The Carbon Tax: An Analysis

In these days of the 24-hour news cycle and opinion being taken as fact, it’s can be difficult to get a firm grasp of the news of the day. This is concerning when the topic is important and its outcome could have considerable economic or social consequences. Carbon taxation is one of these topics. Like royalties, pipelines or Senate reform, the carbon tax has become a hot potato. Much coverage reports the reactions of individuals or groups involved on both sides of the issue instead of analysis of the issue itself. Here is an overview of the new carbon tax initiative set out by the federal government, plus the arguments for and against.

What is a Carbon Tax?

It’s an environmental fee levied by governments on the production, distribution or use of fossil fuels such as oil, coal, and natural gas.¹ It puts a price on each tonne of greenhouse gas emissions generated (GHG). This price can be as high as Sweden’s price of $150 (USD)/T CO₂ enacted in 1991² or as low as Mexico’s $3.50/T CO₂ that goes into effect this year.³

What is Cap and Trade?

A cap and trade system allows a government to put a limit on the amount of GHG emissions various industries are allowed to emit.⁴ Typically, this system uses carbon emission credits that are distributed to the industries under the system. If companies need or want more credits, they can purchase or trade them amongst themselves. The goal is to reduce the carbon footprint of the targeted industries.

Canada’s Commitment

On October 3, 2016, Prime Minister Justin Trudeau announced Canada’s commitment to impose a federal government initiative for carbon pricing. Taking effect in 2018, the tax will begin at $10/tonne and incrementally go up an additional $10/tonne until 2022 where it will be capped at $50/tonne.⁵ Each province and territory can enact their own version of a cap-and-trade scheme or tax, but it has to meet the federal benchmark or else the federal government will step in and impose a system. The initiative will be revenue neutral for the federal government—all money collected will stay with the provinces and territories.

The Arguments For

This is not an isolated initiative. More attention is being drawn to reduction of carbon emissions throughout the world. Currently, 25% of global carbon pollution is already or about to be covered by carbon pricing. This represents 40 different countries, and seven of the 10 largest economies.⁶ China, one of the largest carbon emitters in the world, is engaging in proactive steps launching its own cap-and-trade scheme in 2017.⁷
The world is turning towards renewable energy sources and not embracing this trend will severely undermine Canada’s future potential as a world leader in this area and reduce potential market share. Currently, the global clean tech market is worth $1.5 trillion and expected to double by 2022.⁸ Canada can be at the forefront of this sector and create economic opportunities for generations to come.
There is already a working model in Canada, and by most accounts it’s achieving what it intended to do. British Columbia introduced a carbon tax back in 2008 and it’s held up as the standard-bearer for carbon taxation in the Western Hemisphere. It was began July 1, 2008 with an initial rate of $10/tonne, increasing $5/tonne for the next four years until it reached its current level of $30/tonne in 2012.⁹

The BC Carbon Tax has demonstrated success in several areas:

It has contributed to lower fuel consumption. Since 2008, when the tax took effect, British Columbians’ use of petroleum fuels has dropped by 15.1%.¹⁰
BC’s economic growth has been unaffected. In fact, BC’s GDP growth has outpaced the rest of Canada, though only by a small margin.¹¹
The BC carbon tax is revenue neutral. There is no net increase in taxes for the province. In fact, there was a net benefit for taxpayers—over $300 million had been returned in tax cuts.¹² BC’s personal and corporate tax rates are now the lowest in Canada due to the carbon tax shift.
BC has seen a decline in GHG emissions. Initial reporting from 2008 to 2010 saw BC’s per capita GHG emissions decline by 9.9%, a reduction that outpaced the rest of Canada during the same time by 5%.¹³

The Arguments Against

The carbon tax is hard on the economy, however this is fundamentally what it is designed to do. It is supposed to shift consumer behaviour and encourage the changing of habits. However, to suggest that it is good for the economy is misleading. Any time there are regulations put on industry, it will hamper productivity.¹⁴
It’s difficult to trust in an abstract concept where there is a legitimate global climate concern and the economists’ suggestion is to create a tax.¹⁵ It’s one thing to invest in new technologies that create concrete environmental benefits like carbon capture initiatives, solar panels or reforestation programs. These things are tangible. It’s very different to introduce a tax that raises the cost of your gasoline and your monthly heating bill and hope that it’s helping the planet.
Politicians the world over need to be seen as doing something to address climate change and environmental issues. Carbon pricing is a very convenient route for them. Levying a tax will inevitably reduce emissions and in most cases, economies will adjust and adapt accordingly. The politician can stand up with arms raised as a champion for a worthy cause that met its ends and did not destroy the economy. Fair enough, but did it really achieve its goal? This is where it becomes complicated. Is pricing carbon the highest concern on the environmental agenda? While there’s a system in place to address carbon emissions that is government-friendly, but is this more important than deforestation, loss of biodiversity, oceanic dead zones, or population growth?
Even with the carbon tax being “revenue neutral”, a new tax is unsettling. Most people are happy to pay their fair share because it keeps highways paved, hospitals and schools running, and police and firefighters on the streets. However, the carbon tax is seen as taking more money from taxpayers based on a commitment that it will be returned in the form of tax deductions. Fundamentally, taxpayers have to believe that government will make good on its promise and not divert the extra funds into somewhere else instead of into deductions.
The carbon tax will be especially hard on Saskatchewan. It’s one thing for it to work in British Columbia, but Saskatchewan is a different region with a different economy. One major concern is the effect it will have on agriculture.¹⁶ By nature, the industry is rural and requires more fuel usage.

Moreover, Saskatchewan is an energy-producing province and a pricing scheme will inevitably affect the province more than say British Columbia.¹⁷ With the oil and gas sector just starting to recover, is this the right time to saddle the industry with more hardship?

In terms of competitiveness, Saskatchewan and Alberta in particular are far more exposed to these dangers because they are energy producers unlike the rest of Canada.¹⁸ There’s another danger lurking—referred to as “carbon Leakage”.¹⁹ This is when carbon pricing is installed in a jurisdiction that causes businesses to move to places with more lenient regulations or none at all. Ultimately, the jurisdiction will report reduced emissions, but those emissions haven’t disappeared, they’ve simply changed location.

This is especially concerning as Canada’s number one trading partner is the United States. Their current government is seeking to offset any existing trade advantages Canada has and is attempting to drop their own taxes.²⁰ Again, this begs the question of whether the timing is appropriate for a carbon tax.

As this article demonstrates, the carbon tax is a complex issue. There are very important points on both sides of the debate that should be taken seriously. No matter what side of the debate you’re on, carbon pricing comes into effect for Saskatchewan in 2018, and its impact on the province’s economy remains to be seen.