Choose Wisely

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Choose Wisely: Options and Trade-offs in Recycling Carbon Pricing Revenues

CANADA

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Overview1. The issue: recycling revenue

2. The options: approaches to recycling revenue

3. The trade-offs: • Household fairness• Business competitiveness• Economic growth• GHG emissions• Public acceptability

4. The various contexts: potential provincial priorities

5. The upshot: recommendations for governments

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The importance of revenue recycling

1. Addressing challenges from carbon pricing– Household fairness – Business competitiveness (“leakage”)

2. Improving broader performance– Environmental outcomes: GHG emissions reductions– Economic outcomes: GDP growth

1. The issue

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Household fairness1. The issue

Several separate effects on household budgets from carbon pricing (before revenue recycling):

1. Prices rise — direct and indirect emissions

2. Incomes fall — employment and investment

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Household fairness1. The issue

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1. The issue

Competitiveness Pressures: British Columbia

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1. The issue

Competitiveness Pressures: Alberta

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Competitiveness Pressures: Ontario1. The issue

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Competitiveness Pressures: Nova Scotia1. The issue

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Competitiveness / Leakage1. The issue

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The scale of potential carbon revenue

1. The issue

BC AB SK MB ON QC NS NB PEI NL$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

0%

2%

4%

6%

8%

10%

12%

14%

Total provincial government revenue ($ millions)Carbon revenue as a share of total revenues in 2013-14

Annu

al re

venu

e ($

mill

ions

) ba

sed

on 2

013

emis

sion

s

Shar

e of

tota

l pro

vinc

ial r

even

ue

(201

3-20

14 b

udge

t)

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Six options for revenue recycling:

2. The options

1. Transferring revenue to households2. Reducing income taxes3. Investing in infrastructure4. Investing in clean technology5. Reducing government debt6. Providing transitional support to industry

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Transfers to households

2. The options

Advantages Disadvantages

• Can address fairness issues — highly progressive

• Highly transparent

• Helps to build support

• Forgone revenue — no economic or environmental benefits

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Income-tax cuts (personal income taxes and corporate income taxes)

2. The options


• Can improve economic growth

• Can increase “durability” of policy

• Corporate tax cuts can increase support from business

• Tax cuts not highly “visible”; may not increase public support

• Personal tax cuts may be regressive

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Investments in clean technology

2. The options


• Can drive additional emissions reductions

• Can reduce cost of long-term reductions, enabling more cost-effective policy

• Could increase public support

• Challenging to implement well (picking winners vs. broad support)

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Investments in public infrastructure

2. The options


• Can improve longer-term productivity and economic growth

• Could drive additional emissions reductions in some cases (e.g., grids, transit, rail)

• Could improve public support

• Challenging to differentiate “additional” infrastructure spending due to carbon revenue

• Economic benefits depend on precise choices and details of implementation

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Reducing government debt

2. The options


• Addresses costs of increasing high debt (in provinces with this issue)

• Could help avoid future tax increases to service debt

• Improves inter-generational fairness

• Very intangible; unlikely to garner public support (except in high-debt cases)

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Transitional support to industry (output-based allocations or tax rebates)

2. The options


• Can address competitiveness / leakage pressures

• Can give industry more time to reduce carbon costs

• Can build support in business community

• Can increase overall costs

• Can decrease environmental effectiveness

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Comparing options side-by-side

3. The trade-offs

Implications of recycling choices Analytical approach

Competitiveness impacts

Computable General Equilibrium (CGE) modelling

GHG impacts

GDP impacts

Household fairness SPSD/M micro-simulation modelling

Public acceptability Opinion polling

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Implications for household fairness

3. The trade-offs

Province

Percentage of carbon-pricing revenues required to fully offset carbon costs for households in the:

First quintile First & second quintile

Alberta 3.2 % 9.5 %

Manitoba 4.4 % 12.6 %

Ontario 3.9 % 11.6 %

Nova Scotia 4.0 % 11.8 %

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CGE modelling scenariosScenario Stringency Revenue Recycling

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In every province, carbon is priced at

the same, increasing rate:

