Thank you very much for the opportunity to speak to you today about carbon pricing. I represent Canada's Ecofiscal Commission, a group of leading economists from across the country. The Ecofiscal commissioners are also supported by an advisory board with representation from across the political spectrum.
Through multiple research reports, Ecofiscal has strongly recommended carbon pricing as the most cost-effective approach to reducing greenhouse gas emissions in Canada. Let me structure my remarks today around expected outcomes of carbon pricing relative to other policy options and other possible approaches.
The first area is environmental impacts. As we know, the main objective of climate policy is to reduce greenhouse gas emissions. To be clear, policy is required to achieve this objective. Absent policy action, our emissions will continue to increase and we will not meet our national objectives. Those emissions will contribute to global climate change, the costs of which will likely be very large. The recent national climate assessment in the U.S. highlighted global impacts and very large economic costs. Similar impacts might be expected in various sectors in Canada.
Both economic theory and policy experience are very clear that carbon pricing is effective in reducing greenhouse gas emissions. Carbon pricing creates incentives for businesses and emitters to avoid paying the price by taking action, whether that's adopting technologies or changing behaviour, to do so. In the longer term, it also increases the value of new emerging technologies that reduce more emissions at lower cost. As a result, as Professor Rivers indicated, carbon pricing can be a powerful driver of low-carbon innovation over time.
In practical experience terms, in B.C., according to rigorous research by various economists, we know that greenhouse gas emissions would be 5% to 15% higher if B.C. had not implemented its carbon tax. It reduced emissions from where they would otherwise have been. Early evidence also suggests that Alberta is shifting away from coal-fired electricity, in part in response to that carbon price. There were similar outcomes in the United Kingdom with their electricity system, and deep improvements in emissions intensity in Sweden, where they've had carbon pricing for a long time.
Notably, other policies can reduce GHG emissions. Regulations can require specific outcomes, whether through performance standards requiring levels of emissions intensity at a firm or sector-level basis, or even through requiring the adoption of a specific technology. Subsidies can also reduce emissions. They can use public dollars to provide incentives for emitters to adopt emission-reducing technologies, processes or behaviours.
Importantly, however, while all those instrument options can reduce emissions, they don't compare similarly in other interventions. Overall economic impacts are a great example. Carbon pricing can achieve a given level of emissions reductions at the lowest possible cost relative to those alternatives. The reason it does so is that it creates flexibility for emitters. Individuals and businesses can make their own choices about how and when they reduce greenhouse gas emissions to avoid paying that carbon price. That's why economic analysis finds that the impact on the economy, even of high carbon prices, is likely to be very small. Ecofiscal's own modelling projects strong economic growth under a carbon price in Canada that rises to $100 per tonne by 2027. No matter how that revenue is recycled back to the economy, growth remains strong and positive. Impacts on growth are very modest at most, and negligible in several of those scenarios.
B.C.'s carbon price has existed since 2008, and B.C. has some of the strongest growth in the country. The carbon price is not the reason for this performance, but B.C.'s experience does show that carbon pricing has not prevented strong economic growth in B.C.
What about those other policies? Subsidies are more expensive than carbon pricing for three reasons. They require governments to pick winners, choosing the technology or activities to be subsidized. Government is not always good at making those choices, and it is less good than the market at doing so. It also requires public dollars to fund those subsidies, which requires increasing taxes or reducing other government services. Finally, those subsidies are often paid to emitters who would have taken the action anyway, even in the absence of the subsidy. For example, Ecofiscal's analysis has found that subsidies for electric vehicle purchases cost about $400 per tonne of CO2 reduced. Part of the reason is that the subsidy was paid to purchasers of EVs who would have bought the EV even with no subsidy or with a much smaller subsidy.
Regulations tend to be more expensive than carbon pricing because they rely on government, not the market, to identify means or sectors or timing for reducing emissions. Flexible regulations, if implemented optimally and designed to rely on market mechanisms similar to carbon pricing, can come close to performing as carbon pricing does.
Here is one more example. Ecofiscal's analysis found that, historically, combinations of regulations and subsidies for ethanol cost around $180 per tonne of emissions reduced. Again, they supported specific technologies rather than being agnostic as to where and when emissions were reduced.
With regard to impacts on business, well-designed carbon pricing can reduce emissions while also protecting the competitiveness of Canadian businesses, even while some of our trading partners do not price carbon. Ecofiscal's analysis suggests that output-based carbon pricing can create incentive for industry to reduce greenhouse gas emissions by improving emissions performance, not by reducing production or shifting investment to other jurisdictions. This is the approach pioneered in Alberta under the specified gas emitters regulation and subsequently improved under the carbon competitiveness incentive regulation. It is also the approach being proposed in the federal backstop.
Carbon pricing provides advantages for businesses over other approaches such as regulations because it is simple and transparent, and it's also flexible, non-prescriptive and cost-minimizing. Perhaps for these reasons, the Canadian Chamber of Commerce recently indicated that it supported carbon pricing rather than regulatory approaches to drive a low-carbon transition in Canada.
With regard to impacts on households, when considering net impacts of carbon pricing on individual households, we have to consider the impacts both of carbon price and of the use of revenue generated. Credible analysis from the federal government finds that for 80% of households, rebates would exceed carbon costs under the backstop carbon pricing policy. Notably, these rebates would not undermine the incentive to reduce emissions. The rebate is independent of the carbon price itself. Emitters can reduce their emissions and generate that tax rebate. Finally, carbon pricing can also be designed to be fair. Rebates to households can ensure the policy does not disproportionately affect low-income households.
What about those other policies? Importantly, those other policies also have costs for households, though they would not have the benefits from revenue recycling. Regulations impose indirect costs on households, as businesses will pass on the costs that they require under regulations. As we noted before, to achieve a given level of emissions reductions, regulations would require greater overall costs than would carbon pricing.
Similarly, subsidies require additional revenue. That means either reducing other government spending or generating new revenue through new taxes, which will impose costs on the economy and also impose costs on households.
Let me sum up with these points.
Carbon pricing works. It is the most cost-effective policy option available to reduce greenhouse gas emissions. It can and should be designed to protect business competitiveness but also to ensure fairness for low-income households.
Thank you very much for the invitation today. I look forward to your questions.