Pumping the brakes on carbon tax debate Federal policy’s long-term objectives getting lost as political rhetoric heats up By: Julia-Simone Rutgers Posted: 11:15 AM CST Friday, Nov. 17, 2023 Last Modified: 1:14 PM CST Friday, Nov. 17, 2023 Updates

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Carbon pricing has turned Canadian politics upside down. Carbon pricing exemptions have muddied the waters. Carbon pricing is doomed.

The headlines reveal no shortage of controversy over Canada’s cornerstone environmental policy.

Since its introduction in 2018 as an incentive to lower emissions and spur the shift to a low- or no-carbon economy, the federal carbon price scheme has generated its fair share of plaudits and criticisms.

But recent exemptions have opened rigorous debate about the financial impacts of the fees, shifting the focus to affordability — particularly for middle-class Canadians feeling the pressure of carbon pricing in day-to-day life.

The messages are confusing and the environmental impacts are unclear. So we asked three experts to weigh in on what it all means.

You could be forgiven for some confusion as to where Manitoba — and indeed Canada — stands on the carbon pricing scheme at present.

On Oct. 26, the federal government announced it would exempt home-heating oil — a fuel similar to diesel used in some boilers and furnaces — from its levy collection. The exemption reignited a political feud that looks likely to carry on through the upcoming federal election.

The Liberal government has argued heating oils are disproportionately pricey for those who use them — predominantly Atlantic Canadian residents — and the tax is therefore a hindrance rather than an incentive to swap to less polluting heating options.

Federal and provincial conservatives argue the new exemption is evidence the carbon levy isn’t working as intended, arguing it’s unfair to exempt some heating fuels and not others.

Five conservative premiers have signed a letter asking the federal government to exempt natural gas — a significantly more commonly used heating fuel.

Saskatchewan Premier Scott Moe has pledged the province will stop collecting the tax if the exemption isn’t granted. (In an attempt at political grandstanding, Manitoba’s opposition Conservatives have announced plans to introduce similar legislation.)

Manitoba’s position on the carbon price could be described as inconclusive.

NDP Premier Wab Kinew offered little comment on carbon pricing during the campaign, aside from an attempt to distance the party from the Conservatives’ more aggressive “axe the tax” stance. He promised to work collaboratively and not combatively with the feds.

Since his early October election win, that position has muddied.

At first it seemed Kinew would focus on finding subsidies to help Manitobans invest in geothermal heating. On Nov. 6, Kinew joined Canadian premiers for a meeting in Nova Scotia, during which he announced Manitoba would indeed be asking for a carbon price exemption on natural gas for home heating.

Two days later, after meeting with federal Finance Minister Chrystia Freeland to announce energy funding, Kinew declined to comment on carbon discussions and shifted the focus to jobs and clean energy initiatives.

By Nov. 13, he chose not to sign the conservative premiers’ letter, prompting accusations of a policy “flip-flop” from opposition critics.

With all the confusion, the purpose of the carbon tax has become lost in the fray.

Three experts: Carleton economist Maya Papineau, University of Manitoba sociologist Mark Hudson and climate planner Durdana Islam help break down the myths and realities of carbon pricing with an eye to its original purpose — climate action.

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Why have a carbon price at all?

According to the federal government, carbon pricing is a “financial incentive for people and businesses to pollute less.”

The government’s position — that such a pricing scheme is one of the most “effective and efficient approaches to reduce the greenhouse-gas emissions that cause climate change” — has been widely accepted by international experts.

The nuts and bolts of the carbon price are undoubtedly complex. Manitoba is one of 10 provinces and territories subject to the federal backstop plan, a steadily rising fee on every tonne of carbon pollution, while British Columbia, Quebec and the Northwest Territories have their own emission pricing systems.

Most people notice the carbon levy in the charges added to most fossil fuels and those applied at gas stations, on fossil-fuel-generated heating bills, and indirectly on a variety of goods and services. (Major industrial polluters in federally regulated provinces are charged according to a different system entirely.)

Most money collected from residents is returned through quarterly climate action incentive payments.

There’s some debate over how much families get back relative to what the carbon levy costs them, but nearly all suggest the majority of Canadians get more back in rebates than they spend on carbon fees.

Though the price on pollution is commonly referred to as a “carbon tax,” the Supreme Court of Canada has found it is “not a tax” and is instead a constitutionally valid regulatory charge.

Durdana Islam (the climate planner): We need to price carbon because, in recent years, the biggest reason for climate change has been burning fossil fuels.

Who is going to pay the price of what’s happening to the environment when we’re burning fossil fuels at the rate that we are? The logic is that the polluters should pay for the emissions they’re creating.

There are two ways we can do that: one is a carbon tax, and another is implementing a cap-and-trade system.

Emitting greenhouse gas has environmental effects, it has infrastructural costs. When we are paying the price of buying gas at the gas station, you’re not paying for all these things.

