Large-emitter trading systems help industry succeed and cost next to nothing for households.
Previous research from the Canadian Climate Institute has shown that industrial carbon pricing systems impose very low costs on Canadian industries while positioning them to succeed in increasingly uncertain global markets.
But how does industrial carbon pricing affect Canadian households?
The short answer is: not much, if at all.
Large-emitter trading systems have almost zero impact on households
The Institute’s recent research shows that Canada’s industrial carbon pricing systems—also known as large-emitter trading systems—have essentially no impact on households. This light touch is a feature: it’s a result of the way that systems have been designed to limit costs to industry, and a function of the kinds of products that are covered by large-emitter systems.
The Institute recently published an independent assessment of Canada’s large-emitter trading systems. The assessment includes detailed modelling that examines the impact of these systems on emissions and the economy. The analysis distinguishes the impacts of consumer carbon pricing systems from the effects of their industrial equivalents. It shows that while consumer carbon pricing slightly depresses household expenditures on average, industrial carbon pricing has almost zero impact on household costs.
Large-emitter trading systems have an average impact of around 0 per cent on household consumption in 2025, (with even small net benefits for some consumers) and a tenth of a per cent in 2030. In some cases, industrial carbon pricing could even have a positive impact on household consumption in 2030, largely because of provisions in Alberta’s TIER system that can reduce the cost of electricity.
Large-emitter trading systems are not carbon taxes
The low cost of large-emitter trading systems is especially notable considering that they are expected to be the single biggest driver of emissions reductions across the country.
What explains this cost-effectiveness?
Large-emitter trading systems are very different from consumer carbon pricing or carbon taxes, and three important differences help explain why industrial carbon pricing has so little impact on households.
First, large-emitter trading systems impose much lower costs on total emissions than consumer carbon prices, around $10 or less per tonne of emissions against a carbon price of $95 per tonne. At worst, these costs represent a Timbit per barrel of oil, while some industries are even able to earn money, on average. These low costs are intentional: large-emitter trading systems are designed to incentivize industry to reduce its emissions, but without imposing costs so high that Canada loses market share to places with weaker controls on emissions.
Second, industrial carbon pricing applies to goods that are largely exported. About 50 per cent of the output of Canada’s large emitters is exported and some industries export much more; the oil sands send closer to 80 per cent of its production abroad. This implies that only a fraction of the already low costs get passed on to Canadian consumers. Moreover, the prices of industrial products are largely set by global markets, not domestic policy. The major exception is electricity, but as the Institute’s analysis has shown, in some places—like Alberta—large-emitter trading systems can actually help reduce prices by enabling low-carbon producers to generate saleable credits.
Third, industrial carbon pricing barely affects households because these modest increases in the cost of industrial goods have only a small impact on the price of finished products. Consider a product made with steel. Research finds that the use of pricier low-carbon steel has a negligible impact on the purchase price of a vehicle or the construction costs of a building. There are of course differences depending on the product; for example, the cost of cement has a higher impact on the total cost of construction (though households use very little cement). Yet the principle remains that the price of the inputs is only a fraction of what a consumer pays.
The bottom line is that large-emitter trading systems deliver big benefits at a low cost. And for consumers in Canada, these costs are negligible. Large-emitter trading systems are not perfect, but they are still powerful tools for reducing Canada’s emissions and retooling its industries for long term competitiveness. Along the way, Canadian households can rest assured that they will shoulder very little in the way of costs.
Ross Linden-Fraser is a Research Lead at the Canadian Climate Institute. Dave Sawyer is Principal Economist at the Canadian Climate Institute.