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A Petro-Canada gas station with a rocky mountain backdrop just outside of Calgary, on Feb. 4, 2020. Parliamentary Budget Officer Yves Giroux said households with higher incomes face larger carbon tax bills largely because of their consumption choices.Todd Korol/The Globe and Mail

Most households paying the federal carbon tax will receive rebates that more than compensate for their added costs from carbon pricing, a new report from the Parliamentary Budget Officer says.

But the PBO said federal and provincial sales taxes will reduce the net benefits to households that were estimated in an earlier report.

And in Ontario, the top-earning 40 per cent of households will be worse off under carbon pricing, a contrast to the finding in its April, 2019, PBO report – and the federal government’s sales pitch – that 80 per cent of households in provinces subject to the federal carbon tax would be net beneficiaries.

Parliamentary Budget Officer Yves Giroux said households with higher incomes face larger carbon tax bills largely because of their consumption choices. "Somebody living in suburbia, working downtown and commuting by car will have a bigger footprint than somebody working very, very close to home and walking to work.”

And he said higher-income households tend to have two adults, and children, further increasing their carbon footprints.

Broadly, the report forecasts that the carbon tax revenues will peak in 2022-23 as the electrical generation system moves away from carbon-intensive sources of power and Canadians shift their consumption patterns. For the majority of households, rebates will more than offset costs, a rebuttal of the claims of carbon-tax opponents.

“That is exactly how the system is designed. It is working as we said it would,” Environment and Climate Change Minister Jonathan Wilkinson said in reaction to the report, while declining to directly answer whether Ottawa will increase rebates in response to the PBO findings of lower net benefits.

The federal carbon tax imposes an escalating cost on greenhouse gas emissions, starting at $20 a tonne in fiscal 2019-20 and rising to $50 a tonne in 2022-23. (The PBO assumes that the carbon tax won’t rise after that point, although the federal government has yet to say what it will do.)

Ottawa has imposed the tax in provinces that haven’t implemented their own plan approved by the federal government: Alberta, Saskatchewan, Manitoba, Ontario, and for 2019-20, New Brunswick. Beginning in April, New Brunswick will implement its own carbon tax, although at an effective rate lower than the federal version.

The amount charged for a given volume of fossil fuels varies according to its carbon footprint. To offset that cost, Ottawa is providing annual rebates to consumers through the income-tax system, with the amount varying by size of household and location.

In addition, companies with large industrial operations face a separate charge, under regulations that set gradually tighter restrictions for the intensity of greenhouse gas emissions, or how much carbon is generated by a given volume of production.

The PBO calculated the effect of both policies in provinces where those federal programs are in place assuming that businesses would pass through the entire cost of the carbon tax to consumers; in its second report, the parliamentary watchdog included the sales taxes consumers will pay on their carbon-tax bills.

Ottawa will raise $5.29-billion from the carbon tax, the industrial levy and federal sales taxes related to the carbon tax in 2020-21, rising to $8.445-billion in 2024-25. Of that, about 80 per cent will be returned to consumers. The federal government has said it will return all direct carbon revenue to the provinces in which they are generated. But it has not said how it will distribute revenue from large emitters. Nor has it made any commitment to return sales-tax revenue, which will amount to $179-million in 2020-21, rising to $288-million in 2024-25.

Even with those additional costs, most households in Canada will receive more in rebates than they pay out, on average. The net benefit shrinks as household income increases, reflecting greater energy consumption and a carbon tax bill that eventually rises beyond federal rebates.

In Ontario, for instance, the PBO forecasts that the lowest-earning 20 per cent of households (with income of $32,299 or less) will receive a net rebate of $115 in the coming fiscal year, 2020-21. But for the top-earning 20 per cent of households in Ontario (with income of more than $141,132), there will be a net cost of $134 in 2020-21.

There are at least two caveats to the PBO report that could further increase household costs. The PBO excluded agriculture from its analysis. Mr. Giroux said the PBO did so because government policy has exempted the sector from the direct effects of the carbon tax and that data are lacking. However, that policy doesn’t take into account the costs incurred by farms, chiefly on the Prairies, to dry crops before sale. The government has said its review of carbon policy this year will examine that issue. In remarks to reporters, Saskatchewan Minister of Trade and Export Development Jeremy Harrison pointed to a report from the Agricultural Producers Association of Saskatchewan that asserted the carbon tax would reduce farm incomes in the province by 12 per cent by 2022.

The parliamentary watchdog also did not include costs to Albertans for that province’s regulations to reduce industrial emissions, since that is not a federal policy. If those costs were to be included, the carbon cost for Albertans would rise, although the PBO could not say by how much.

With files from Marieke Walsh

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In 2018, the federal government announced that all provinces would need to implement a carbon-pricing system by April 1, 2019 and those that didn't would fall under a federal carbon tax. But what is carbon pricing anyway?

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