To view the webinar that went with these slides visit: http://ecofiscal.ca/events/comparing-canadas-carbon-pricing-policies/

1. Comparing the Stringency of
Carbon-Pricing Policies
Ecofiscal Webinar
August 16, 2016

2. Two Questions
1. What is a practical way to compare the
stringency of different provincial systems?
2. What is a practical way to coordinate different
provincial systems?

3. A Quick Aside on Costs
1. What are “marginal abatement costs”?
2. Why are MACs different across provinces?
3. How does carbon pricing work?

4. 1. Marginal versus total.
2. Different “blocks” of abatement.
3. Blocks within blocks.
4. Smooth curve as a simple approximation.
The “MAC” Curve

5. A carbon tax sets
the price directly
A cap-and-trade
system sets the
quantity directly
The two policies are more similar than different.
How does carbon pricing work?

6. Five Stringency Metrics
1. The quantity of emissions reduced.
2. The marginal price of carbon.
3. Average carbon costs.
4. Coverage-weighted carbon price.
5. Trade-adjusted carbon price.

7. 1. The quantity of emissions reduced
Practical Problems?
1. Emissions data collected with long lags.
2. Relevant reductions are relative to counterfactual  modeling.
3. Equal emissions reductions might be arbitrary: different trends.
4. Equal emissions reductions involve different costs in different provinces.

8. 2. The marginal price of carbon
Practical Problems?
1. It is an indirect measure of the ultimate objective (emissions reductions).
2. A high price could apply only narrowly  low stringency.

9. 3. Average carbon costs
Why give away
permits for free?

10. Practical Problems?
1. Estimates require modeling the MAC curve and also emissions reductions.
2. Low average costs may simply reflect “revenue recycling” choices, but the
marginal price is what drives emissions reductions.

11. 4. Coverage-weighted carbon price
coverage–w 𝑒ighted carbon price =
marginal carbon price × covered emissions
total GHG emissions
Key Advantage
1. Easy to measure – price observed directly; coverage easy to estimate.

12. Practical Problems?
1. It is also an indirect measure of the ultimate objective (emissions reductions).
2. Low price might reflect permits purchased from another jurisdiction.

13. 5. Trade-adjusted carbon price
Trade–adjusted carbon price =
Price × covered emissions + net imported permits
total GHG emissions
Key Advantage
1. Easy to measure. Price observed directly; coverage easy to estimate; permit
trade easy to observe.

14. Practical Problem?
1. Since it is price-based it is (still) an indirect measure of the ultimate objective.

16. The Second Question
What is a practical way to coordinate different
provincial systems?

17. Two Competing Objectives:
1. Lowest economic cost  equate prices across
provincial systems
2. Practicality  flexibility as to how provinces
achieve (roughly) comparable stringency

18. A Simple Idea
Equating the trade-adjusted carbon price across
provinces provides a reasonable balance of these
two objectives.
Each province would have three dimensions of
flexibility:
1. Marginal price
2. Policy coverage
3. Use of permits

19. A Simple Example
(This example assumes a specific (hypothetical) MAC curve.)

20. The Bottom Line?
1. Comparing stringency of different systems is
complicated.
2. There is no right metric – they all have their pros
and cons.
3. There is a practical metric for coordination.

21. Questions?