It was a decade and half ago when Alberta and then British Columbia introduced the first carbon-pricing schemes in Canada. Today, Alberta maintains its carbon-pricing mechanism for large emitters, and B.C. still has its carbon tax. All other provinces have either adopted their own carbon-pricing schemes or use the federal backstop pricing system.
Now however, opposition to carbon taxation has mushroomed so much that it is one step away from its grave. The federal Conservatives have been unexpectedly successful in their campaign to “Axe the Tax” — the same tax that was praised by many experts when it was first introduced. Most provinces have expressed opposition, surprisingly joined by B.C.’s NDP party, which is desperate not to lose the fall provincial election. The federal NDP and Bloc Québécois want revisions (with the Bloc attacking Alberta and Saskatchewan over a $30 increase in their carbon tax rates compared to provinces with lower per capita emissions like Quebec). That leaves the federal Liberals dangling in their support of the current approach.
The Liberals haven’t helped their case much. While correctly professing that carbon pricing is more efficient and less economically costly than mandates, regulations and subsidies, they have introduced over 130 “complementary” policies like EV and clean electricity mandates and subsidies and the Clean Fuel Regulations. Many of these programs could have been avoided by letting the carbon tax increase as planned. With the possibility of losing Atlantic seats, the Liberals added another nail to the coffin by exempting home heating oil.
Will carbon pricing be abandoned? Not entirely. The carbon-pricing system that is applied to big emitters — the Output-Based Pricing System (OBPS) — will likely remain at the provincial level. Rather, it is the fuel charge at the federal and provincial levels that could be eliminated.
One reason the fuel charge and not the OBPS carbon tax is on the ropes is a mistaken impression that even economists have bolstered. The OBPS has been referred to as the “industrial” carbon tax and the fuel charge as the “consumer” tax. Neither is true.
The fuel charge applied at the refining and utility stage typically increases gasoline, diesel and fossil-fuel-based electricity charges and heating costs. When shifted forward through higher prices, consumers pay the tax. However, so do agriculture, forestry, manufacturing, mining and service businesses who buy energy. The federal government assumes most businesses simply pass on their fuel charge costs to consumers.
That is plainly false, however, for an economy open to trade and capital flows like Canada. As Conservative Leader Pierre Poilievre often points out, a greenhouse firm in his constituency could go bankrupt because if the company charges higher prices, it loses market to cheaper U.S. vegetable and fruit imports that are not subject to carbon pricing. To the extent that businesses cannot shift forward carbon taxes to consumers, they inevitably reduce investment and employment. Thus, the fuel charge is not just a consumer tax but also a tax on businesses.
Because of this fundamental flaw in treating the fuel charge as a “consumer tax,” we have failed to address competitiveness issues properly. The federal rebate system provides relief to the average household facing energy costs. (Which means that some are better off and others worse off depending on their use of energy including that imbedded in food and other products they buy). Outside of a teeny rebate for small businesses, the current rebate system fails to address the competitiveness problem faced by lower-emitting companies.
As the carbon tax rate rises to $170 per tonne by 2030, many businesses will find that they will increasingly be at a disadvantage in international markets. Axing the fuel charge will be popular not only for consumers who can’t drive or heat their homes less but also for many businesses that bear the carbon tax burden without relief.
As for the OBPS, it applies only to large emitters that are exempt from the fuel charge. To maintain the business competitiveness of large emitters, roughly 90 per cent of emissions are exempt from carbon taxation (marginal emissions in excess of the allowance are taxed). Nevertheless, faced with higher taxes on their energy inputs, large emitters will raise consumer prices or reduce production and employment if they are unable to push through price increases due to international competition.
If the fuel charge is toxic to voters, why is the carbon price associated with the OBPS likely to remain? Provinces that run their own pricing schemes for large emitters (which is most of them) will likely want to retain them. Even though the U.S. does not have carbon pricing (except for California and a few other states), the OBPS provides a strong rationale for Canada to be exempt from any U.S. carbon border tariffs. Same for European border adjustments. Besides, economic studies have so far shown that the OBPS is far more effective in reducing emissions than what is currently achieved by the fuel charge. Politically, it is easier to impose a hidden tax on businesses as many voters don’t understand that the ultimate impact is to raise consumer prices and reduce investment or employment.
Expect the fuel charge to be axed. It is hated by consumers who can’t avoid the tax and hurts the competitiveness of lower-emitting companies. On the other hand, the big-emitter carbon tax will remain at the provincial level. Maybe that is a good result in a federal country like Canada.
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