While the climate crisis reminds us of its presence through natural disasters, there is an index that helps quantify it: the social cost of carbon. The latest report from the Canadian government indicates that each ton of carbon causes $250 in damage to society1.
This is not a number to be taken lightly, it offers a way to determine “optimal” climate action.
For example, subsidies for electric cars cost $340 per ton of reduction2, while energy efficiency measures (insulation, heat pump, etc.) can reduce the cost to less than $100 per ton, according to Dunsky3. The economic logic is therefore that any policy that reduces a ton of carbon below the social cost is desirable.
However, the reverse is not necessarily true. Just because a policy is expensive doesn’t mean it’s always undesirable. There are other elements to consider, such as climate justice, economic benefits and innovation.
In addition, the social cost of carbon also makes it possible to inform the population about the sustainability of their way of life.
By way of illustration, a Montreal-Paris flight or a Corolla car (driving 20,000 km/year) imposes an annual social carbon cost of $500, while an SUV and an F-150 respectively impose social costs of $1,000 and $1,750 annually4. In fact, a vegetarian causes half the damage to society ($375/year) compared to his carnivorous counterpart ($750/year).
However, be careful not to confuse the social cost of carbon and the price on carbon, these are two very different things. While the former is information about the social cost of a ton of carbon – particularly useful in cost-benefit analyzes – the latter is national policy; this is the price that must be paid by polluters5. Moreover, the social cost of carbon does not generally equal the price on carbon.
In the Canadian case, the price per ton of carbon is $65 and will reach $170 in 2030, while with the Quebec Carbon Exchange, this price should remain below $100 by 2030 – Quebec offers excess carbon credits6, 7. Note that both have the same social cost of carbon ($250/tonne), but differ in their applications.
Economic thinking is elegant in this respect: in the presence of pollution, one must put a price (or a subsidy) equal to the social cost of this pollution in order to regain economic optimality.
So we should match the price on carbon to the cost of carbon.
Pricing carbon at the social cost of carbon is not without challenges, however. Increasing the carbon tax risks increasing the price of polluting goods and could affect the financial situation of households.
However, the federal government has included this aspect in its carbon pricing policy. It uses the double dividend – the revenue collected from the carbon tax – to redistribute wealth. An Alberta family of four therefore receives $1,500 per year. Moreover, since the wealthy consume more, 80% of Canadian households receive more carbon credits than they pay. This policy therefore does not only combat climate change, it is also redistributive!
Quebec uses its double dividend differently. Instead of redistributing, it stimulates innovation and “green” projects through the Green Fund – now called the Electrification and Climate Change Fund.
A high social cost on carbon makes it easier to finance climate policies, such as public transit, and hinders polluting projects, such as highway expansions and oil and gas exploration.
Two hundred and fifty dollars a ton of carbon is a reminder that our rate of consumption is unsustainable.
It is a call to action.