Understanding Output-Based Pricing Systems

• In Event: Beyond Pigou: Evidence on Efficiency, Equity, and Policy Instruments

Abstract

In recent years, Canada has used a distinctive carbon pricing regime, “output-based pricing systems” (OBPS), to incentivize emission reduction for large industrial facilities. This regime has come under heightened scrutiny as a more general carbon tax is cancelled in 2025 due to political controversy. However, OBPS regimes have received no prior economic analysis; commentators have mostly criticized the weakness of the emission trading markets within them. This Essay argues that OBPS should be viewed as primarily implementing a carbon tax with an intensity-based exemption. OBPS further introduces emissions trading into this carbon tax regime, but trading only worsens the regime’s performance, by offering a distortionary production subsidy to low emitters and by weakening abatement incentives. Inefficient emissions trading markets are thus not OBPS’ main problem; the combination of carbon taxation with emissions trading may be fundamentally flawed. Moreover, the Essay highlights several previously-neglected affinities between various pricing and regulatory instruments for achieving emission reductions, as well as the difficulty of identifying equivalences even among carbon pricing regimes.

Author

• Wei Cui, wei.cui@ubc.ca