everyone else by contributing to climate change. establishing a price for carbon emissions forces polluters to bear those wider societal costs — thus internalizing the externality. based on this logic, setting the right price for carbon is at the core of canada ’ s strategy to tackle climate change. 3 in a market economy, prices are the mechanism through which decisions of individuals and companies are coordinated. using that mechanism to address carbon emissions aligns environmentally sustainable goals with the self - interests of individuals and companies. of course, the right pricing does not mean that greenhouse gas emissions and global warming would stop. it only means that environmental costs are properly weighed against the benefits of the activities that generate the emissions. we can set a price for carbon through a carbon tax or a cap - and - trade system. either way, we create incentives to reduce greenhouse gas emissions in the most efficient way possible. these incentives motivate several kinds of changes in behaviour by encouraging the use of existing technologies to reduce carbon emissions, inspiring the development of new technologies, and helping shift consumption and investment toward those goods and services that require less carbon to produce. while some are skeptical that pricing will motivate changes in behaviour, experience confirms that price incentives work. an example is british columbia ’ s carbon tax, which is estimated to have reduced greenhouse gas emissions by 5 to 15 per cent below what they would have been otherwise. 4 other examples include the widespread switch to smaller cars, prompted by the oil price spikes of the 1970s, and the displacement of coal by cheaper natural gas for power generation in recent years. 2 / 7 bis central bankers'speeches properly aligned incentives can reduce the need for pervasive regulation. of course, regulation has its place as a complement to pricing. but given how energy is used in a modern economy, and the magnitude of the changes required, regulation alone cannot possibly do as comprehensive and consistent a job of changing the behaviours and activities that generate greenhouse gases. of course, carbon pricing has economic consequences : most directly, it is costly for households and businesses to transition to a smaller carbon footprint. but those consequences need not all be negative. they depend very much on how the revenues from carbon pricing are used. for example, the revenues from carbon taxation could be used to lower the burden of other taxes. 5 that is the approach followed in british columbia, where the carbon tax enabled the provincial government to reduce personal income taxes and corporate taxes by a roughly equal amount. such revenues could also be used to smooth

more energy - intensive products toward other products and activities. while many countries will be undergoing a similar structural transformation, adapting to a lowercarbon economy will likely mean more profound structural changes for canada than for many other countries. canada is an important producer of fossil fuels. our manufacturing sector is closely linked to energy — notably our automotive and aerospace industries — and will be affected by measures to address climate change. and canadians use more energy per capita than residents of many countries, given the size of our country as well as our climate, living standards and lifestyles. at the same time, canada has certain advantages in facing this transition. it is already a large producer of renewable energy, notably hydroelectric power. and, given our highly educated population, canada has the capacity to innovate in green technologies — while the magnitude of the transition itself provides a strong motivation for such innovation. 4 / 7 bis central bankers'speeches while the coming shift does present some unique challenges, canada has shown an ability to adapt. we have experienced major structural changes brought about by changes in relative prices. think of the past two and a half years, when the drop in commodity prices drove production and employment away from resource industries toward other sectors of the economy. this shift represented a meaningful setback to canadian economic growth and much economic pain to many families in the energy - intensive provinces. but the canadian economy has proven itself resilient. our flexible exchange rate helped provide a boost to our non - resource industries, including services and manufacturing. our labour markets are adaptable — employment has kept growing at the national level in the face of job losses in the oil industry. our financial system is strong and resilient and has been able to finance the transition rather than amplifying the resource downturn. our governments ’ sound fiscal positions have given them room to provide support for aggregate demand. and at the bank of canada, we had room to ease monetary policy further to buffer the shock to the economy. thus, as the effects of the oil shock have bottomed out, the canadian economy is expected to return to its potential around the middle of next year. of course, adjusting to a lower carbon economy will likely be more profound and involve different, more complex challenges. but the same factors that have made canada resilient to the oil shock should serve us well as this adjustment proceeds. through the adjustment and beyond, we also will rely on the innovative capacity of canadians to recognize the many opportunities to develop new products and technologies for a lower