10 Things You Need To Know About Canada’s Carbon Tax
Last Updated on February 8, 2021
The Canadian carbon tax is making headlines yet again. This time though, it’s not just about the annual price raise. The federal government has now introduced a new climate plan called, “A Healthy Environment and a Healthy Economy” (HEHE).
The proposed plan will increase the price of carbon by $15 per year, until it reaches $170 per tonne by 2030. It makes for a considerable jump from the initial price cap of $50 per tonne.
For many Canadians, this tax increase can be intimidating. Any new tax can come across as an outright tax attack on their personal finances. As such, it’s generated opposition from both the provinces and the public. Understandably, they’re worried about the potential impact on consumers, industry, and ultimately, their wallets.
1. Global Traction
Despite the apprehension, many global leaders are in agreement. An aggressive carbon pricing is key to reaching climate change targets. The World Bank’s Carbon Pricing Dashboard now shows 45 national jurisdictions implementing carbon pricing initiatives.
While this hike in the carbon price is substantial, it’s by no means unsubstantiated. The International Monetary Fund (IMF) has claimed a carbon price of $75 USD by 2030 is needed to cut carbon emissions. As a national assessment, Canada’s Ecofiscal Commission calculated a price of $210 CAD.
2. The Fundamentals
I believe some of the opposition that carbon pricing faces stems from a lack of understanding. Heck, that’s the main reason I began to explore this topic!
To put it simply, assigning an economic value to carbon, inserts it into the cost equation.
Now if economics isn’t your thing, and letters in equations defies all logic, don’t despair. I assure you, this equation is not a difficult one to solve.
3. Actual (Societal) Cost = Private Cost + External Cost
The idea of carbon pricing stems from the realization that the true cost of a product is not totally encapsulated in the private cost, or market cost. These unaccounted for external costs are placed on society rather than the producer or consumer.
Carbon emissions are the archetype externality. The cost to society is climate change.
To face reality, we should be able to adjust the price of goods and services to represent their true cost. That being the case, businesses and consumers will naturally change their habits to be more cost effective. In other words, it makes the “invisible cost” visible.
4. The Carbon Debt
With this realization of external costs, we begin to see that our success has been built on a piling debt of carbon. After so many decades of business as usual, we’re now witnessing the resulting costs to society. And Mother Nature is one hell of a debt collector.
We are experiencing increasing costs in health care, natural disaster relief, and infrastructure damage. Not to mention the major loss to our ecosystems. There’s also the alarming number of unknown costs resulting from climate crisis. According to the Canadian Institute for Climate Choices, we’ve only just begun to see the tip of the iceberg.
As with all debt, “interest” payments end up being much higher than the original cost of proactively investing.
Scary stuff! We should totally know better by now. I mean, even a Lannister knows to pay his debts.
5. Carbon pricing, taxes, and revenue, oh my!
There are pretty much two main ways to tackle carbon pricing. Either through a tax that establishes a price upfront, or through a trading system.
Canada, for the most part, has chosen the carbon tax route.
T-A-X. Most of us cringe at the word and associate it with economic burden, or a government cash grab. And with a current $30 price on carbon, this equates to billions in revenue for the Canadian government.
For the most part, this revenue is given back to Canadians as a tax rebate in an attempt to make the tax revenue-neutral. Indeed, low-income households actually benefit from the carbon tax.
But nothing is ever so simple…
6. Provincial & Territorial Opposition
Canada is a unique nation that is made up of provinces and territories with different economies, governments, values, and local issues. This makes implementing any policy difficult.
With this is in mind, the federal government has allowed for provinces and territories to set their own carbon emission strategy, as long as it is equivalent to national standards. If it’s deemed unsatisfactory, the federal carbon tax is imposed.
This has led to separate court battles between Canada and the provinces of Ontario, Saskatchewan, and Alberta. Each side has been fighting for their constitutional right of jurisdictional control.
7. Affects to Domestic Competitiveness
What about heavy-emitting industries that represent a substantial component of the Canadian economy? It’s recognized that these sectors are at an unfair disadvantage and limits their competitiveness in a global market.
To address this issue, Canada has taken advantage of an output-based pricing system (OBPS). This essentially allows certain industries to operate outside of the carbon tax, until they reach a maximum emission level. Above this limit, companies will begin to pay at the standard pricing.
Until we have a globally mandated price on carbon, the fossil fuel industry in particular will initially incur higher costs. That’s simply the reality of environmental accountability. After all, we are trying to limit carbon emissions.
8. Revenue-Neutrality is Misleading
As we know though, industries are often intertwined in an economy. And Canada is no exception. So government rebates may not cover the full cost of any subsequent price hikes. That’s because the carbon tax doesn’t just impact us at the pump. Carbon costs will trickle through the economy and translate to higher prices for other goods and services.
This can prove potentially vexing. Moreso for people who really depend on fossil fuels. While many urban Canadians have the opportunity to take public transit, or minimize their travel, others may not.
Those that maintain a higher carbon footprint will, as time goes on, pay more than what they will receive in rebates. But isn’t that the point? We are meant to encourage low-carbon alternatives. Still, it’s important to consider the effects that taxing carbon will have on all Canadians.
9. Is it Effective?
Which bring us to the next question. When all is said and done, is the carbon tax an effective means of decarbonizing? Will it actually limit our carbon emissions and help us to meet our climate goals?
Theoretically yes, but perhaps not. People do not always react in a way that models predict and there is a danger in setting a price that is too low or too high. If the cost to society is not great enough, habits will go largely unchanged and the push for green innovation will be minimal. And if the cost is too great, the economy might suffer for it.
However, when we look at other countries that have had a price on carbon well before us, we can see carbon reductions are achievable.
10. Carbon Pricing is Here to Stay
Finland was the first country to implement a carbon tax in 1990. Since then a number of other countries have joined, including the UK, Chile, Sweden, Denmark, Norway, and Australia. Singapore has also implemented a carbon tax, while China is currently experimenting with a price on carbon.
Still, the carbon market is a relatively young one. It will take time for other nations to join in and help make it a global commodity. Sadly, that’s something we’re running short of.
Despite this, I remain hopeful! Given the track record of Canadian voters, I’m confident that our focus on climate action will not be curtailed. There may be shortfalls and costs to bear along the way, but the carbon tax is here to stay.
Through all these debates however, it’s important to remember that carbon pricing is just one strategy to reduce emissions. If we are to achieve our climate goals, a collection of complimentary solutions need to be considered. As a result, one thing is pretty certain. We have a long road ahead of us on our path to carbon neutrality.
Editing by Marc-Antoni Tarondo.