Comparing the Stringency of Carbon-Pricing Policies

Ecofiscal WebinarAugust 16, 2016

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?

A Quick Aside on Costs

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

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

The “MAC” Curve

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?

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.

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.

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.

3. Average carbon costs

Why give away permits for free?

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.

4. Coverage-weighted carbon price

coverage–w ighted carbon price = 𝑒

marginal carbon price × covered emissions

total GHG emissions Key Advantage

1. Easy to measure – price observed directly; coverage easy to estimate.

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.

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.

Practical Problem?

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

It’s complicated!

The Second Question

What is a practical way to coordinate different provincial systems?

Two Competing Objectives:

1. Lowest economic cost equate prices across provincial systems

2. Practicality flexibility as to how provinces achieve (roughly) comparable stringency

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 price2. Policy coverage3. Use of permits

A Simple Example

(This example assumes a specific (hypothetical) MAC curve.)

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.

Questions?