When you look at the longer term, I think it’s fair that we are paying for the pollution we are incurring.

Are the costs outweighing the benefits?

“Today we are calling on the federal government to do the right thing and treat all Canadians fairly by removing the federal carbon tax from all forms of home heating.

“This would help address the significant affordability concerns faced by families from coast to coast to coast,” reads the letter signed by the conservative premiers of Nova Scotia, New Brunswick, Ontario, Alberta and Saskatchewan.

There is no question affordability has become an increasingly pressing challenge for families across the country. Extra costs at the gas pump and higher home-heating bills are, in the immediate term, difficult to navigate, but there is little consensus at the moment as to how much the carbon price is impacting affordability on the whole.

Federal economists have offered differing analyses of the average costs families incur through the carbon tax versus how much they get back through rebates, but most agree that the majority of families get more in return than they pay.

Others — including Bank of Canada’s governor Tiff Macklem — have analyzed the impact of carbon pricing on inflation, finding the impacts to be minimal (only 0.15 percentage points of inflation annually are directly attributed to carbon prices).

Maya Papineau (the economist): The carbon price is the most efficient way to meet our climate change targets — at least if you’re concerned about affordability for households.

There’s a lot of science economy models that run simulations to identify the present value of the global damage from another tonne of carbon dioxide emitted.

That’s what’s being reflected in (carbon) prices: for each tonne of carbon dioxide content for any given fuel, the extra price being added is the social cost of carbon.

That’s going to be a benefit to households who switch to low- or zero-carbon options because you’re not going to be paying for that damage.

If you look at the benefits versus the costs of the carbon tax, the costs of not implementing it — when you consider climate damages — are much higher than any of the savings.

The costs are even higher if you decide to take a different policy approach and completely axe the carbon tax because anything the government does will cost money, but with the carbon tax you get revenue back, which you can remit to households and possibly use to incentivize other low-carbon technology.

Climate change, in other words, is way more expensive. The carbon price system cost the average Manitoban $462 in 2021, but remitted an average $705 in climate action incentive payments.

Estimates from the Canadian Climate Institute, a charity focused on climate change policy research, suggest Canadians will lose more than $700 a year to climate-related damages by 2025 — and those costs will keep rising.

Is the carbon price helping us meet our climate targets?

According to a Nov. 7 report from Canada’s environment commissioner, Jerry DeMarco, the country isn’t on track to meet its 2030 emission reduction targets.

By 2030, the report finds, Canada will have reduced emissions to 34 per cent below 2005 levels, falling short of the 40 per cent target meant to set the country on a path towards net-zero emissions by 2050.

Despite a list of failures on the part of the federal government, DeMarco’s report lists the carbon price among the “potentially strong measures” in Canada’s emissions plan.

Tracking how well a carbon price works for reducing pollution is a long-term project.

British Columbia introduced North America’s first carbon levy in 2008, using a structure that bears resemblance to the federal carbon pricing system in place today.

By 2015, researchers found the tax had reduced carbon pollution by between five and 15 per cent compared to business as usual.

By 2018, the British Columbia Council for International Co-operation found emissions had started to rise, reflecting gaps in the province’s broader climate policy and a hesitation to keep inflating the carbon price over time.

In Manitoba, as with much of Canada, it’s still too soon to say whether the carbon price is pushing emissions downwards.

The province’s most polluting sector, agriculture, produced relatively stable levels of emissions between 2018 and 2021. Fuel used in farming machinery — responsible for about 18 per cent of agricultural emissions — is exempted from the carbon price.

Transportation, Manitoba’s second-largest emissions source, has seen slight declines in carbon pollution since 2018, including a six per cent reduction in emissions from passenger vehicles.

Building heat has seen similarly minute reductions in greenhouse-gas intensity.

Mark Hudson (the sociologist): The most important thing about a carbon tax is its long-term certainty for households, for municipalities, for institutions, firms and businesses about what the cost of carbon is going to be.

We don’t expect there to be really big short-term changes in behaviour with a carbon tax.

What the carbon tax does is send a signal to all kinds of individuals, households, organizations, etcetera, that over time, your failure to address the carbon intensity of your organizations is going to cost you more and more.

That drives long-term investment decisions that are really going to make a difference in terms of climate change.

That long-term signal about what the cost of carbon is going to be in the future is fatally undermined when we open the door for exemptions.

How do exemptions impact our climate goals?

With the evidence of carbon pricing’s impact on climate goals still inconclusive, the questions around the scheme’s affordability have become more pressing.

To try and ensure the carbon price is applied equitably, the federal government already exempts fossil fuels used for farm machinery, fishing vessels and greenhouses as well as diesel and other heating oils used to generate electricity in remote communities.

Rural communities receive a top-up on their climate action incentive payments to make up for gaps in the availability of low-carbon infrastructure options.

To Hudson, the rationale for exempting heating oil from the carbon price in Atlantic Canada has some merit.