2015-2020: $302021-2026: $50

2027-2032: $100

Transfers to households

2 Reductions in provincial CIT

3 Reductions in provincial PIT

4 Transitional support to industry (Output-based allocations / tax rebates)

5Low-carbon technology investments

(Investments in renewable electricity, energy efficiency, targeted technologies)

3. The trade-offs

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Competitiveness implications3. The trade-offs

Implications for GHG emissions

3. The trade-offs

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Implications for economic growth3. The trade-offs

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Implications for public acceptability3.The trade-offs

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Summary of trade-offs3. The trade-offs

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The BC Context: 4. The contexts

• 3rd lowest debt-to-GDP of Canadian provinces in 2014/15

• Economic growth well above Canadian provincial average

• Relatively low tax rates• Lowest corporate tax rates (large corporations)• Lowest personal income tax rate for first income bracket

• 3rd lowest per-capita GHG emissions by province• Clean electricity – 91% of generation capacity from hydro• Very aggressive target for GHG reductions

• Limited exposure to competitiveness pressures • 2% of GDP and 22% of GHGs are from emissions-intensive, trade-exposed sectors

• Recent infrastructure spending for 2010 Olympics and Pacific Gateway

• Carbon tax since 2008; now at $30 / tonne

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The Alberta Context: 4. The contexts

• Lowest debt-to-GDP of Canadian provinces in 2014/15

• Economic growth strongly affected by price of oil

• 18% of provincial GDP and 48% of GHGs from emissions-intensive, trade-exposed sectors

• 2nd highest per-capita emissions of all provinces• From 1990 – 2014, contributed 63% of growth in national GHGs• Coal (43%) and natural gas (40%) main sources of electricity generation

• Young infrastructure, but growing demands

• New climate policy in 2017:• Carbon tax on combustion emissions• Flexible standard with output-based allocations for large emitters• Price rising to $30 / tonne by 2018 (and then beyond)• Support for renewable electricity, coal phase-out

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The Ontario Context: 4. The contexts

• 2nd lowest per-capita emissions of all provinces• Low-carbon electricity• Diversified economy

• But ~ ¼ of Canadian GHG emissions overall

• Moderate existing income-tax rates

• Relatively robust clean-technology sector

• Youngest infrastructure, but fiscal constraints

• Relatively high levels of public debt (~ 40% of GDP)

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The Québec Context: 4. The contexts

• Largest provincial net debt-to-GDP ratio in Canada (50% )

• High income taxes relative to other provinces

• Lowest per-capita emissions of all provinces• 95% of electricity generated from hydro

• Only 1% of provincial GDP and 17% of GHGs from emissions-intensive, trade-exposed sectors

• 36% of Canadian clean energy investments in 2014 were in Quebec

• Current policy: cap-and-trade system linked with California, Ontario

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The Nova Scotia Context: 4. The contexts

• Economic growth low relative to other provinces• Declining population, particularly working-aged individuals

• 7th highest debt-to-GDP ratio, 4th highest debt-per-capita

• High marginal income tax rates relative to other provinces

• Nearly half of provincial GHG emissions come from electricity (coal = 60% of generation) and heat generation • 4th highest per-capita emissions by province

• 2% of provincial GDP and 36% of GHGs from emissions-intensive and trade-exposed sectors (though often these sectors are single facilities)

• Existing policy:• Hard cap on GHGs from electricity generation: 25% below 2010 levels by 2020• Renewable portfolio standard: 40% of generation from renewables by 2020

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Comparing provincial contexts4. The contexts

Conclusions• Carbon pricing is the way forward for Canada, but it generates two clear

challenges for: 1) Household fairness2) Business competitiveness

• Revenue recycling can address both challenges

• Revenue recycling can also support broader economic and environmental objectives

• Different provincial contexts lead to different priorities for revenue recycling

5. The upshot

Recommendations

1. Governments should use revenue recycling to address fairness and competitiveness concerns.

2. Governments should clearly define their objectives for revenue recycling.

3. Governments should use a portfolio of approaches to revenue recycling.

4. Revenue recycling priorities should be adjusted over time.

5. The upshot

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Extra Slides

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More on competitiveness

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Fairness with full dividends

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Fairness and income tax cuts