CARBON TAX: MEANS OF ACHIEVING CANADIAN TAR GET ON

GREENHOUSE GAS EMISSIONS ?

GLOBAL 2016

IBM WATSON ANAL YTICS

COMPETITION

Carleton University , Canada

JOAN

OFULUE

3/29/2016

Has carbon tax been efficient in reducing greenhouse gas (GHG) emissions?

What other energy reduction policy has led to an efficient reduction in GHG?

How can we compare the best policy ?

Would Canada be able to meet its emissions target by 2020 at this rate?

SECTION 1

Introduction and Motivation

Until recently, Canada has been insouciant and laggard about the issues regarding climate change

and greenhouse gas emissions, this was evident in her decision to drop out of the Kyoto protocol

in 2012 claiming it would save the government $14 billion dollars in penalty. With the target of

keeping the world’s temperature at 2°C, Canada’s effort to salvage its international reputation has

recently been applauded with its carbon tax policy first introduced in 2008 in British Columbia

(BC).

Climate modellers suggest that the world emission should not exceed 2900Gt to maintain the 2◦C

threshold and by 2011 an estimated 1890Gt has been used already. This issue has been of concern

to the world due to the disastrous impact on climate change. No wonder the need for the 2015

World Climate Change Conference in Paris that led to countries successfully reaching a climate

change agreement. Although Canada contributes only 2% of the worlds’ emission it has however

been greatly affected by climate change. For example, the mountain pine beetle infestation in BC,

extreme weather events such as heat waves, heavy rainfalls and related flooding, dry spells and/or

droughts, and forest fires.1

The objective of this report would be to analyze the carbon tax policy successfully implemented in

British Columbia and evaluate its impact/contribution in reducing greenhouse gas emission. The

carbon tax was recorded unsuccessful in Quebec which has led to the province to continue the use

of the Cap and Trade system currently used also in Ontario. Even though the Cap and Trade system

has shown successes in terms of achieving gas emission targets, it however has lots of

implementation challenges. This policy is highly susceptible to loopholes and lobbying and so it

is important for us to implement simple but yet highly effective policy as a standard to the rest of

the world.

This research would analyze the trend at which greenhouse gas emission is growing/falling to see

if Canada can achieve its 2020 target of 27Mt. This research would further show why the

government has to be aggressive in its implementation with other provinces such as Quebec,

Alberta and Ontario. British Columbia is currently one of the low emitting province in Canada.2

1 What is a Carbon tax? A carbon tax is a fee placed on greenhouse gas (GHG) pollution mainly from burning fossil

fuels. This can be done by placing a surcharge on carbon-based fuels and other sources of pollution such as industrial

processes. It has been argued that a stronger price on emission is an incentive for Industries to invest in cleaner

energy source and also trigger innovation of green technologies 2 The Kyoto Protocol covers six greenhouse gases: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, and perfluorocarbons and Sulphur hexafluoride. Of these six gases, three are of primary concern because they are closely associated to human activities. Carbon dioxide is the main contributor to climate change, especially through the burning of fossil fuels. Methane is produced naturally when vegetation is burned, digested or rotted without the presence of oxygen. Large amounts of methane are released by cattle farming, waste dumps, rice farming and the production of oil and gas.

The following questions would be addressed in this report:

● Has Carbon Tax been efficient in reducing greenhouse gas emissions?

● What other energy reduction policy has led to an efficient reduction in GHG?

● How can we compare the best policy?

● Would Canada be able to meet its emissions target by 2020 at this rate?

SECTION 2

Potency, Design and Myths of the Carbon Tax.

The carbon tax is collected at the point of retail consumption (for example, at the pump for gasoline and

diesel). With lots of illusion about the carbon tax, the tax collected at the point of retail consumption

(for example, at the pump for gasoline and diesel) has certain distinctive characteristics that

justifies its potency. First, the carbon tax is a function of congestion and carbon density in fuels.

