The Short-Run Household, Industrial, and Labour Impacts of the Quebec Carbon Market

Abstract

Resistance to the implementation of greenhouse gas pricing policies comes in part from fears about the concentrated impacts on certain industries, certain regions, and on less affluent households. These distributional concerns are valid and, to be fair, policy can accommodate some transitional measures to soften the impact of sudden policy changes. However, the carbon pricing policy recently instituted in Quebec, in partnership with California under the Western Climate Initiative, is relatively modest in price targets, gradual in implementation, and has the capacity to spend revenues on transitional and impact-mediating programs for the labour market and households. We analyze the expected short-run impacts of the policy, focusing on equity in two domains: the household income distribution and labour in different industrial sectors. Our analysis focuses on the short-term effects, before capital is significantly reallocated, and before most substitution toward lower-carbon or imported goods has happened. For reasonable prices and pass-through levels, and modelling direct and indirect emissions, we bracket these impacts, finding modest effects in all cases. Generous permit handouts to incumbents are likely to result in some windfall profits. Quebec would benefit from greater transparency in the intended allocation of the Green Fund revenues. Overall, the policy appears tuned to provide a balance of price predictability, steady decarbonisation, and manageable transition costs, but could likely be more aggressive.