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The Canadian Carbon Tax: A great idea, poorly implemented.

Canada has long been one of the worst polluters in terms of greenhouse gasses (GHG) emissions per capita. To fight GHG emissions, Canada implemented a carbon tax in 2018. If it releases pollution, it gets taxed — the idea is simple to grasp. Unfortunately, the tax faced staunch opposition, and the negativity towards it continues to grow. There are both those who are pro-tax and those who believe it does more harm than good. So which is it?

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What is the Canadian Carbon Tax?

Fossil fuels such as coal, petroleum, and natural gas are widely used to power various machines and activities. However, when they are burned, they release carbon dioxide (CO2) into the air. This gas contributes to the earth’s greenhouse effect, which traps heat inside the atmosphere and warms up the oceans. This causes the planet’s average temperature to rise, which can have serious consequences for the environment. To combat this problem, the Liberal government has proposed a carbon tax as a possible solution. Without incentives at the federal level, there’s no hope that big corporations will change the way they’ve been doing things for decades.

The federal carbon tax has two parts: a fuel charge for consumers and a performance-based system for industries. The federal government does not keep any direct proceeds from the carbon tax but returns them to the province or territory of origin through rebates, grants, or tax credits.

It serves as a financial incentive aimed at encouraging individuals and businesses to change their habits by using fewer fossil fuels and transitioning to cleaner energy sources. This initiative is part of Canada’s efforts to reduce its greenhouse gas emissions.

Under this tax system, those who consume less fuel pay less tax but still receive the same rebate as those who use more fuel, resulting in a net financial gain for the former. Starting this year, residents in Newfoundland and Labrador, New Brunswick, Nova Scotia, and Prince Edward Island are subject to the carbon tax and rebate, joining those in Ontario, Manitoba, Saskatchewan, Alberta, Yukon, and Nunavut. British Columbia, Quebec, and the Northwest Territories have their own carbon pricing mechanisms that align with federal standards.

The carbon tax is applied at a fixed price per tonne of CO2-equivalent emissions generated CO2e, currently set at $65 per tonne. This rate is expected to increase gradually over time, with the goal of motivating Canadians to transition away from fossil fuels and adopt more sustainable energy practices.

To answer the question “Does it work,” all data point to “yes.” Empirical research has consistently demonstrated that a carbon tax can effectively reduce emissions [11]. Notably, in British Columbia, where a carbon tax was implemented in 2008, research conducted in 2015 revealed that the tax has resulted in a notable reduction in emissions within the province. The reduction ranged between 5% and 15% since its implementation, all while economic growth remained unaffected. This case study underscores the potential effectiveness of carbon taxes in addressing environmental concerns without hampering economic development. It’s too early to speak of successes at the federal level.

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When the climate becomes political

Prime Minister Justin Trudeau’s recent divisive decision to exempt home heating oil from the carbon tax has again brought the contentious policy to the forefront. This move has also reignited demands from Conservative quarters to abolish the carbon tax completely.

When such issues become a topic for political debate, it can be a problem. In Canada, the carbon tax is often brought up by Conservatives while the Liberal government tries its best to defend the policy. The policy that has been largely successful in a number of countries.

One notable example of success is Sweden, boasting the world’s highest carbon price at US$139 per metric ton of CO2. This achievement underscores the effectiveness of carbon pricing. Notably, since introducing Sweden’s carbon tax in 1991, the country’s economy has expanded by 60%, while carbon emissions have dropped by 25% [2,3].

Investigations into the causal effect of carbon pricing policies, such as the European Emissions Trading System and carbon taxes in Scandinavia, show that carbon pricing is indeed a significant driver of emissions reductions, although the results may vary based on the country [1].

And yet, carbon tax often meets with vocal opposition. Alberta has been a trailblazer in implementing carbon pricing policies across Canada. As early as 2007, it was the first province to establish an output-based pricing system, and in 2017, it introduced a carbon levy on fuel. However, the carbon levy was repealed on May 30, 2019 [4].

Canada and the US have adopted different strategies to address climate change and promote green energy. While Canada has implemented a carbon tax, the US has opted for subsidies, which are financial incentives that lower the cost of producing or consuming certain goods or services. The subsidies aim to support developing and deploying green energy and technologies and make them more competitive with traditional options. Some critics of the Canadian approach argue that the carbon tax is a punitive measure that harms Canadian businesses, while the US approach is a supportive measure that benefits them.