This means that the tax is higher in locations that are highly congested and also higher for fuels

that produce more carbon. Another characteristics of the carbon tax is its price progression. The

price of C$10 per ton of carbon dioxide equivalent emissions (2.4 cents per liter on gasoline) in

2008 has gradually increased yearly by $5, reaching a current price of $30 per ton (7.2 cents per

liter at the pumps). Thirdly, the tax covers all emission from tax combustion and also highly

integrated with other complementary policies/measures aimed at reducing emissions. The last point

helps to create a sense of relieve for individuals skeptical about this policy – The revenue neutrality

of the carbon tax. All revenue received from the carbon tax is reimbursed to every individual in

terms of income and corporate tax adjustment. Low income individuals and families are protected

through this credit.

Some myths of the carbon tax include: The carbon tax is just a tax grab, Industry/business are

exempt from the carbon tax, Many emissions are not taxed, it unfairly affects low-income British

Columbians, Government gets more tax revenue when gas prices rise, The carbon tax applies to

goods other than fuel (e.g., vehicles), Many people have no alternatives and no way to reduce their

emissions, The carbon tax will adversely affect the economy, The carbon tax will have virtually

no impact on reducing B.C.’s greenhouse gas emissions.

(http://www.fin.gov.bc.ca/tbs/tp/climate/A6.htm ). All this unfounded assertions of the carbon tax

justifies the repudiation of this policy.

Ontario and Quebec’s Cap and Trade System Versus Alberta’s System

The Cap and Trade system is another approach to pricing carbon emissions. It is designed to put a

cap on the quantity of carbon emissions by the biggest carbon emitters (25,000 metric tons or

more). The cap amount is then reduced from year to year. The Cap and Trade system influences

industries/firms to seek clean/green energy source. It provides an incentive for organizations to

Nitrous oxide, released by chemical fertilizers and burning fossil fuels, has a global warming potential 310 times that of carbon dioxide.

make profit by trying to sell there pollution quotas rather than buy them. One of the biggest appeal

of this system is the ability to know the exact amount of pollution that was reduced, however this

system is designed for the market to determine price (market failure is a key problem of such).

Although Alberta was the first province to implement a greenhouse gas emission pricing system.

Many doubt that this system which aims at the largest emitters is in any way effective. Alberta

system of carbon policy targets the largest polluters and aims to reduce the carbon

footprint/intensity by 12% rather than the overall emissions. This system of Alberta’s is only aimed

at carbon intensity and as such organization can increase their greenhouse gas emissions if its

carbon intensity is 12% less than the baseline year. Facilities not able to meet this 12% threshold

pay $15 per ton of GHG emissions and also they can purchase the right to pollute from

organizations who have met up with the target.

SECTION 3

Data and Methodology

Statistics Canada Most of our data would be arrayed from the Government of Canada - Statistics Canada. The data

on greenhouse gas emissions for provinces over time is only available in 1990, 2003 and 2013. We

would approximate GHG with data on Gasoline and other petroleum fuels sold annually, Cansim

Table-405-002. Environment and climate change Canada claims about 80% of greenhouse gas

emissions come from fuel combustion, and so for this reason data on gasoline and diesel

consumption would be applicable. Given the carbon footprint calculation below in Figure 1 we can

get the approximate values in metric tons of C02.

The average after tax-income, by economic family type is collected. This data would act as very

important control because of the various provincial tax adjustment made over the years. Also as

mentioned earlier, revenue from the carbon tax is recycled into the economy in form of income tax

adjustment and so it would be important to see how BC tax readjustment further impacts the

response variable.

Table 282-0087 Labor Force survey (LFS) estimate provides provincial data on the level of

unemployment. This last two variables would simple act as control but we expect little impact to

our analysis.

CANADA’S 2020

TARGET OF

27MEGATONES =

27,000,000 METRIC TONNES

Figure 1: Carbon Footprint

The Kent Group

This site would make available data on taxation and petroleum prices for all province across time

(1993-2013). The order in which the taxes are applied is as follows:

1. Consumption and excise taxes (provincial and federal) are added to the extra price;

2. The GST/HST is calculated and added onto the sum from 1; 3. (In Quebec only) the QST is calculated and added onto the result of 2.

