The recent Glasgow Climate Pact during COP26 renewed the global community's dedication to align with the Paris Agreement. Nevertheless, like many international agreements, the pact lacks enforcement mechanisms or penalties for non-compliance.
To address this issue, experts propose economic solutions, such as the 'club theory' or Nordhaus model, wherein member countries adhere to a common carbon tax or "price on pollution." Non-members would face a 3% tariff on their products sold to club members, incentivising them to join. Over 3,600 economists have already endorsed carbon taxes as the most cost-effective lever to reduce emissions. Germany's new Chancellor, Olaf Scholz, has suggested establishing a 'climate club,' including the EU, US, Japan, and others, to establish common carbon standards and prevent trade friction. However, discussions continue regarding which countries should be included, while the Nordhaus model advocates for open membership.
Critics argue that such an approach could prove economically burdensome for developing nations. In response, the International Monetary Fund (IMF) proposes a varied international carbon price floor, with lower prices for developing countries. Canadian Prime Minister Justin Trudeau supports the idea, advocating for a "shared minimum standard for pricing pollution." Some suggest that Canada's successful carbon pricing model, with its tax and rebate plan, could serve as a blueprint for other major fuel-exporting countries, complementing the IMF's proposal.
Canada stands out as the only country with a significant fossil fuel industry to implement a nationwide carbon pricing plan. Starting in 2019, it introduced a carbon tax of approximately US$32 per tonne, set to increase to nearly US$40 per tonne in 2022 and rise by around US$12 per tonne annually until reaching US$134 per tonne by 2030. The Canadian plan boasts broad emissions coverage, encompassing 78% of household and industrial emissions. To support decarbonisation, Canada has committed US$11.8 billion to investments in renewable energy, grid modernisation, and incentives for zero-emission vehicles, aiming to reduce emissions by a third by 2030.
According to Canadian think tank Clean Prosperity, Canada has a reasonable chance of achieving its targeted 40-45% emissions reduction by 2030, given full implementation of government plans. Key elements distinguishing Canada's approach include provincial flexibility, tax rebates to households, predictable increases in the carbon price, and measures to protect industry competitiveness. While the federal government mandates the carbon price, provinces have the flexibility to choose their own methods of meeting it, such as Quebec's emissions trading system or British Columbia's carbon tax. Provinces without their own system default to the federal carbon backstop, consisting of a carbon tax and an emission cap for large industrial emitters (known as the Output-Based Pricing System - OBPS). Moreover, 90% of revenues from the Canadian carbon tax rebate are directly returned to households, often exceeding the amount they pay in taxes. This approach has fostered social acceptance of the tax and encouraged the adoption of greener alternatives.
One concern regarding carbon pricing is its potential impact on domestic industries' competitiveness compared to international firms not subject to similar pricing. To address this, Canada has considered border carbon adjustments (BCAs), which involve tariffs on carbon-intensive imports. However, critics argue that the existing OBPS is too lenient on industry, leading Canada to explore additional measures. Despite facing challenges in implementing carbon pricing policies, including opposition from certain provinces like Alberta and Ontario, the federal carbon backstop has remained intact. Nevertheless, the policy remains vulnerable should a more conservative government come into power.
