The effectiveness of Carbon Pricing: The Case of Alberta and British Columbia

Abstract

The Intergovernmental Panel on Climate Change (IPCC) recently presented its Fourth Report that contained additional evidence that human activities are a significant cause of increases in Greenhouse Gas (GHG) emissions resulting in a warming of the climate. There has been growing pressure on governments to substantially reduce these emissions by adopting effective policy mechanisms. In Canada, individual provinces have implemented a variety of approaches that best fit their individual circumstances. This, in turn, provides an opportunity to assess the effectiveness of different policy approaches in reducing carbon emissions. This report focuses on the relative impacts of the carbon tax implemented by British Columbia (B.C.), and Alberta’s carbon levy. Having neither a carbon tax or carbon levy, Saskatchewan is used as the ‘control province.’ A difference-in-difference estimate is used to study the real mitigation effects of the carbon tax and levy. The results indicate that Alberta’s carbon levy has had a positive impact in reducing the emissions intensity levels of the oil and gas, electricity and heat, transportation and residential buildings sectors. The mitigation effects of the B.C. carbon tax were limited to the transportation sector. Based on the findings of the statistical analysis presented in the report, several recommendations are made so that a greater reduction in emissions can be achieved. The recommendations include: expanding the size and scope of the levy for large emitters, and subjecting small emitters to the carbon levy, phasing out the use of coal-fired plants for power generation in Alberta, introducing energy efficiency programs, and monitoring the performance of Alberta’s Specified Gas Emitters Regulation on a continuous basis.