Contributed by Robert Lyman © 2019
Robert Lyman is an Ottawa energy policy consultant. He was a public servant for 27 years and a diplomat for 10 years prior. His full biography is here.
The Trudeau government, supported by environmental groups and many in the Canadian business community, has implemented a carbon dioxide pricing system as one component of the Pan-Canadian Framework on Clean Growth and Climate Change. “Carbon pricing” is the term that includes carbon dioxide taxes, emissions trading, and fees on industrial emissions intensity, all intended to create a financial incentive to reduce greenhouse gas emissions.
In a recent paper, I compared the design of the Canadian carbon pricing system to the theoretical model that has been used to justify it. I also examined the actual and expected effects of the system on pricing, consumers, industry and regions.
LINK TO PDF OF ‘Carbon Taxation: The Canadian Experience”: Lyman-carbontax-1 (1)
The federal government’s national policy framework allows each province and territory to decide how it will implement carbon pricing, while at the same time setting certain minimum conditions that must be met. Jurisdictions may use either carbon taxes or emissions trading (‘cap and trade’) systems. For larger emitters, they may also employ output-based pricing systems (OBSP). An OBSP imposes fees on firms that do not meet prescribed levels of emissions intensity in their production processes. The framework requires steadily rising prices for the effective tax, levy or emissions trading permit price. Starting at $10 per tonne of CO2 equivalent in 2018, the rate must increase by $10 per tonne per year until it reaches $50 per tonne in 2022. The jurisdictions must return a portion of the revenues collected to the public, although there is considerable room for flexibility in how this is done. If, in the federal government’s judgment, a province or territory does not meet these conditions, the government will impose a ‘backstop’ system. The backstop system will apply in New Brunswick, Ontario, Manitoba, Saskatchewan, and Alberta.
While the carbon tax rates have not been set for the period after 2022, it is clear that $50 per tonne is not high enough to meet the government’s emissions reduction target for 2030 and the much more demanding reductions now being advocated by the New Democratic Party, Green Party and others.
There are six key flaws in the present carbon pricing system.
In theory, the price increase caused by carbon taxes should reflect the “social cost of carbon’, or the estimated present value of the impact that an emitted tonne of carbon dioxide today will have on humans in the future. In fact, no one really knows what this is. There are other alternatives, such as the current market price of internationally traded carbon credits. The Canadian rates, however, bear no relationship to the social cost that, theoretically, they are supposed to represent. The rates are based on political, not economic, considerations.
Carbon taxes are beneficial when they provide a market-based substitute for a host of intrusive government programs and regulations that seek to manage and direct consumer and industry behaviour. Canada’s system merely adds to a large and growing number of government regulations, subsidies and other program measures. There are over 600 of these.
The taxes will have severe adverse effects on the emissions-intensive sectors and firms in Canada. By far the largest adverse impacts will occur in Alberta and Saskatchewan, where almost half of all Canadian emissions occur. This is not just a western Canadian problem, though. The energy-intensive resource and manufacturing industries in other provinces and territories must inevitably be affected by the impact of the taxes on their competitiveness. This includes primarily firms in the emissions-intensive industries like mining, petrochemicals, iron, steel, cement, metal fabrication and vehicle and parts manufacturing. The United States, our main trading partner, has no federal carbon tax and China has regional taxes of about $2 per tonne.
The system will vary considerably across Canada in terms of coverage, rates, exemptions and revenue recycling. Rates will be highest in provinces and territories subject to the federal “backstop” regime, and lowest in Atlantic Canada and, for the time being, in Quebec. Quebec’s carbon prices will be set by the price of permits in the Western Climate Initiative with the State of California; Quebec firms pay millions of dollars to California permit holders, but the cost will be less than the residents of other provinces pay to governments.
Revenue recycling, in theory, should be done in ways that would minimize the adverse macroeconomic effects of the tax, ideally through reductions in the rates of other generally -applied taxes like corporate income taxes. The Canadian system, to the extent that it provides for recycling, is instead an income redistribution system. It is not yet clear how much, if at all, businesses will benefit from rebates. The rebates thus serve essentially to deflect the criticism that carbon taxes are a “revenue grab”, while failing to compensate households for the full economic costs of imposing the tax.
Three provinces – Saskatchewan, Ontario and New Brunswick – have filed appeals to the courts seeking judgments that the federal legislation authorizing implementation of the carbon pricing regime is unconstitutional. Alberta may follow suit. In the single court decision rendered so far, the federal jurisdiction was upheld. With provinces representing over half the Canadian population opposed on political and legal grounds to the tax, this raises obvious problems for the future viability of the system.
Finally, the public should be aware of the exaggerated estimates of carbon tax effectiveness. By 2022, the carbon tax rates will be the equivalent of about eleven cents per litre of gasoline. Canadian Taxpayers Federation surveys show that the national average pump price of gasoline in 2018 was $1.35 per litre, so the tax would add 8 per cent to that. Yet, in its latest report to the United Nations, Environment and Climate Change Canada estimated that present climate policies will reduce 2022 emissions by 80 to 90 million tonnes per year. That is more than the emissions of all light duty passenger vehicles (cars, SUVs and pickup trucks) in 2017. As with respect to other aspects of carbon pricing, the government should think again.
Additional Carbon Tax resources: