nevertheless, by reducing the cost of new investments by about 50 percent, the tax deduction can accelerate CCUS rollout to reduce industrial emissions faster. The budget estimates the government’s cost of credit at $ 8 billion over the next decade, and that projects in the private sector will account for more than $ 17 billion in CCUS investments.
It is also noteworthy that Ottawa’s emission reduction plan envisages an additional 640,000 barrels of oil sands production per day – an increase of 21 percent – by 2030 compared to 2020 production. At the current emission intensity of the oil sands, this will increase the emissions to about 100 megatons.
The Oil Sands Pathways to Net Zero, a consortium of the majority of oil sands producers, announced earlier plans for 22-megaton reductions by 2030, with CCUS accounting for about a third. Much more CCUS is needed if oil sands producers are to reduce emissions by 2030 to the 55 megatons envisaged in the federal plan, while still increasing production.
Governments face a slightly enviable and messy task of both rapidly reducing emissions in the face of the pressing threats of climate change and mitigating the immediate impact of industrial viability and household living standards. Economists should examine the actual effects, but in the fog of war against the threat of climate change, this budget makes important progress.
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