Carbon Pricing in New Brunswick: It’s Happening and it’s Complicated

Huddle publishes commentaries from groups and individuals on important business issues facing the Maritimes. These commentaries do not necessarily reflect the opinion of Huddle.

By Van Lantz, dean and professor, Faculty of Forestry and Environmental Management, University of New Brunswick and Adrienne O’Pray, president & CEO of the New Brunswick Business Council

The Federal Government’s Pan-Canadian Climate Plan mandates a Canada-wide carbon price as part of a national strategy to reduce greenhouse gas (GHG) emissions. The plan leaves the choice between a carbon tax or a cap & trade system for pricing carbon to the provinces so they can address needs, circumstances and preferences of businesses and residents. If a province does not implement its own mechanism for pricing carbon by 2018, the federal government will impose a carbon tax on the province and return the revenues to the province. The Government of New Brunswick committed to pricing carbon in its Climate Change Action Plan released in December 2016 but to date, a carbon pricing mechanism has not been chosen.

Carbon pricing for New Brunswick is no longer just an environmental issue – it is a regulatory issue. In the context of New Brunswick’s economic structure, future aspirations for economic development, demographics, and trade relationships, which carbon pricing mechanism – a carbon tax, cap & trade or a hybrid of the two – is most likely to minimize the socio-economic costs of meeting the government’s regulatory and green economic development objectives?

The economic case for a price on carbon emissions is simply that it requires emitters to pay a price for fossil fuels that reflects the environmental cost of fossil fuel use. With a price on carbon emissions, businesses and consumers have an incentive to use less fossil fuel, reducing CO2 emissions. In the short run, the higher cost of using fossil fuels will encourage the development of supply and use of cleaner fuels. In the long run, as cleaner energy becomes more affordable, the economy can also further grow.

Carbon pricing strategies have three components: 1) a pricing mechanism (cap & trade with auction or free allocation emissions rights or a carbon tax), 2) which emissions are targeted (upstream or downstream) and 3) the use of public revenues collected from either taxes or from sales of emissions permits (return to people/firms including exemptions, reduce other taxes or regulations or fund government programs to support firms and individuals adapt/mitigate). Designing a carbon pricing scheme for New Brunswick amounts to making choices about these three components.

While the principle and purpose of carbon pricing may be clear, how to put a price on carbon is not. The details of the carbon price mechanism design must reflect the objectives and priorities of the government. For example, the choice of how to price carbon will depend on whether the government’s objective is to reduce emissions or to collect revenue from pricing carbon. Cap & trade can provide certainty for emissions reductions but not the price of carbon, which will be set by the market for emissions rights. A carbon tax can give certainty over the price of carbon but not over emissions reductions.

In January of this year, the Policy Studies Centre at the University of New Brunswick in partnership with the New Brunswick Business Council organized a symposium which brought together a diverse group of 60 stakeholders from around the province including government, entrepreneurs, industry, seniors, environmental and social NGO’s as well as academia to discuss the relative merits of the options for how to price carbon in New Brunswick.

The objective of the day was not to produce prescriptive recommendation for how carbon should be priced or for detailed elements of the policy. Instead, the goal of the day was to identify key issues that stakeholders in the room want to see considered as the Government of New Brunswick designs and implements its carbon pricing mechanism for the province.

What emerged from the discussion is that symposium participants agree on the long-term potential for New Brunswick to thrive from a green transition of the economy spurred by carbon pricing. Where our symposium participants expressed concerns about carbon pricing for the province was in areas concerning the short run impacts on households, businesses and the provincial economy.

Perhaps we can summarize the situation as one where New Brunswickers are being offered a risky investment opportunity for a better tomorrow with no clear contract for what we will pay for it today and no assessment of the risk that it may not work.

The main message emerging from the symposium is that, in practice, putting a price on carbon is complex and creates socio-economic risks if poorly executed and economic opportunities if “done right.” The highest-level recommendation that comes from the symposium for the province is that the government must be transparent in its objectives for carbon pricing and the values guiding the design and implementation of any carbon pricing mechanism – what is the balance between revenue to finance the transition to a greener economy and reductions in emissions? What principles will guide how the government will allocate the burden of carbon pricing across businesses, households and communities?

Based on the discussions over the day, it is clear that the following elements will be critical for developing trust of New Brunswickers that whatever policy is rolled out for 2018 is the best option for the province in both the short term and the long term: meaningful engagement with stakeholders throughout the design phase of the policy; investment in modelling of policy alternatives and public disclosure of these results; and a demonstrated willingness to learn the lessons from other jurisdictions further down the path of carbon pricing.

A full report on the symposium is available online at UNB’s Policy Studies Centre website.