I spent much of the past three weeks immersed in informal conversations with friends, family and colleagues about either carbon pricing or the Middle East, subjects which are somehow both deeply contentious, such that the simple act of posting this sentence makes me nervous both as a Jewish person and as a climate scientist.
This former was brought on by the recent Canadian government decision to create a three-year exemption to the federal carbon pricing system for home heating oil. Since that decision, much of the chatter has focused on politics and the fate of Canada’s carbon pricing system.
I’ve noticed three things missing from many of the carbon pricing discussions. Politics aside, I suspect these have interacted to lead the country into this bind, where the carbon pricing is unpopular, and even policy experts are becoming more divided on the subject:
1. Carbon pricing is a gradual solution to a transformational challenge
The Paris Climate Agreement marked a significant shift in the objectives of international and domestic climate policy. Previously, the focus was often on halting the growth of greenhouse gas emissions or achieving marginal reductions based on short-term targets. Now, the world acknowledges that halting global warming requires achieving net-zero emissions. That means concentrating on transformative actions that can eliminate greenhouse gas emissions, rather than incremental measures that can achieve marginal reductions. To use a skiing analogy, we need to get off the bunny slopes to over to a double black diamond.
Carbon pricing is a foundational climate policy tool. An increasing carbon price should incentivize shifts and household and corporate behavior. On its own, however, a carbon price may not be sufficient to motivate transformational actions necessary to eliminate greenhouse gas emissions from many activities. Instead, it may incentivize more marginal shifts in behaviour over time, e.g., turn the heat down at night, rather than switch from a gas furnace to a heat pump. In that sense, carbon pricing is somewhat of a legacy of the older emissions reduction paradigm.
Part of the problem lies in the fact that the argument for pricing comes from economy/energy models, which excel at representing the behavior of existing markets but may not capture the transformative effects of new technologies or systems. In the model world, the price alone may suffice, but in the real world, where a transformation in energy sources and systems is needed, a price may not, on its own, encourage optimal long-term decarbonization decisions.
One risk is what our Net Zero Advisory Body refers to as “dead ends”. Actions encouraged at the low initial price might be well suited for emissions reduction, not necessarily emissions elimination. Those actions then risk locking us in to a system or technology (e.g., blending ethanol into gasoline for passenger vehicles) that will eventually need to be replaced (e.g., replacing gas vehicles with EVs), often at great cost to all taxpayers and to workers dependent on the old technology or system.
2. Perceived policy uncertainty causes a feedback loop
As I mentioned, many of the choices that people and companies must make to eliminate emissions are binary (e.g., EV vs. gas car, or gas furnace vs. electric heat pump), with costs often also front-loaded, and savings accruing over time. Those are hard decisions!
For a carbon price to incentivize such transformational actions, the price has to be high. However, the government cannot start with a very high price, as it would be an unfair shock to the average person and the economy as a whole.
The solution is to increase the price over time. The Canadian government’s announcement that the carbon price would gradually increase to $170 in 2030 was a smart policy move. The announcement itself signaled that even though the current price might be too low to spur transformative action, the knowledge that the cost of high-emitting systems will continue to rise over time should encourage the adoption of low or zero-carbon options.
The problem is that people and companies need to trust that the price increase will happen. Given that Canada is a democracy, and the main opposition party and several provincial premiers have spent more than a decade railing against carbon pricing and confusing the public, many people and companies do not trust that the carbon price will continue to increase, or survive at all. The low perceived policy certainty creates a vicious feedback loop where the suggestion that the price may not survive further encourages people to lobby to stop the price increase or to create more exceptions. Climate policy experts playing political pundit and predicting the carbon price will not survive only play into this dynamic.
3. We are not economically rational decision makers
Even in a scenario in which the carbon price is scheduled to increase, and people trust but that increase will occur, models may overestimate people’s willingness to change behaviour.
Traditional economics and economic modelling assume that people are rational actors, meaning they will act out of self-interest in order to maximize personal gain and minimize losses. However, in reality, many other factors, from culture and identity to distributional obstacles (e.g., not enough trained heat pump installers), which influence our ability to make economically rational decisions.
Even if the math shows that buying an EV or a heat pump is clearly the cheapest option over the long term, people may be reluctant to do so because changing behaviour is hard. As systems theorists would say, it takes a lot of energy or resources to change from one state to another. This reluctance can lead to cognitive dissonance – not wanting take the action (switch to an electric vehicle), prompts questioning of the evidence that the action works (distrust lifetime cost savings and life cycle emissions analyses).
Adding this to the previous two points, even with the ‘right’ C price according to a model, people may not make the ‘right’ low- or zero-carbon decision. And if progress happens slower than expected, that further accelerates the positive feedback loop of lobbying to pause, reduce or kill the carbon price.
The solution recommended by behavioural economists and others to fix the non-rational actor problem is to change how the choices are offered and/or the market is structured. Instead, of relying on the economic inventive alone, present the options in a way to highlight the benefits of the economically rational solution (sometimes called “nudges”) and/or create additional measures to increase the availability of the alternatives.
Take-home message
Pricing carbon is still good foundational policy. However, it requires complimentary regulations, investments and industrial strategies to steer decisions in the right long-term direction. It may seem crazy that the Canadian government, for example, has so many different climate policies, from zero-emission vehicle mandates to heat pump rebates to targeted investments, layered on top of the carbon pricing system. It may also be the correct approach.
