What The World Should Learn from Canada's Carbon Tax System

The United Nations climate change conference, named COP26, was held in Glasgow, Scotland, on November 13 with a new climate accord: The Glasgow Climate Pact. The deal confirms the international community’s dedication to reducing overall warming to 1.5°C and includes pledges to cut methane emissions, eliminate deforestation, as well as assist the most vulnerable nations with respect to effecting addressing climate change. However, the agreement, just like other international accords, lacks a system of checks and balances. States are highly urged to decrease emissions, but they cannot be compelled to do so, therefore if they fall short of their commitments, there will be little to no consequences. As a result, numerous experts favor financial rather than policy solutions to the climate challenge.

One of them is the “club theory,” which was popularized in 2015 by Nobel Prize-winning economist William Nordhaus. The “club” refers to a collection of nations that have agreed to a unified carbon tax or “cost of emissions.” Nonmember nations face a 3% charge on items they sell to members, enticing them to join. So far, over 3,600 scholars have signed a declaration claiming that carbon taxes are the greatest “cost-effective lever to reducing carbon emissions.” This concept has come up multiple times this year in both political and scholarly settings. In May, German Finance Minister and now Chancellor Olaf Scholz stated that the European Union should form a “climate club” with nations such as the United States as well as Japan to establish uniform carbon standards to minimize trade friction.

However, the topic of who should be admitted to the club has long been a source of dispute. The Nordhaus model argues for a club that any country may join, but detractors argue that this is too much to expect of poor countries, who will be unable to afford the unreasonably high carbon price established by affluent countries. A new idea aims to overcome this problem. The International Monetary Fund (IMF) suggested an International Carbon Floor Price Between large emitters in June, a group they claim innovates on the Nordhaus model. The new approach concentrates on a small number of major polluters and proposes a minimal carbon floor price with some leeway for poorer nations. “India would not join if they are expected to enforce the same carbon pricing as the EU,” said Ian Parry, an ecological policy analyst as well as co-author of the paper.

Some may find it strange that Canada, the world’s 4th largest oil producer, has emerged as a carbon price leader. Several political and industrial leaders are still divided on the topic, however, Canada’s system has remained stable because of a continuous Liberal Party government, robust federal regulations, as well as low consumer pricing. Presently, Canada is the only nation with a significant fossil fuel sector that has effectively implemented a national carbon pricing strategy. The Canadian system would be an effective blueprint for other significant emitters interested in implementing comparable models on a domestic level. When translated from Canadian to US dollars, the carbon tax is presently fixed at approx. USD 32 per metric ton, and will increase to nearly USD 40 per metric ton by 2022. It will then surge to about USD 12 each year before it reaches USD 134 per metric ton by 2030.

The Canadian model also includes high emissions coverage, which alludes to the proportion of household and commercial emissions that are subjected to the carbon tax. According to an impartial expert evaluation, this figure is 78% in Canada. Canada has invested USD 11.8 billion in sustainable power, infrastructure upgrades, as well as zero-emission automobile incentives to aid in the emissions reduction process. In combination, these measures are expected to reduce the country’s emissions by one-third by 2030. According to the Toronto-based research group Clean Prosperity, Canada stands a good chance of attaining its present objective of reducing emissions by 40-45% by 2030, provided their government’s initiatives are completely implemented.