The Canadian government has recently announced a carbon tax and, as usual, groups on both sides are not happy. Environmental groups are both praising the move while simultaneously saying it’s not enough. On the other side, business and industry groups are saying that a carbon tax will do nothing to help the climate and will just hurt Canada's economy.

But could there be a way to make everyone a little happier? Could there be a way to reduce carbon emissions more than a carbon tax does, and be less damaging to businesses? Fortunately, the answer is yes.

In a perfect world, every dollar that is collected from a carbon tax does two things: First, it encourages the emitter to emit less by charging them a fee. Second, if the government operates perfectly efficiently (which we know it does not), the government would put that dollar towards the most effective initiative or technology (or combination thereof) to reduce carbon - be it R&D, mass transit, renewables, subsidies for hybrids, etc.

However, only one of those two things is happening in Canada. We have a stick (the carbon tax), but no carrot. In the two provinces that have implemented a carbon tax, Alberta and British Columbia, much of the tax revenue is going back to the consumer in the form of rebates or income tax cuts. This is not necessarily a bad thing – but, we are missing a huge opportunity to reduce emissions. Why? Well, there are (at least) four things we can do with carbon tax revenues. Here they are, in order of increasing effectiveness for reducing emissions:

 

  1. Put it in the general fund (not effective for reducing emissions)
  2. Give it back to individuals and businesses (getting better)
  3. Invest it perfectly on emissions reductions (good, but not realistic)
  4. The business driven solution – treat carbon taxes like speeding tickets (great!)

 

What Alberta and British Columbia are doing, simply returning the revenues in the form of tax breaks, is not a bad solution. But, there are better (and less economically disruptive) ways if your objective is to reduce emissions. Furthermore, because it is nearly impossible for most governments to do anything perfectly (option 3), that brings us to the business driven solution (option 4):

The business driven solution – treat carbon taxes like speeding tickets

Modern society has invested a lot of time and effort in expensive technologies and climate programs, but as it turns out, the best way to reduce emissions - is to reduce emissions. Meaning: reduce emissions from places that are already emitting. And the best people to figure out how to reduce emissions from these sources are the same people that are emitting from these sources.

The idea is simple and can be compared to speeding tickets:

In many states in the U.S., when you get your first speeding ticket, you can either pay the fine (expensive), or take a class on safe driving (cheap or free). The result? People drive safer, at a very low cost, rather than paying for the privilege of driving like maniacs. The business-driven solution simply gives emitters the option to take a safe driving course.

Note: Not all jurisdictions have these ‘take defensive driving instead of paying a speeding ticket’ programs. For somewhere like Alberta, a better analogy is this: if you take driver’s ed, you get a discount on your car insurance. But the concept is the same – instead of being forced to pay (more for insurance), you get a rebate for learning how to drive safer.

Here’s how it works for carbon emitters: Let’s say some company, call them CanadaBusinessCo, owns some oil wells or a factory or a power plant that emits carbon. If a carbon tax is implemented, CanadaBusinessCo might have to pay, let’s say $10 million in carbon taxes. Instead of forcing them to pay for the privilege of emitting, with the business-driven solution CanadaBusinessCo would be given the opportunity to use this $10 million to invest in emissions reduction strategies (e.g. investing in renewable energy or energy efficiency).

The reason this strategy works is twofold:

First, if we don’t do it, we just have to hope the government is going to spend that money efficiently. But given the same amount of money to reduce emissions, there is no way the government could reduce a business’s emissions more efficiently than business could themselves.

Second, and most importantly, this business-driven solution reduces more carbon than simply levying a tax. If CanadaBusinessCo were to switch their fuel source to natural gas, or build some renewables, or install heat recovery on their processes, or paint their roofs white, or switch their vehicle fleet to hybrids, or one of a millions of other options, it would make a significant dent in emissions.

If we allow these businesses to invest in emissions projects instead of paying a fine, everyone will do it. It’s exactly the same reason why so many people take defensive driving courses (or driver’s ed) – because you avoid the fine for speeding (or a higher insurance rate) if you do it.