Some opponents of the Canadian approach claim that it puts Canadian businesses at a disadvantage compared to their US counterparts, who receive subsidies instead of paying taxes. They argue that this creates an uneven playing field and a risk of losing jobs and industries to the US, especially in border regions.

Political science offers two key observations concerning carbon pricing. Firstly, there is often a positive correlation between ambitious carbon pricing and high levels of political trust coupled with low corruption. Cross-national studies reveal that countries with lower public trust in politicians and a perception of corruption tend to have weaker climate policies and higher greenhouse gas emissions. This phenomenon is exemplified by Finland, Norway, Sweden, and Switzerland, which boast significant levels of trust and are currently the only nations implementing carbon prices exceeding $40 per ton of CO2 [1].

It’s fair to say that the carbon tax has managed to rub almost everyone the wrong way in Canada. It’s not rare to hear people say that the tax is “a weapon against the working class” or that environmentalism has turned into religion. Those who oppose the tax run the risk of being labeled a climate change denier, which is often not the case. Recent polling indicates that a significant portion of Canadians favour the notion of reducing or eliminating the carbon tax. But that can probably be said about any kind of tax. In any case, the problem of perception is the one the current Liberal government needs to solve, especially after the recent decision to exempt home heating oil from the carbon tax for three years. Critics, including environmental advocates, argue that the exemption undermines the credibility of Canada’s carbon pricing, which is designed to incentivize a shift away from emission-producing options [15].

Who will be affected by the Carbon tax?

Some people who live in cold regions of Canada face challenges in reducing their carbon footprint. They may rely on natural gas to heat their homes, which is subject to carbon tax. Switching to electric heating may not be feasible. Nor is it possible for every home in a development to switch to electric heat. The increase in power required is beyond the capabilities of today's infrastructure. Canada will need to plan to generate double the electricity used today if we are to meet our goals [18]. This is far beyond the control of the average Canadian home owner.

Additionally, they may have limited transportation options that are not dependent on gasoline. Battery Electric Vehicles (BEVs) are not an option for many Canadians, especially those living in colder regions. The grid capacity and infrastructure to charge electric vehicles does not yet exist. As of the writing of this article, BEVs remain substantially more expensive than gas vehicles and generally difficult to purchase due to limited supply. Charging infrastructure remains limited but that is expected to improve over time.

Consumers are left with a difficult tradeoff. With current and expected future carbon tax levels, we have estimated that the total cost of ownership of a BEV in Canada is likely similar to or more expensive than an equivalent gas vehicle. Assessing the cost of ownership is a complex task full of assumptions and uncertainties about future fuel and power pricing, battery lifetimes, vehicle lifetimes and various other factors. The financial incentive to move from gas vehicles to BEVs is simply not there, especially in the case where a consumer must borrow money to purchase a vehicle. Interest payments over time will very likely make a BEV more expensive than a gas vehicle.

We are left with the feeling that the carbon tax in Canada, in its present form, is set at a level where behaviours will not be driven by the tax. So what is the purpose ?Perhaps it is just a tax, targeted, intentionally or not, at those that can least afford another tax.

Is the carbon tax actually making our lives more expensive?

Post-COVID, life hasn’t been cheap. The prices continue to grow, and it’s in our nature to look for a culprit. For many, the easy scapegoat is the carbon tax that makes food prices go up. Allegedly.

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Statistics Canada reported that in July 2023, Nova Scotians experienced a 14% increase in fuel prices compared to June, attributing this rise to the introduction of the federal carbon levy in the province and higher wholesale fuel costs. [6]

The impact of the carbon tax is also evident in data from the Canada Revenue Agency, indicating a 14¢ per litre increase in gasoline prices, a 17¢ per litre increase in diesel and home heating oil prices, and a 12¢ per cubic meter increase in natural gas prices.

The Bank of Canada’s Governor, Tiff Macklem, has made statements about the impact of the carbon tax on inflation. He stated that the carbon tax has a small impact on inflation, attributing 0.15 percentage points of the inflation increase to the carbon tax. This statement was used by the Conservative Party to argue that the federal carbon tax makes life for Canadians more expensive [5].

The Parliamentary Budget Officer (PBO), serving as the non-partisan and independent budget oversight authority for the federal government, highlights that the carbon tax has adverse financial implications for Canadians. According to the PBO, most households will experience a net loss, as they will pay more in fuel charges and GST while simultaneously receiving lower incomes compared to the Climate Action Incentive payments and the reduction in personal income taxes they pay. Analysis conducted by the Department of the Environment reveals that the second carbon tax will disproportionately impact lower and middle-income households [10].

