Maximizing Value: Options for Allocating Carbon Pricing Revenue

This Issue Summary was written by Adam Baylin-Stern, based on a research paper titled, “Carbon Pricing and Mind the Hissing” by Marisa Beck and Randall Wigle. The paper is available here.

Key Messages

  • Governments implementing carbon pricing as part of their efforts to transition to a low-carbon economy may see the generation of substantial revenue. How to allocate this revenue is a key component of carbon pricing policy design, with the potential to influence the policy’s effectiveness, efficiency and public acceptability.
  • With carbon pricing revenue, governments can choose to invest in low-carbon technology, reduce existing taxes, spend on redistributive measures (supporting vulnerable population groups or sectors of the economy), and/or target spending to general productivity enhancing measures (such as investing in infrastructure or reducing deficits). The various options differ in terms of their effects on economic efficiency, emissions reductions, and public acceptability.
  • To date, jurisdictions with carbon pricing regimes have chosen a variety of different allocation options, with some choosing to divide revenues across more than one option. Each jurisdiction’s revenue allocation choice reflects its particular priorities and circumstances.
  • Carbon pricing regimes are already in place in Quebec, Alberta and British Columbia, with more under consideration or development, including the emissions cap-and-trade system under development by the Government of Ontario. Existing carbon pricing systems in Canada differ in terms of revenue allocation – favouring reducing other taxes, investing in low-carbon technology, or investing in infrastructure.
  • With the implementation of new carbon pricing systems, or with price increases in existing ones, there will be an increase in carbon pricing revenues—making it all the more important for policy- makers to consider the various options for revenue allocation.

  • Research paper: Carbon Pricing and Mind the Hissing
  • Blog: How to maximize value: Options for allocating carbon pricing revenue
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    About the Project

    The goal of this project is to shed light on the relationship between economic activity and the environment by exploring the linkages between changes in our natural capital and our measures of productivity generally, and through the construction of an environmentally adjusted measure of productivity specifically.

    While it is now commonly accepted that economic activity and the state of our environment are linked, many economic measures still fail to incorporate the environment – both the things we draw from it and the pollution we release into it. By developing and calculating measures of productivity that include natural capital, Canada may be able to better understand these linkages. This, in turn, may lead to the identification of strategies that can help Canada become more efficient and innovative in the use and protection of natural capital, and thus more productive and more prosperous.

    Using the forestry sector as a case study, this project aims to construct an environmentally adjusted measure of multifactor productivity. In doing so, we aim to add another layer of understanding to the environmental and economic performance of this sector. The proposed measure will have relevance to the Canadian economy as a whole.