Petroleum prices are adjusted for inflation using Consumer Price Index for all goods with base

year 2008.

Methodology Our research utilizes IBM Watson Analytics. IBM Watson Analytics is an easy-to-use service for

finding answers in your data. It provides visualization and smart discovery solutions available on

the cloud. It guides data exploration, automates predictive analytics and make creating dashboards

and infographics almost effortless.

• 2.3 kg (CO 2 ) LITRE 1

GASOLINE

• 2.7 kg(CO 2 ) 1 LITRE

DIESEL

0.0 0239

METRIC

TONNE

0.00262

METRIC

TONNE

Watson Analytics provides cognitive service that's meant to bear some of the load executive’s face

when preparing data, while making it easier to run predictive analyses and use "visual storytelling",

such as using graphs, maps and infographics to illustrate a point. Although we don’t implore large

terabyte of data due to the nature of this specific environmental issue but Watson Analytics helps

create greater insight and further support the result of other analytics tools.

SECTION 4 The solution details would cover the following:

• Exploration of concept; •

Prediction of trend; and

• Public perception.

Greenhouse Gas Emissions trend

Figure 2 offers insight into the trend at which the greenhouse gas emissions has grown in Canada

over the years. The density of the color in the map provides information on the intensity of

greenhouse gases in the province. Alberta takes the lead in emissions in all the years analyzed.

This is not strange as Alberta is not only one of the most populated province (4th populous) but

also the province with the highest number of oil fields, oil sands and energy refinement activity.

Quebec, Ontario, British Columbia and Saskatchewan are coming after in GHG emissions

intensity. The top five emitters (Alberta, Ontario, Quebec, Saskatchewan and British Columbia)

together released almost 91% of Canada's national total GHG emissions of 726 Mt of CO2

equivalence in 2013.

From initial observation, Alberta reveals increased emissions between 2005 and 2013. In spite of

Alberta’s policy introduced in 2007, Alberta has seen drastic increase in emission. Alberta has

failed to become a national leader on climate change. This unsuitable state of Alberta’s energy

practices is evident in President Barack Obama’s rejection of TransCanada’s application to build

the Keystone XL pipeline calling Alberta’s oil “dirty”. British Columbia on the other hand has a

reduction in GHG emissions, although in comparison with Quebec and Ontario, BC’s reduction is

less.

Figure 2: Emissions Trend

Gasoline and Diesel Sale

As earlier mentioned, due to poor availability of data, total gasoline and diesel consumption (both

by individuals and industries) is approximated for C02 emissions which is the most important of

the anthropogenic GHGs. The first visualization in Figure 3 provides Canada’s emission reduction

target, which is aimed at reducing emissions to 734 Mt using provincial measures and just slightly

below 862 Mt using only federal measures. One would argue that gasoline and diesel sale is a bad

approximation as consumption differ according to population sizes in different province. This

report considers such reservation and focuses on the trends rather than actual consumption.

Gasoline and diesel consumption in Alberta further supports earlier GHG emissions trend. After

2007, the consumption of this fuel continues to increase in Alberta as opposed to BC and Quebec.

Quebec’s policy (Cap and Trade) was introduced in 2013 and in such a short time CO2 emissions

have fallen drastically however this policy is still at the infant stage and its sustainability cannot

be determined yet. This similar policy was introduced in Ontario and so both provinces maintain

the same trend.

British Columbia exhibit an unusual trend in diesel consumption between 2010 and 2014, this

could be accounted for by the government of BC decision to replace all hydrogen powered vehicles

to diesel and other fuels starting in 2009.

The average for gasoline and diesel consumption in all other provinces maintains a steady trend

and also low quantity and this further supports our justification for dropping all other province.