The carbon tax is projected to cost the average family between $347 and $710 in the current year, even after accounting for rebates, as per the PBO’s assessment [9]. Furthermore, the carbon tax is expected to impose a significant financial burden, with the Canada Revenue Agency (CRA) indicating that it will elevate gas prices by 37¢ per litre by the year 2030 [8].

Mark Carney, the former Bank of Canada governor, has expressed concerns about the carbon tax policy in Canada. But while he questioned the federal government’s decision to lift the carbon price on home heating oil, he also praised the government’s efforts in facilitating the transition and implementing measures related to heat pumps, a more environmentally friendly alternative to burning oil or gas. But converting a home from natural gas to heat pumps requires significant investment and is inaccessible to lower-income families.

More importantly, there are reasons to suspect that the tax has affected food prices, making it more expensive and putting lower-income households at risk. This topic has been discussed by Prime Minister Justin Trudeau and Conservative Leader Pierre Poilievre. Poilievre suggested that the Liberal government should eliminate its carbon tax to lower food costs. The fact that the prices have gone up is hard to deny — food prices increased by 11.4% in Canada last year, according to Statistics Canada.

Yet, according to economist Trevor Tombe from the University of Calgary, the carbon tax is estimated to be responsible for less than 1% of the increases in grocery prices. Tombe emphasized that while carbon taxes do have a discernible impact on food prices, this effect is relatively modest and nowhere near the significant spikes in food prices observed in recent years. In Alberta, the carbon tax has led to a price increase of approximately 0.3 percent, equivalent to just 30 cents on a $100 bill. In Manitoba, the increase stands at 0.9 percent; in Ontario, it’s approximately 0.4 percent. [12]

Higher fuel prices should also be taken into account. In winter, when most of the fruits and vegetables are imported, it can affect their prices. But, according to Sylvain Charlebois, a professor at Dalhousie University who researches food distribution, there hasn’t been enough research to be sure. What we are sure of is that the carbon tax has resulted in increased expenses for businesses. He pointed out that within the food supply chain, there is a “compounding effect” as various components of the supply chain experience heightened costs, partially due to the presence of the carbon tax.

But once again, there’s just not enough data to make a blanket statement. After all, in food production, it’s important to note that a significant portion of carbon emissions from the agricultural sector is exempt from the carbon tax. This exemption applies to many emissions associated with agricultural activities. Emissions stemming from the operation of vehicles and equipment, accounting for 10 megatonnes, are either entirely or partially exempt from the carbon tax [12].

In contrast to various other federal and provincial policies that may impact the cost of food, such as corporate taxes and food safety regulations, the federal carbon tax incorporates a rebate system. According to the findings of the parliamentary budget officer, the rebate effectively offsets both direct and indirect costs for nearly all households. Only households in the highest income quintile are anticipated to pay more than they receive from the rebate, largely due to their higher consumption levels. Consequently, repealing the carbon tax could potentially result in a net financial disadvantage for many Canadians [14].

Finally, an analysis conducted by Statistics Canada, published in November, established a connection between “erratic weather” (droughts, heatwaves, flooding) and the escalation in prices of various food items such as meat, fruit, vegetables, sugar, and coffee [16]. Economists at RBC reported in June that, although food price inflation was projected to decelerate, a return to pre-pandemic price levels was improbable due to the increasing frequency of extreme weather events occurring across various regions, which could significantly impede farm production and thereby affect food prices [17].

Final Thoughts

The carbon tax remains highly controversial. The tax gains more criticism with every new year, and as the prices continue to grow, so does the amount of negativity towards it. But whether it actually affects low-income communities is still hard to say. One thing is certain: it’s not enough to motivate households to go with more carbon-neutral options. High costs or outright unavailability of most options mean we’re still far away from a carbon-neutral future. We support the idea of financial incentives to move consumers and businesses towards lower carbon alternatives. These incentives must be well thought out and implemented to be effective. Consumers must have viable alternatives that they can realistically implement. If affordable alternatives do not exist then we have simply added a tax.




Denis Koshelev


Denis Koshelev

Mauro Aiello, Ph.D.

Lark Scientific Financial Support

Axel Doerwald


Adri Poggetti


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