Carbon Pricing in Canada

The 2018 Greenhouse Gas Pricing Act is a national framework for carbon pricing which imposed the carbon tax on jurisdictions and there were three provinces – Alberta, Ontario, and Saskatchewan – forcefully opposed the carbon tax and challenged the constitutionality of the federal carbon tax which was before the Supreme Court of Canada for a while.

The Supreme Court of Canada on 25 March 2021, has given the federal government the constitutional green light to impose a carbon price on the provinces.

Carbon pricing has been accepted globally as an efficient mechanism to abbreviate greenhouse gas (GHG) emissions at the lowest cost to businesses and consumers, while stimulating innovation and clean growth.  Carbon pricing is also a way to acknowledge the fact that GHG emissions cause a cost to society but at the same time it has all kind of reasons to attract investments in low-carbon technological inventions by nurturing multilateral cooperation and creating conditions between energy and climate policies.   

According to the International Energy Agency (IEA), carbon pricing initiatives are spreading throughout the world.  Over 60 countries, cities, states and provinces have implemented or are planning to implement carbon pricing schemes, with a fairly balanced distribution between emissions trading systems and carbon taxes. When the trading system in China’s power sector starts operating, carbon pricing initiatives will cover 20 percent of global emissions. Jurisdictions in Asia and the Americas are now the driving forces for new carbon pricing initiatives.

At the same time many big companies are already using an internal price on carbon to inform their business decisions. A growing list of companies have also voiced support for a policy to put a price on carbon, including Apple, Google, BP, Royal Dutch Shell, Unilever, and Nestlé. Companies and investors need to reorient their business models toward a low-carbon economy, while supporting the implementation of a robust carbon price.

Carbon pricing instruments comprise carbon taxes and emissions trading systems:

  1. Carbon Tax: Carbon taxes consist of direct taxation on emissions by enacting laws or regulations to establish a fee per ton of carbon emissions from a sector or the whole economy.  People who are emitting emissions would be required to pay taxes equivalent to the per ton fee times their total emissions.  Those subject to the tax would have an incentive to lower their emissions by transitioning to cleaner energy and more efficiently; and
  2. Emissions Trading Systems (ETS): Emissions Trading Systems also known as Cap-and Trade Systems are market-based instruments that create incentives to reduce GHG emissions where these are most cost-effective. In most trading systems, the government sets an emissions cap in one or more sectors, and the entities that are covered are allowed to trade emissions permits.

The World Bank defined carbon pricing as an instrument that could be used to capture the external costs of GHG emissions and tie them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.  The external costs of GHG emissions that public pays for could be classified into the following three categories:

  1. Damage to Crops;
  2. Health Care Costs from Heatwaves and Droughts; and
  3. Loss of Property from Flooding and Sea Level Rise.

The external costs are defined as those actually incurred in relation to health and the environment and quantifiable but not built into the cost to the consumer, and therefore which are borne by society at large. They include particularly the effects of air pollution on human health, crop yields and buildings, as well as occupational disease and accidents.

It was reported that climate change could directly cost the world economy $7.9 trillion by mid-century as increased drought, flooding and crop failures hamper growth and threaten infrastructure, new analysis showed.

The Economist Intelligence Unit’s (EIU) Climate Change Resilience Index measured the preparedness of the world’s 82 largest economies and found that based on current trends the fallout of warming temperatures would shave off three percent of global Gross Domestic Product (GDP) by 2050.

In 2015, Canada and 194 other countries reached the Paris Agreement. This agreement aims to limit the global average temperature rise to well below 2 degrees Celsius and pursue efforts to limit the increase to 1.5 degrees Celsius.  In order to meet this objective, the countries around the world must decrease drastically GHG emissions in their countries.

Canada recognizes the fact that human activity increases the amount of GHG in the atmosphere. When more heat is trapped, the temperature of the planet increases. Canada is committed to implementing its strengthened climate plan to ensure Canada not only meets, but also exceeds its 2030 emissions reduction goal, and beginning work so that Canada can achieve net-zero emissions by 2050.

