Canada Cracks Down on Carbon Pricing

Background

Canada is currently undergoing what the Senate has labeled a “Herculean shift” in energy policies in order to combat climate change.  In an attempt to curtail carbon emissions the Canadian government issued the “Pan-Canadian Approach to Pricing Carbon Pollution” in 2016. This document outlines national carbon emission benchmarks, and currently allows provinces and territories to chose implement either a price based system (i.e carbon tax) or create a cap and trade system as means of reaching federal benchmarks. However, several provinces are still struggling to meet emissions goals, and some have simply failed to implement any form of a carbon pricing system.  

In an attempt to help provinces that either lack a pricing mechanism or continue to struggle to enforce one, the Canadian government has  recently issued a federal carbon price backstop plan. The plan consists of a carbon levy and output based pricing system. In other words, provinces and territories that currently lack carbon pricing systems will soon be subject to a federal one. The plan is in line with the Pan -Canadian Framework, which seeks to establish pricing carbon system throughout Canada by 2018.

Backstop carbon price

Carbon pricing is an effective way to curtail excessive emissions by encouraging companies and consumers to invest in low-emissions technology and sustainable production practices. Since 2016, Canadian provinces have had the flexibility to determine their own carbon pricing systems. However, some provinces still lack carbon pricing systems, and the Canadian government intends to remediate this by enforcing a federal carbon pricing backstop. The plan would effectively put a cap on carbon emissions in Canada’s provinces, while creating a national price for carbon.  As promised within the current plan, direct revenues that are collected from either carbon levies or output based pricing systems will be directly returned to the jurisdiction of origin. The end goal is to help Canada reach its emissions reduction goal by 2030.  

The backstop price would be carried out through a combination of a  carbon levy applied to certain fossil fuels as well as through a an output- based pricing system for industrial facilities. The carbon levy would apply to liquid fuels, gaseous fuels, and solid fuels, and each fuel would be priced in relation to the national benchmark price of $10 per tonne of CO2e in 2018. Producers or distributors of fuels would be responsible for paying the levy, which in turn will result in increased fuel prices.  Furthermore, the levy is designed so that prices will gradually increase over time in order to encourage a smooth transition to cleaner and cheaper energy sources. In other words, consumers will also feel the effects of the carbon levy, and will be more inclined to invest in fuel efficient technologies.

According to the discussion paper issued by the Canadian government, the output based pricing system would apply to

  • industrial facilities that “emit above 50 kt of carbon dioxide equivalent (CO2e)”
  • an option for smaller emitters to opt-in to this system.
  • Municipal buildings, hospitals, and schools would be exempt from the output based pricing system.
  • Facilities that produce less than their federally prescribed emissions limits will be rewarded with “surplus credits” that can be used in future emissions or cap trading.
  • Smaller emitters, facilities that emit less than 50 kt of CO2e per year, will be eligible to “opt in” to the output-based pricing system instead of paying the carbon levy

In the long run this plan will make it easier for the country to collectively reach its carbon emission benchmarks. Provinces that already have carbon pricing systems, such as British Columbia, Quebec, Ontario and Alberta will feel the weight of reaching emissions reductions lifted once other provinces that have been falling behind begin to comply with the federal pricing system.

While the plan seems promising the question remains, will it work? The success of British Columbia’s carbon emissions tax serves as a promising precedent for the current plan.

Will it Work?

In 2008, the British Columbia Liberal Party successfully introduced a carbon emissions tax on businesses, vehicles, factories, and homes throughout British Columbia. The tax was originally applied to a pre-existing fuel tax paid by fuel wholesalers.  The tax passed downstream from wholesalers, to retailers, to consumers who paid increased prices for their fuel purchases.  Consumers gradually turned to more fuel efficient technologies and cheaper fuel sources.

The tax proved to be successful, with economic growth coupled with emissions reductions. The tax reduced emissions by 5 to 15 percent and, according to economists from Duke University and the University of Ottawa, had “negligible effects on aggregate economic performance.” In fact, researchers at Sustainable Prosperity, a think tank at the University of Ottawa, partially attribute British Columbia’s positive economic performance during the 2008 economic downturn to the carbon tax, because they saw the rise of fuel prices encouraging more sustainable living and   pushed businesses to switch to cleaner energy sources, which saved money.

Over time, both business and citizens grew to favor the tax, with polls in 2015 showing that only 32 percent of voters opposed the tax. One reason for the taxes gradual acceptance was the benefits of redistribution felt throughout the province:

  • a cut in personal income tax rates,
  • a cut in corporate income taxes,
  • the creation of a tax credit for low income citizens vulnerable to any negative effects of the carbon tax,
  • a return of 1.7 billion Canadian dollars to businesses and families in 2016.  

A case that is often juxtaposed to that of British Columbia is that of the carbon tax in Alberta. Where Alberta’s carbon tax garnered criticism was in its inability to be completely “revenue neutral”. In other words, unlike British Columbia’s carbon tax where tax revenue was returned directly to taxpayers, Alberta invested the revenue in helping business and industry. If the case of British Columbia serves as a model for successful carbon taxing, then the key to maintaining approval of the carbon tax is to successfully redistribute and return the revenue back to citizens.

The case of British Columbia  highlights two key factors:  carbon levies and carbon taxes yield positive environmental and economic benefits in Canada, however, the continued success of carbon levies is contingent on other provinces committing themselves to emissions reduction and carbon pricing. While the tax has contributed to the reduction of emissions in British Columbia, the current pace of reductions is not enough to meet the province’s reduction goals. For that to happen the tax would need to increase, a plan which British Columbians do not support. However, the current backstopping plan could alleviate some of British Columbia’s burdens by getting other provinces to be more involved in carbon pricing and competition. Unfortunately, getting other provinces on board may take some time given that there has been lash back from several governments to the proposed backstopping plan.

This plan comes at a critical time. With the U.S’s recent withdrawal from the Paris Agreement the responsibility of remaining signatories, like Canada, to reduce their carbon emissions has become that much more paramount. Canada must continue to pursue plans that will mitigate the impacts of climate change and help achieve a more sustainable nation.  

 

For more information about the plan, click here