Figure 3: Sale of Fuel

Exploration of Gasoline sales and Tax in BC

Figure 4 shows a simple exploration of BC gasoline sale and BC gasoline tax with the size of the

bubble representing the volume of sales. The content in the gold circle lays emphasis on our point

of interest. Between a taxes level of 20 and 22 cents per liters BC experiences the lowest sale of

gasoline. The bubbles (shown in green) in the circle (bottom right-hand corner) lie between year

2012 and 2014. Although earlier years reveal a steady high consumption (20082011), this could

signal the possibility of a tipping point that leads to change in demand by major consumers. The

predictive section would justify this preliminary idea.

Figure 4: Gasoline sale and Tax in BC

Predictions

From immediate observation of Figure 5 we recognize a tipping point at which the carbon tax

begins to have significant effect of consumption. The 73% predictive strength of the analysis reveal

a rapid decrease between 14.5 cents to 19 cents reaching the lowest point after 19 cents which is

the same as shown in Figure 4.

Figure 5: BC Gasoline Sale Prediction

One key characteristics of the carbon tax is its price progression. As at 2012 the component of tax

that belongs to carbon tax is 7.3 cents from the value of 2 cents recorded when the policy was first

implemented In BC. Recent news has signaled subsequent increase in the carbon tax. But like any

other price policy one has to be careful so as not to charge amounts that would led to a negative

impact on the economy and further fall short of the purpose of the policy. Watson Analytics fails

to capture/find a combined impact of the tax and other social economic factors that might affect

consumption. We find unemployment separately affecting consumption with a 57% predictive

strength. The low predictive strength and the anomaly in unemployment figure could be a major

reason why Watson Analytics failed to capture this combined impact.

Figure 6: BC Diesel Sale

Figure 6 shows a two dimensional graph of the predictive ability of unemployment and diesel tax on diesel

sale in BC. The graph shows an increase in unemployment decreases the mean consumption of diesel, with

trends that are affected by the tax (the higher the tax the steeper the slope). In particular, an increase of 16%

on unemployment rate will generate a decrease in consumption of: 5% when the tax level is at most 11.5

cents/ liter, 10% when the tax level is between 11.50 and 15 cents/liter and 19% when the tax level is

between 15 and 20.10 cents/liters.

The interesting point about Figure 6 is that even though there exist no significant interaction with both

unemployment and diesel tax, we can show how the slopes change with the different level of tax. One would

expect if we have more data points that the red dot would have the highest slope in comparison to the yellow

line where diesel tax lies between 15 and 20 cents per litre.

One would love to apply the same analysis to Alberta and Quebec but the design of their policy doesn’t

impact tax in anyway and so the tax data is a constant amount for both diesel and gasoline. No prediction

can be done with such figures, but from our exploration we can get insight as to how this policies tackles

consumption of fuels.

The public perception is been disclosed in Figure 7. The issue of carbon tax between the years 2013 and

2015 is been discussed the most in Australia, Canada and the United States of America. Australia just

recently introduced its carbon tax under the Gillard Government. Falls to emissions was noticed just after

the policy was implemented. A major difference between the Australian and BC policy is that Australian carbon tax is only targeted at electricity generators and industrial sectors and doesn’t cover transportation

and agriculture. There has also been a lot of debate claiming that carbon reduction has been as a result of

other unrelated factors. The USA on the other hand doesn’t have a federal carbon tax. Similar carbon tax

policy is operated in California where revenues are expected to be channeled towards climate mitigation

programs. It is however dismal that nations like China, India and Russia that produce the highest portion of

GHG have little to say about a fine piece of emissions regulatory policy.

In regards to sentiments, a large proportion of individuals are positive or neutral about carbon tax. One

would expect individuals to be cynical about issues regarding imposing taxes. It is quite impressive that

discussions around this parts of the world show general acceptance of the policy. It is possible that the

portion of individuals neutral about this topic don’t understand properly the nitty gritty of the carbon tax

and so more work has to be done in promoting this idea to individuals especially its positive impacts to a

household and the economy as a whole.

