A new study by economists at the University of Ottawa and University of Calgary has found that carbon pricing has the potential to significantly lower electricity prices and lower electricity demand in Canada.
The findings, published in the Journal of the Royal Economic Society, come amid growing concern that the carbon tax is having an adverse impact on the economy and the environment.
“It’s been known for some time that climate policy is a key driver of economic growth,” said Benoit de Brossard, a professor of economics at the university and one of the study’s authors.
“The question is: How can we make it a more efficient driver of growth?”
The study also found that the price of carbon has little to no effect on economic activity and that emissions reductions can be a significant factor in the success of climate policies.
“We believe that we can take a carbon pricing approach to lower electricity and heating bills and thereby increase demand for electricity, which would result in lower electricity costs and thus reduce electricity demand,” de Bossard said.
The researchers calculated that in Canada, carbon pricing would increase electricity demand by $3.6 billion in 2020, or 3.4 per cent.
In the United States, carbon prices are currently in place for an estimated 10 per cent of the electricity produced, and could help offset some of that cost.
The authors argue that carbon prices could reduce energy use by $2.7 billion per year, or 12.4 million tonnes of CO2-equivalent annually, with a higher price offsetting emissions.
A carbon price is set at a level that is less than 1 per cent higher than current federal prices and will have an effective annual effect of $2,700 per tonne.
De Brossar said a carbon tax in Canada would likely cost the government about $300 million annually.
“So, this is a very modest amount of money,” he said.
“This is a modest amount compared to other countries, but we think that’s very relevant.”
The study focused on two scenarios in which the carbon price were set at $3 per ton, or $1.70 per ton.
In this scenario, electricity prices are reduced by $0.50 per kWh and heating and cooling costs are reduced to $1 per kWh.
In another scenario, the price is $3 a tonne, but heating and heating costs are lowered to $2 per tonn and cooling and cooling cost are reduced from $3 to $0 per tonnes.
In each case, emissions are reduced under both scenarios by $8 billion annually, or about half of what they would be if the carbon pricing were at current levels.
The cost of carbon to Canadian consumers and businesses is projected to drop by $4.3 billion annually under the $3 price.
“What’s more important is that we get this revenue back into our economy and into our wallets,” said de Brosard.
“If the price drops to $3, the tax revenues that would have been used to lower the prices of fuel and electricity would be redirected to our economy.”
The researchers believe the carbon taxes will help reduce the impact of global warming and could also spur investments in infrastructure, renewable energy and the building of new plants.
The study’s findings are significant because they show that the Canadian government has the ability to increase its ability to lower emissions, said de Sade.
“Canada has the capacity to do so in a cost-effective way, and that is an issue that is important to Canada,” he added.
“And this is the first study that does a cost analysis of the impacts of a carbon price.”
In addition to de Brousard, the authors include: Andrea Cioran, who studies energy markets at the Centre for Economic Performance at the Canadian International Development Agency, and who co-authored the study; and Daniel LeBaron, a postdoctoral researcher at the same centre.
The paper was published online Dec. 23 in the journal Energy Policy.