A price on carbon pollution is an essential part of Canada’s plan to fight climate change and grow the economy. It is one of the most efficient ways to reduce GHG emissions and stimulate investments in clean innovations. It creates incentives for individuals, households, and businesses to choose cleaner options.

In 2018, Canada passed a federal carbon pricing law in an effort to reduce GHG emissions. The Greenhouse Gas Pollution Pricing Act was designed not to interfere with any provinces that had independently put a price on carbon, so long as a province’s system met the requirements of the federal law.  In provinces that hadn’t acted, the federal scheme would kick in instead.

The scheme involved a tax on fuels starting at CAN$20 per ton of CO2, rising to CAN$50 by 2022.

Here is the government’s plan to collect carbon taxes through 2030:

  • The price will increase by CAN$10 per ton each year through 2022;
  • The price will go up by CAN$15 each year after 2022 which will reach CAN$170 per ton in 2030; and
  • The government will “Explore the potential of border carbon adjustments” – A type of import tax meant to protect domestic industry from goods produced in countries without similar carbon taxes.

Here is the government’s plan to pay back revenue:

  • The tax revenue is distributed back to the populace, with 90 percent going to individuals and 10 percent used for businesses and institutions (including hospitals) that can’t really pass on increased costs; and
  • Individual payments are scaled progressively based on income, and the government estimates that 80 percent of households should receive a bit more than they paid. Of course, if you can reduce fossil fuel use, you’ll pay less in increased costs while still receiving the same rebate payment, providing additional incentive.

At the same time, a separate portion of the program established a Cap-and-Trade system for large industry, setting a limit on emissions and proportionally assigning permits that can be traded.

These new, higher prices will substantially increase the tax revenue that gets redistributed. The cost also means that some of the more expensive forms of emissions mitigation—like capturing CO2 from smokestacks or ambient air and injecting it underground—can become economically viable.

Canada’s goal is for its 2030 emissions to be 30 percent below 2005 levels, and the new carbon prices were selected to achieve that. The recent government announcement also includes CAN$15 billion in other climate initiatives over the next 10 years — money earmarked for improvements to the country’s electric vehicle charging infrastructure, rebates and tax write-offs for zero-emissions vehicles and funding for home retrofits, among dozens of other proposed policies.

According to CBC News (11 December 2020):

  • The tax hike will result in higher costs for consumers when they buy gasoline. The price at the pump will increase by 37.57 cents a litre by 2030 as a result of this new plan, and the cost of light fuel oil for home heating, natural gas and propane will rise as well;
  • To compensate for the cost-of-living increase, the government said it will continue to return most of the money collected by this program through rebates;
  • Under the current system, the money is returned to individuals and families annually through the ‘Climate Action incentive payment’ when they file tax returns. Starting in 2022, the carbon pollution rebate payments will be distributed on a quarterly basis
  • The average family of four in Ontario will collect roughly $2,018 a year in climate rebates by 2030; and
  • The cheques will be higher in provinces like Alberta and Saskatchewan — $3,242 for a family of four in Alberta and $3,829 for a similar family in Saskatchewan — because the people in those provinces generate more carbon emissions per capita.

Here are two different views:

  • Supporters:  Say the threat of climate change demands action and a revenue-neutral plan of this sort is the best way to shift patterns of consumption away from GHG-emitting fossil fuels. All of the money that Ottawa collects from tax is returned to the provinces where it originated through the rebates; and
  • Opponents:  Fear a levy of this sort will be economically damaging and too punitive for consumers and small businesses.

The implementation of the policies of the federal Greenhouse Gas Pollution Pricing Act is estimated to reduce 80-90 MtCO2-eq by 2022 across all jurisdictions. Notably, this estimate includes the impact of provincial carbon pricing policies that existed before implementation of the federal policy but that may be modified to meet the benchmark. While carbon pricing is a critical element of Canada’s clean growth and climate plan, it is not designed to be the only policy measure in the plan to reduce greenhouse gas emissions, as this would require a very high carbon price.

Kanata, Ontario, Canada 25 March 2021