Carbon pricing in North America: Work truck industry implications

Guest editorial
Jeffrey Phillips and Anna Barrera
Dawson Strategic 

This article was published in the November 2016 edition of NTEA News.

Governments around the world are moving to put a price on carbon emissions in an effort to mitigate greenhouse gas (GHG) emissions. According to the World Bank, some 40 countries and more than 20 cities, states and provinces already use carbon pricing mechanisms. With more planning to do so in the future, it’s important to understand what carbon pricing is and how it may affect the work truck industry.

Climate change is a major driver of carbon pricing policies. Ideally, pricing carbon is an efficient economic tool signaling market participants to decide whether to curtail their polluting activity, reduce emissions or continue their existing level of emissions and pay for it. In this way, the overall environmental goal can be achieved in a flexible manner. Also, it stimulates clean technology and market innovation, fueling new, low-carbon drivers of economic growth.

The two main forms of carbon pricing are a tax and cap and trade system. The tax directly sets carbon cost by defining a tax rate on GHG emissions, which puts a price on each unit of emissions. For example, British Columbia’s revenue-neutral carbon tax currently sits at CAD $30 per tonne of GHG emissions (each province specifies which greenhouse gases are included in the calculation).

In a cap and trade system, the government puts a firm limit on the overall level of carbon pollution from industry and reduces it every year to reach a set target. This system allows market participants to either sell or purchase emissions allowances depending on whether they are above or below the pollution threshold.

North America update
Across North America, national and sub-national governments are adopting carbon pricing regimes to help meet climate change targets.

In the U.S., California has had a cap and trade system in place since 2012, and several other states like Washington and Oregon are considering some form of carbon price. There is also the Regional Greenhouse Gas Initiative — a cap and trade system designed to reduce power sector emissions. It includes Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont.

In Canada, four provinces implemented or scheduled implementation of a carbon tax (i.e., British Columbia and Alberta) or a cap and trade system (i.e., Ontario and Quebec). Others, like Manitoba, indicated interest in the idea. Beyond this, on Oct. 3, 2016, Canada’s federal Liberal government announced a pan-Canadian national price on carbon pollution whereby all Canadian jurisdictions will have a price on carbon by 2018.

Mexico introduced a national carbon tax in 2014 that applies to the sale and imports of fossil fuels.

Industry impacts
A price on carbon means there is a real cost for GHG emissions created by businesses and consumers, whereas previously there was no direct associated fee. Regarding overall economic affects, there is no particular evidence to suggest pricing carbon significantly influences investment or production in any jurisdiction. The impact of a carbon price on any given industry’s competitiveness is mainly a product of: 1) the energy (specifically carbon) intensity of the industry; and 2) the degree to which the industry is trade-exposed and faces global competition from jurisdictions that may not have a price on carbon.

For the North American work truck market, the most noticeable affect will likely be indirect costs as the majority of industry companies are generally not large final emitters, such as electricity generation, mining and large- scale manufacturing. The exception to this is OEMs that may be directly impacted by carbon pricing mechanisms and could be active participants in a carbon trading market under a cap and trade system.

Indirect costs most relevant to the work truck industry relate to fuel cost increases stemming from a carbon price, be it a cap and trade system or a tax. Looking at Ontario’s system as an example, the provincial government set a cap of 25,000 tonnes of carbon dioxide equivalent at the facility level. Industrial and institutional actors with emissions above this threshold would have to pay by purchasing allowances or otherwise reduce emissions below the limit. In this sense, they are directly impacted by the introduction of cap and trade.

However, there are many firms in Ontario that do not produce anywhere near the 25,000 tonne threshold, yet still yield GHGs through their operations. After announcing the system, the government released fuel cost increase estimates for gasoline (4.3 cents per litre), diesel (4.7 cents per litre) and natural gas (3.3 cents per cubic metre). So, a company operating a fleet of vehicles would not be subject to the cap, but would likely face increased operating expenses as fuel is now more costly.

Carbon pricing also opens up new opportunities, particularly for companies manufacturing or adopting green technologies and equipment that reduce fuel consumption. These products will be further incentivized in markets where GHG emissions have a price. In certain cases, governments are establishing green funds based on carbon pricing revenues to help speed the adoption of technologies that reduce GHGs across all sectors, including transportation. Businesses may be able to tap into these funds to more rapidly transition to lower emissions in their operations.

The carbon pricing landscape in North America is evolving quickly. NTEA will continue to monitor key developments so the work truck industry can remain competitive in this policy environment. For individual companies, it is more important than ever to understand your supply chains, identify who could be impacted at the point of regulation of a carbon price, and assess how this may affect day-to-day costs.