I'd like to thank the committee for inviting me to appear this afternoon with such a distinguished group of fellow witnesses. I'm the only person here today who's not an economist. However, I have spent a lot of time in committee rooms like this over the years as a staffer to MPs and ministers, so I suppose I'm here to provide simultaneous translation from “economese” to English.
Canadians for Clean Prosperity is a not-for-profit organization that promotes market-based solutions to environmental challenges. In particular, since our foundation five years ago, we've been advocates of revenue-neutral carbon taxation as the best response to the challenge of climate change for the reasons that my fellow witnesses have given. We've also been active in the debates over carbon pricing across Canada, at both the federal and the provincial levels.
Today I want to talk about why carbon pricing, and the current federal approach with the carbon pricing backstop legislation, is so important and how it can help contribute to the international search for answers to climate change.
I note that the committee is studying the international leadership component of the pan-Canadian framework. I want to suggest that what Canada is doing with carbon pricing under the framework, and the federal backstop legislation that ensures its consistency across the country, is in fact an internationally significant precedent.
If Canada succeeds over the next few years in bringing together a national carbon pricing framework supported by the backstop, we will position ourselves as leaders internationally, and there is good reason to think that other jurisdictions, especially the United States, will take notice. If, on the other hand, our attempt to build national-scale carbon pricing falls apart due to politics, then Canada will serve as a warning lesson about the difficulty of carbon pricing, which may discourage further international action.
As you know, there are several different forms of carbon pricing, and Canada has had some experience with almost all of them.
First, there is a straight carbon tax, generally charged on all fossil fuel combustion, which British Columbia was a pioneer in implementing. In many ways, the B.C. carbon tax brought in under former premier Gordon Campbell is the textbook model of how a revenue-neutral carbon tax is supposed to operate. It has been extensively studied, including through the work that Dr. Rivers and others have done.
Second, there is cap and trade, where a jurisdiction-wide cap is set on emissions and where firms need to purchase allowances, usually through an auction, in order to emit. The European trading system and the Western Climate Initiative, based out of California, are two of the most prominent examples. Quebec is—and, until recently, Ontario was—a partner in WCI and brought this model of cap and trade to Canada.
Another variant is sometimes called “baseline and credit”, where firms are given a baseline level of allowable emissions, often based on the intensity of emissions as compared to their industrial sector. Depending on whether their emissions are above or below the baseline, they either have to purchase credits or can earn credits.
Alberta's specified gas emitters regulation, brought in under the Conservative government there in 2007, was an example of that. The current carbon competitiveness incentive regulation, which was designed with the help of fellow panellist Andrew Leach, and the federal output-based pricing system for large industry are based on this model. I'd add that both the Saskatchewan and the Ontario governments have very similar proposals for their industrial carbon pricing. Today, Saskatchewan actually has in place an output-based pricing system at $20 per tonne for its industrial sectors.
Yet another variant of carbon pricing is sometimes known as “carbon fee and dividend”. Under carbon fee and dividend, which is really a variant of carbon tax, a carbon fee is charged on all combustion emissions. The resulting revenue is then returned by government as an equal per capita dividend to all the citizens of the jurisdiction.
This model has had quite a lot of popular, grassroots support and some political support in the United States. Two organizations, the Citizens' Climate Lobby and the Climate Leadership Council, have been active proponents of the fee and dividend model. Several bills with bipartisan support have been introduced into the U.S. Congress based on fee and dividend models, although so far none have actually made it to a vote in the House of Representatives or the Senate.
In early 2018, a number of prominent American leaders and major corporations put their support behind a carbon dividend plan promoted by two former Republican secretaries of state and treasury, James Baker and George Shultz. If there is any type of carbon pricing that has a chance of succeeding politically in the United States with bipartisan support, it would likely be some version of a carbon fee and dividend system. The closest thing we have to a carbon fee and dividend system in the world today is the federal carbon pricing backstop legislation. It charges a direct fee, the fuel charge, on all fossil fuel emissions in provinces that fall under the backstop, and, by law, the federal government is required to return all revenue to the province or territory that it is collected in.
Last fall, the federal government announced that 90% of the fuel charge revenue would be returned directly to households as direct rebates, which would be equal per capita for the first tax filer in every household, with proportionate amounts for the spouse, or second filer, and dependent children. The remaining 10% would be redistributed to small business, schools, hospitals, and other organizations facing the carbon price.
Analysis, including research done by my fellow witness Dave Sawyer for Canadians for Clean Prosperity, shows that this kind of fee and dividend system would leave most households better off. In fact, the federal government estimates that eight out of 10 Ontario households would be better off after the federal climate action incentives.
What we're seeing play out in the four provinces in Canada, accounting for roughly 50% of our population and GDP, is the first large-scale test of how a fee and dividend model could work in practice. If this is seen to be positive and succeeds in reducing emissions while keeping most consumers and households whole from the price impacts, then this is going to be an important example internationally that will be looked at closely in the United States and elsewhere.
If it is undermined, and Canada unravels the progress we've made on carbon pricing, then we're going to make the path to carbon pricing much more difficult for other countries, which would not want to repeat the negative experience here. We've seen this happen with Australia and the recent protests in France. Where there is resistance to carbon pricing in one place, it can undermine progress in others. On the other hand, a successful implementation, as we've seen in the U.K. or British Columbia, can be a positive model to encourage action elsewhere.
Getting carbon pricing and the federal backstop right over the next few years is a key piece of Canada's international leadership on carbon pricing, and I hope the committee's report will reflect that.
Thank you very much.