Carbon taxes, pollution, and the U.S. tariff threat

Hey there, time traveller!
This article was published 24/03/2025 (367 days ago), so information in it may no longer be current.

In a stunning reversal, newly minted Liberal Prime Minister Mark Carney dramatically moved away from Justin Trudeau’s marquee commodity-based carbon tax.

Except, it turns out he did not actually “eliminate” it. Removal of the Greenhouse Gas Pollution Pricing Act would require Parliament. The document displayed prominently had no real force, requiring corrections in some news stories. Instead, the actual order-in-council involved an interesting sleight-of-hand, not a permanent move. It employed allowable administrative changes to set fuel charge rates under the Act all to zero.

The Act remains, with opponents suggesting Carney could reimpose the tax at some future, “opportune” time. Carney could have signalled an intent to amend or repeal the Act, but chose not to, exacerbating doubts of true intent. In the election, pending at any time, carbon taxation will likely be an issue, but also in more subtle ways.

One big problem is that Liberals, including Carney, have strongly supported the carbon tax, but characterize opposition as “divisive,” hence justifying political expediency.

Unfortunately, not one questioned the extent to which lack of fairness and effectiveness contributed to unpopularity. There are lots of opinions, but little analysis of the carbon tax using actual results. Ultimately, performance matters more than virtue signalling.

Last year, a team of MBA students from the Asper School of Business examined fairness using available data for Manitoba covering fiscal 2021-2022. They confirmed the average Manitoba household paid more in carbon taxes than received in rebates, based on past data, not computer models. They also identified significant numbers of lower-income households do not file income taxes and do not receive rebates, becoming especially disadvantaged.

More recently, MBA students updated evaluation of effectiveness with new data, using 2019 as a baseline and tracking carbon tax paid and changes in consumption for two major fossil fuels, on-road gasoline and diesel, over four subsequent years, through 2023. Four provinces under the backstop pricing system were analyzed.

Over the four years, more than $14.4 billion in carbon taxes was paid on these fuels. Yet, consumption reduced only 2.4 million tonnes net or 2.6 per cent lower than 2019. The key point is that reductions so far have been meaningless. The net cost, even after considering rebates, was $780 per tonne, more than three times the cost of doing nothing. Understanding these major deficiencies is important.

At the same time, it has become apparent why Carney continues to be vague, loath to outright remove the Act. It also covers Canada’s second carbon tax, the one nobody hears about, namely the “output-based pricing system” or OBPS.

Its design originated in Alberta but applies only to major industrial emitters. Companies pay the same carbon tax as consumers, but only on emissions that exceed progressively declining limits. While not perfect, it has shown some positive results, unlike the commodity-based tax.

The Canadian Climate Institute, albeit using computer models, suggests the OBPS could be an important contributor of reductions to 2030. An inherent assumption, however, is that major industrial emitters would continue to be financially in positive positions. This is now highly questionable, given the existential threat from the U.S. faced by Canada and Canadian companies. Further, many of these emitters are oil producers, based on which governments in Canada receive significant funds, helping to support social programs.

Carney has expressed designs on the OBPS, stating he would make, “big polluters pay consumers to lower their carbon footprint.” Such a move risks shifting the OBPS to becoming a “cash cow” and impacting companies when they are under severe threat. The problem becomes obvious considering the relative scales of money involved.

Heat pump and electric vehicle uptake in Canada are still small, just over five per cent and three per cent overall, respectively. Attempting to discernably move the needle with consumers on both, say just five per cent over five years, would require about $5 billion annually just for incentives. Unlike the commodity-based carbon tax, involving billions in proceeds, the OBPS is only a few hundred million annually, a huge mismatch. Given severe threats from the U.S., it may be wiser at the moment to temporarily suspend the OBPS altogether until we have more stability.

Carney, like Trudeau, continues to propagate an underlying falsehood, that reducing emissions is inexpensive and easy, plus someone else will pay. In a recent interview, he claimed the added cost to build a $25,000 car entirely from zero-emission steel is less than $200. Direct-reduction steel processes are developing forward, like MIDREX and HYBRIT, but at least a decade from broadly realistic. His perspective is what would be expected from a stock promoter.

The opposition has been straightforward on proposed directions, whether agree or not, while Mark Carney is nothing but vague. He owes Canadians more clarity on what exactly he proposes to do.

Robert Parsons teaches sustainability economics at the I.H. Asper School of Business, University of Manitoba.