Pedro Antunes is executive director, economic outlook and analysis, and deputy chief economist, at the Conference Board of Canada.
The federal government has just introduced a carbon tax to apply in the four provinces that have not implemented a price on carbon themselves. It is appropriate to “tax” pollution because we know that greenhouse-gas emissions are affecting the environment in ways that are difficult to measure. Therefore, taxing polluters is justified on a societal and economic basis.
The carbon tax will be imposed on end users of products that emit greenhouse gases (GHGs), including businesses that use oil and other fossil fuels as inputs, and households that use energy for heating or cooling their homes and running their vehicles. The current federal plan for the four provinces is to start taxing GHGs at a rate of $20 per tonne in 2019, with incremental increases to reach $50 per tonne by 2022. The revenues collected will be returned to households through rebates that cover the overall increase in household costs.
But will it work at reducing Canada’s emissions? And will it allow us to reach our international commitments to reduce GHG emissions by 30 per cent from 2005 levels by 2030, as set out in the Paris Climate Accord? The Conference Board of Canada’s research suggests we’ll need to do more than reshape our tax bills.
There is compelling evidence that applying a tax on GHG-emitting products is an efficient measure to lower consumption and change behaviour for businesses and households. Energy use, however, is inelastic – households will not get rid of a gas-guzzling SUV right away. But with the expectation that gasoline prices will continue to rise steadily, the next vehicle they purchase will likely be greener. Similarly, changing energy usage for businesses often requires significant investments over time – and businesses will be motivated to look for cost savings only if they are convinced there will be long-term increases in the cost of emitting GHGs.
The Conference Board’s estimates suggest that a $50 carbon tax would add about 1 per cent to overall consumer prices. Implemented over a four-year period, this represents a lift to annual inflation of about 0.25 percentage points. But, as intended, households would be expected to slowly substitute away from those more expensive polluting items, suggesting that the hit to households' purchasing power would be somewhat mitigated. Overall, we expect that the federal rebates will more than cover the increased carbon tax costs to households. That said, the expectation is that, even with eventual rebates, the effect of higher prices on GHG-emitting goods will push consumers to reduce their purchases of these goods.
To put Canada’s GHG emissions on a path to reach our Paris Accord commitments, however, additional efforts will be needed. In addition to steady incremental increases in carbon taxes, significant investments will be required to decarbonize electricity generation and add to clean energy infrastructure.
The combination of carbon taxes and additional investments will have implications for the economy – with some sectors losing out and others gaining. How energy-intensive exporters will maintain competitiveness with U.S. producers is the most significant concern. The Trump administration has already announced its intentions to opt out of the Paris Accord, although U.S. states such as California continue to be aggressive in implementing emissions trading programs. Meanwhile, U.S. federal corporate taxes underwent a massive reduction in January. These factors are already challenging Canada’s tax competitiveness which is affecting business investment in our country. While a depreciated loonie could help absorb some of the shock, our analysis suggests that overall, exports will take a hit.
Climate change is likely responsible for some portion of the significant increases in the cost of environmental catastrophes in Canada over the last 20 years. Carbon taxes are a necessary step. But to significantly change public behaviour, policy-makers will need to continue to clearly communicate their plans for reducing greenhouse gas emissions.