Figure 7: Social Media

SECTION 5

Conclusion and Recommendation

The carbon tax no doubt has been of positive impacts in reducing carbon emissions. The popular quote

“never let the facts stand in the way of a good story” is one describing the case of Canada (BC) where

former Prime Minister Steven Harper repeatedly claimed that carbon tax would destroy jobs and growth.

Yet the evidence from BC tells a different story. BC’s personal and corporate income tax rate are now

among the lowest in Canada and also fuel use has dropped by 16% while it rose 3%in the rest of Canada. BC’s carbon tax has gained global praise and has become the model of the world as we can see in Australia

and the United States. Carbon tax has some widespread advantage which include:

• Revenue neutrality – The biggest selling point of the carbon tax is its revenue neutrality. This makes

the system predictable and reliable. • Innovation and productivity – Recent research has identified a positive relationship between carbon

pricing and innovation. Firms strive to seek cleaner energy processes, this innovation further leads to

productivity. But it is necessary that there is widespread acceptance of low carbon technology to support

the transitional strategy of a carbon tax. • Alleviating impact on low income households – Availability of support policies to low income

households who depend largely on carbon-intensive goods.

• Competitiveness – The argument that carbon pricing would lead to higher cost for firms thereby losing their market share or even migration to regions where there are not such policies has become a

prominent debate. But only a small percentage of individuals are affected through a combination of

several scenarios. • Public opinion – The public seem to be more concerned about the use of revenue gotten from carbon

tax. There has been a general acceptance of the policy and results from the sentiment analysis further

supports people’s opinion of the policy.

The facts would also not be denied that the reduction with carbon tax so far would not be enough to reach

BC 2020 target. We have to implore different policy measures to tackle emissions. Alberta has shown

disappointing progress towards its reduction of carbon emissions. If Canada must meet either its provincial

/federal target then Alberta has to take aggressive measures in joining the pack of other province in

implementing multiple and effective measures. Alberta has to stop pondering on the possibility of carbon

tax and start taking action.

Quebec Cap and Trade has shown so much potential in reducing GHG emissions. One major boon of the

Cap and Trade system is the ability to know the exact quantity of emissions reduced but the price cannot be

determined because it is left to market forces. The indeterminate price can led to some market problems

allocation issues. In comparison to the cap and trade system, the carbon tax is simply to implement as it

uses existing price structures.

Conclusively, the carbon tax is one of the many solutions to fight global warming, but a

comprehensive climate change plan will have to include many other measures to achieve the desired

emissions target.

“Unless we decide to reduce greenhouse gas emissions within just a few years from

now, our destinies will already be chosen and our path towards hell unalterable as the

carbon cycle feedbacks……kick in one after another” - Mark Lynas

[1] Nicholas Rivers. The case for a carbon tax in Canada.Canada2020, November, 2014 [2] David Suzuki Foundation. Carbon tax or Cap and

Trade.http://www.davidsuzuki.org/issues/climatechange/science/climate-solutions/carbon-tax-or-cap-and-trade/ [3] http://www.desmog.ca/2015/05/05/alberta-carbon-levy-primer [4] http://www-03.ibm.com/software/products/en/watson-analytics [5] http://www.theglobeandmail.com/news/alberta/alberta-to-release-climate-change-policy-at-

edmontonsciencecentre/article27433002/ [6] http://www.c2es.org/publications/options-considerations-federal-carbon-tax [7] http://business.financialpost.com/fp-comment/b-c-s-carbon-tax-shift-works a. DATA [8] Statistics Canada. Table 202-0603 - Average after-tax income, by economic family type, 2011 constant dollars,

annual (dollars), CANSIM (database) [9] Statistics Canada. Table 405-0002 - Gasoline and Other Petroleum Fuels Sold, annual (litres), CANSIM (database). [10] Statistics Canada. Table 282-0087 - Labor force survey estimates (LFS), by sex and age group, seasonally adjusted

and unadjusted, monthly (persons unless otherwise noted), CANSIM (database) [11] Kent Marketing Services.

Petroleum Price data

References