Carbon Pricing in North America – Leading a New Era of Climate Policy

by Tamaki Stiles * (Advanced Biofuels USA) Reducing greenhouse emissions is a shared goal in North America. In fact, presidents of the United States and Mexico and the Prime Minister of Canada met in June this year to establish partnerships on clean energy and the environment. One of the important outcomes of this meeting was a commitment to strive to have 50% of all electricity generation in North America from clean energy sources by 2025. Carbon pricing can be a driving factor for reaching this goal, and the forum at Resources for the Future (RFF) discussed carbon pricing developments in Canada, the United States and Mexico on September 16. This article summarizes the highlights of the discussion.

In Canada, provinces have taken an initiative in carbon pricing. For example, British Columbia has had a carbon tax since 2008. That carbon tax is currently at $30 per ton and it is revenue neutral. This means that British Columbia has cut other taxes to offset the revenue from the carbon tax. In Quebec, they have a carbon trading system linked to a California system. It covers roughly 85% of the province’s emissions. Alberta has also had carbon pricing in place since 2015, while Ontario, Manitoba, and Labrador have developed a plan to implement carbon pricing in 2017. The general election in October 2015 has accelerated this trend and climate change mitigation became a primary goal for the federal government after the election.

What does it mean? As Rachel McCormick, Counselor for Energy and Environment at the Embassy of Canada put it, it means “As of 2017 we will have over 85% of the population living in a province that has prices on carbon... We want energy part of the solution.”

In the United States, the Clean Power Plan was introduced in August 2015 to reduce carbon emissions from electricity power plants. Under this plan, Dallas Burtraw, a senior fellow at RFF, expects that at least 30 states will engage in carbon trading that complies with the Clean Power Plan. With this Clean Power Plan, states set their own targets for carbon emissions reductions and they were supposed to submit a final plan by September 6, 2016.

California is the first state that submitted a draft. An important achievement for California is that this August, the California Assembly passed Senate Bill (SB) 32 that extends the original law to 2030. The original law is called Assembly Bill (AB) 32, which required California to cut its emissions to 1990 levels by 2020. The new bill, SB 32, requires the state to reduce greenhouse gas emissions to 40% below 1990 levels by 2030.

The original law, AB32, gave the California Air Resources Board (ARB) power to set policies to meet the 2020 target. It includes a cap-and-trade program, a Low Carbon Fuel Standard, and registrations such as SB 535. An important piece of SB 535 is “it required 25% of the [amount of emission] allowance value that’s created by putting prices on carbon should be directed to be the benefit of disadvantaged communities.” This bill also requires that at least 10% of the money should be used in these communities.

The California Assembly also passed AB 197 this August, a bill linked to SB 32. AB 197 puts priority over reduction, “not just relying on carbon markets to find the least cost emission reduction.” It calls for source-specific emission reductions, for example. If emission standards for electricity plants were not achieved with the Clean Power Plan, additional specific measures will be required at these plants.

Mexico already had a carbon tax in 2014. The way they got there was interesting because they gradually removed fuel subsidies since 2010. By the end of 2013, they had a good foundation for introducing the carbon tax.

Carlos Muñoz Piña, Lecturer at Instituto Tecnológico Autónomo de México introduced the idea of “unconditional” and “conditional” in his speech. Unconditional means carbon intensity per unit of GDP. Mexico has a goal which is 25% reduction of ‘business as usual’ by 2030. The key here is business as usual. He says, “We don’t know if Mexico will be growing 2%, 3%, 4% a year by 2030... Business as usual means many things over time. Basing carbon density would make sense for the entire goal, and then convert it to specific numbers that can be traded for this year.”

In fact, fuels are taxed by carbon density in Mexico. For example, coal has a lower carbon tax, while diesel has a higher carbon tax. Natural gas is exempted. On average, the tax is US$ 3.5 per ton of CO₂.

In contrast, Carlos argues that conditional means “an international agreement that pushes forward a carbon price.” It makes sense for shared responsibilities among trading partners. The word conditional is used because it is conditional to trading partners. Carlos also added “whatever your neighbors do matters to how we can handle carbon taxing.” He talked about differences in taxes between their border states. Gasoline taxes in California are about the same as those in Mexico. But along the Texas border, Mexico has to decrease their taxes, otherwise people would go to the other side of the border.

He concluded his speech by saying that the market, including the emissions market, needs to recognize common differentiated responsibilities. “The differences can be used to gain efficiency to productivity... Some creativity needs to be used here to develop linkages between any emerging carbon markets... We need to create heterogeneous linkages that recognize and use our differences towards generating more productive and ambitions efficient way.”

Based on the discussions of the three panels, it seems that partnerships among the United States, Canada, and Mexico will become more crucial to reducing greenhouse emissions significantly in North America.

* Contributing author, Tamaki Stiles, consults on business and strategy analysis and has a growing interest in the energy sector. Photos by T.Stiles