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Grain farmers are among growers who need to burn large amounts of natural gas as part of their operations.SHANNON VANRAES/Reuters

After three years, Ottawa is addressing one of the biggest inequities of its carbon-pricing scheme by carving out rebates for farmers.

Prairie grain farmers, especially, have long complained about the added costs of carbon pricing that they have incurred from burning natural gas to dry their harvests. The expenses can run into thousands of dollars for larger producers in particularly wet years.

Ottawa’s new system, outlined in December’s fall economic statement, falls short of farmers’ demands for a full exemption for the use of natural gas. But it does provide some relief, while still creating an economic incentive to move to a less fossil-fuel-dependent future.

Politically, the change deals with a policy discrepancy: Ottawa touted carbon-pricing rebates to households and shielded export-exposed heavy industry, but left farmers on their own to cope with rising carbon charges from natural gas consumption. “This is an important part of making the system fair,” said Nicholas Rivers, Canada Research Chair in climate and energy policy at the University of Ottawa.

Still, there will most certainly be farms that pay more in carbon charges than they receive in rebates, since eligibility extends to any kind of farming operation.

Farms with hefty natural gas bills from drying grain are eligible for rebates, in the form of refundable tax credits. But so are other farms that haven’t incurred such bills, including greenhouse operators that already have 80 per cent of their natural gas consumption exempted from carbon charges. Farmers are already exempt from carbon pricing for gasoline and diesel used in their operations.

In effect, Ottawa has created a slightly altered version of the rebate program for households, which provides annual – soon to be quarterly – payments that aren’t tied to an individual’s fossil-fuel consumption. Farmers, like other Canadians, are eligible for those payments, but the money is designed as an offset for household energy use, not for the added expenses incurred by agricultural operations.

Households with relatively low fossil-fuel use (and, hence, lower carbon charges) end up with money in their pockets. Conversely, households with relatively high consumption end up paying more in carbon charges than they receive in rebates. It’s that dynamic that provides an incentive to reduce fossil-fuel use, either through conservation or by switching to less carbon-intensive infrastructure.

Now, there’s a similar dynamic for farming operations. The rebates are based, for the most part, on expenses used to calculate income from farming for tax purposes. The amount of expenses a farm can claim will be reduced if its operations extend beyond the provinces where federal carbon pricing applies (Ontario, Manitoba, Saskatchewan or Alberta). But most types of farming expenses will be included.

Farmers can claim a flat rate for each $1,000 in such expenses. For 2021, that rate is $1.47, rising to $1.73 in 2022. So a farm with $1,000,000 in eligible expenses would be able to claim a refundable tax credit of $1,470 for the 2021 tax year and $1,730 in 2022.

In a statement, Finance Minister Chrystia Freeland’s press secretary Adrienne Vaupshas said the new program will support farmers in reducing their emissions. “We are committed to supporting Canada’s agriculture and agri-food sector to meet its emissions targets and capture new economic opportunities,” she wrote.

The Canadian Federation of Agriculture said it welcomes the arrival of rebates, but noted that the amounts budgeted for payments to farmers are smaller than the carbon charges the agricultural sector pays to the government. “Farmers are feeling it on the bottom line, and that’s always the issue with the carbon tax,” said Todd Lewis, a CFA vice-president, and president of the Agricultural Producers Association of Saskatchewan.

Mr. Lewis, a grain farmer, said there are elements of the rebate design that make sense, including the decision to base the payments on farming expenses.

Prof. Rivers said Ottawa has done a good job of designing a rebate system that provides a financial prod to reduce greenhouse gas emissions in the agricultural sector. He also praised the choice to use expenses reported for income-tax purposes, saying it was administratively simple.

However, there are distortions resulting from the diverse nature of the agricultural sector. Some growers, such as grain farmers, need to burn large amounts of natural gas (at least in the short term) as part of their operations. Others don’t, meaning they will probably end up with cash in their pockets even without action to reduce their emissions. “This is likely a windfall for a potato farmer,” Prof. Rivers said.

Other distortions are a result of Ottawa’s policy choices, most notably the existing exemption for greenhouse growers. Under that exemption, carbon charges are reduced by 80 per cent for eligible greenhouse operators. That substantial exemption remains intact – and greenhouse operators are also eligible for refundable tax credits under the new rebate program.

David Sawyer, principal economist for the Canadian Institute for Climate Choices, said greenhouse operators are likely to be overcompensated under the rebate system, and that the exemption should be ended.

The CFA’s Mr. Lewis said there are other discrepancies that disadvantage grain farmers. Basing claim amounts on taxable expenses ends up excluding the cost of rail shipments, which are deducted from gross revenue before the calculation of expenses and net income. By contrast, the cost of shipping crops by truck – more common in eastern provinces – is categorized as an expense in calculating taxable income.

More broadly, Mr. Lewis said, the introduction of carbon rebates marks a major change in tone from the early days of the carbon-pricing debate, when Ottawa lectured farmers on the need to reduce emissions. Now, he added, the federal government has acknowledged both the difficulties farmers face, and the contributions the sector can make in reducing national greenhouse gas emissions.

Tax and Spend examines the intricacies and oddities of taxation and government spending.

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