Federal Energy and Natural Resources Minister Jonathan Wilkinson recently told Reuters heating oil can cost two to four times more than natural gas to produce a comparable amount of heat.

Because oil is more polluting than natural gas, it also faces steeper carbon fees: 17 cents per litre of oil compared to about 12 cents per cubic metre of gas.

That leaves households using heating oil — about three per cent of Canadians — paying far more to stay warm.

Hudson: I heat my home with natural gas. Natural gas, when it actually gets combusted, has less of a greenhouse impact than home-heating oil does.

People in Atlantic Canada are heating their homes with heating oil, not because of a moral failing on their part, but because they live in a place where historically people made decisions that they were going to heat their homes with oil.

So, should they have to pay a bigger cost than I do, despite the fact that it’s not actually up to them to decide how their homes are being heated?

Yes, there are some individual options for people — depending on where you live you can use geothermal, you can install heat pumps — but those are really expensive at the moment and until we come up with collective solutions for how to finance those kinds of energy switches it’s really hard to shoulder people with an expense that they are incurring, to some extent, through no fault of their own.

But exemptions for home-heating oil have stirred up a cry to exempt all forms of fossil-fuel based home heating from the carbon price — and that’s where the exemption becomes risky.

According to Statistics Canada, more than half of Canadian home energy consumption came from natural gas in 2019, meaning an exemption for natural-gas heating would leave a far larger hole in the climate policy.

Papineau: The more you start poking holes in what sectors the carbon tax is being applied to, the less you get the signal that you need.

You need the relative price of a good that’s been produced using fossil fuels to be higher relative to the price of low-carbon or zero-carbon goods.

The more you water it down by poking holes, i.e. creating exemptions, the less you’re going to be effective.

If you were to exempt natural gas, I think it would be an accurate statement that the carbon tax is dead.

Is there a way to balance affordability and climate needs through the carbon price?

Speaking to reporters during the premiers’ meeting in Halifax, Manitoba’s premier stressed the carbon price isn’t “a silver bullet” to reducing emissions. That’s partly why, Kinew says, he’s advocating for the natural-gas exemption.

While there’s still a glaring lack of research and evidence assessing how well the carbon price works to cut into emissions, there’s broad consensus that carbon pricing doesn’t work in isolation.

Hudson: He’s right, it’s not a silver bullet. But before you go throwing that bullet out, you better have something else in the cylinder. You can’t throw out your only bullet.

Find some different ammunition on this, and that ammunition should be credible, viable and effective, or you cannot undermine the long-term signal of the cost.

The NDP has said they’re going to connect 5,000 heat pumps, they’re going to do an (electric vehicle) rebate — I think that’s worthy stuff — but it’s small potatoes relative to the scale of the challenge in front of us.

We need to be talking about big, public, collective solutions: investments in infrastructure, building efficiency, heating systems like geothermal, building codes, a Crown corporation to retrofit aging housing stock, a public bank to fund that infrastructure, a broader mandate for Efficiency Manitoba and regulation of large industrial emitters.

Papineau, Islam and Hudson agree the affordability challenges facing Canadians — particularly lower-income families — deserve serious consideration and effective government policies to overcome. That doesn’t mean axing the tax will work.

Papineau: (Carbon pricing) will hit the pocketbooks least, in terms of all the possible ways to meet your targets.

You need a ‘yes-and’ approach, meaning ‘Yes, let’s maintain this carbon tax as broad-based as possible, let’s not poke any more holes.’

And in circumstances where households face additional barriers then you can add policies and programs on top of that.

The government has already done some of that, possibly more will be needed, especially as the carbon tax keeps rising, but the way to get to our targets is not to say, ‘Things are expensive now, let’s scrap the tax.’

That’s kind of the point: you want the fossil-fuel-intensive goods and durables to be more expensive relative to the goods and durables that are zero-carbon.

Are there any changes to carbon pricing that would make sense?

Governments need to spend time researching the impacts of their carbon pricing programs and the suite of additional rebates and incentives aimed at facilitating the move to low-carbon and zero-carbon options, Papineau stresses, adding there’s no need for an all-or-nothing mentality.

Carefully assessing what works and what doesn’t will help Canada get in line with its climate targets.

Working directly with communities to implement climate-action initiatives, Islam sees a way the carbon levy could better support both systemic and individual moves toward a zero-carbon economy.

Islam: As a citizen, are you really using this money to offset your carbon footprint? How do I measure that? Affordability is a big issue, so when I’m getting this extra money, should I spend it on groceries?

Since the federal government is collecting the carbon tax, bypassing provincial governments, our provinces do not have the revenue to recycle that fund in a way that is beneficial and moves us forward, because the overall goal is to reduce our greenhouse-gas emissions every day.

We can recycle the revenue in a way that will help us change our behaviour, change our lifestyle, change infrastructure and change a system.

julia-simone.rutgers@freepress.mb.ca