Contributed by Robert Lyman @ March 2016
The recent First Ministers’ Conference in Vancouver resulted in a communiqué stating that they “committed to transition to a low carbon economy by adopting a broad range of domestic measures, including carbon pricing mechanisms”. To understand what they mean by a low carbon economy, one must look at the communique’s reference to the outcome of the COP 21 meeting in Paris at which several countries agreed in principle to eliminate the use of all fossil fuels as early as 2050.
Canada’s greenhouse gas emissions, largely from the combustion of fossil fuels (coal, oil and natural gas) totaled 726 megatonnes in 2013. These emissions came from all sectors of the Canadian economy, including industry, resource development, transportation, electricity generation, buildings, agriculture and waste. Transportation, upon which so much public attention focuses, represented only 23% of emissions; emissions from light duty vehicles (cars and SUVs) constituted about 15%, with the rest coming from trucks, trains, buses, marine vessels, and aircraft.
Canada and the United States have passed regulations that will force vehicle manufacturers to significantly increase the fuel efficiency of light duty vehicles in the period to 2025. By then, the average new vehicle will have a fuel economy of 4.4 litres per 100 kilometres, a 50% increase from 2013 levels. Even with this significant and costly increase in vehicle design, the increase in vehicle sales will still offset much of the regulation’s effect.
Governments and environmentalists consider this a central challenge of the climate change agenda. So, to get people out of their cars, they are increasingly pinning their hopes on making fuel much more expensive by imposing carbon taxes.
How high would carbon taxes have to go to force Canadians out of their cars?
To estimate this, it helps to consider three things: the cost per litre of a carbon tax defined in terms of dollars per tonne; the effect of higher fuel prices on people’s tendency to drive; and international price comparisons showing how effective high gasoline prices have been in other countries in reducing or eliminating eliminating the use of light duty vehicles.
At this point, one can only speculate on the level of carbon taxes that might be applied in Canada. British Columbia now has a carbon tax of $15 per tonne. The NDP government in Alberta has committed to introduce a carbon tax of $20 per tonne in 2017and to raise that tax to $30 per tonne in 2018, with subsequent increases at the rate of inflation. Each $10 per tonne equates to 2.3 cents per litre. In 2008, the former National Round Table on the Economy and the Environment (NRTEE) issued a report on how Canada could reduce GHG emissions by 60% by 2050. It estimated that a carbon tax of at least $300 per tonne (i.e. 69 cents per litre) would be needed. This is a good indication of where carbon taxes, once accepted, are going eventually.
Here’s the problem with that in terms of achieving the policy goal. The NRTEE used, as the basis of its estimate, a fairly high calculation for how much gasoline consumption would decline in response to higher pump prices. Their “elasticity of demand” was about .06. In fact, more recent studies show that gasoline demand elasticity is only about one third of that, or .02. That means that even a 69 cent per litre carbon tax will not come close to getting people out of their cars and SUVs.
International price comparisons tend to bear this out. At the end of February, 2016, GlobalPetrolPrices.com published the prices of gasoline in several countries. The prices were all listed in terms of U.S. cents per litre. Canada’s average gasoline price was 74 cents per litre. Prices in Europe, in contrast, were much higher: $1.28 per litre in Germany, $1.34 in France, $1.42 in the U.K., and $1.63 in Norway. In other words, even if governments impose a 69 cent per litre carbon tax on gasoline in Canada, the resulting price of $1.43 per litre (in U.S. dollars) would only equal what Britons now pay and would be 19 cents per litre less than what motorists pay in Norway. In The UK, gasoline consumption is virtually the same as it was in 2000; in Norway consumption is higher.
In short, even punishingly high carbon taxes will not accomplish governments’ goals of getting Canadians out of their cars. To greatly reduce gasoline consumption, governments will have to place severe restrictions on who can own and operate a vehicle or when and where vehicles could be used.
That should be really popular.
For more on GHG transportation reductions and the challenges, see Robert Lyman’s brief: “You Can’t Get there from Here”