This year most Canadians living outside Quebec have had to pay more at the pump in the name of reducing carbon emissions than those living inside that province.
And the ever-increasing federal price on carbon may only exacerbate that discrepancy in the future.
The reason? Quebec’s price on carbon is set through the cap-and-trade system that is linked with California’s as part of the Western Climate Initiative. Most of the rest of the country pays a carbon tax, either one instituted by their provincial government or imposed by Ottawa, that is higher.
How can this be fair? It’s not. And it’s about to become a huge problem for Ottawa.
Alberta Premier Danielle Smith has gotten wind of this incongruity, which may finally provide her a legitimate issue for her grievance-based governing agenda. She recently referenced a Canadian Taxpayers Federation report pointing out that all provinces outside Quebec are required to raise the carbon tax to 14 cents a litre of gas next year. Meantime, Quebec’s cap-and-trade carbon tax will be about nine cents a litre.
That discrepancy may not be precise, because under Quebec’s cap-and-trade regime the price of carbon is set by the market. It goes up and down, but lately it has given the province an unfair break over the rest of the country, especially as the national carbon levy increases. Ms. Smith is likely to use the issue as a cudgel with which to bash Prime Minister Justin Trudeau, holding it up as a prime example of why she brought in her much-maligned sovereignty act.
And because she seems to have a legitimate beef, she is likely to build support for her cause among other premiers.
But there is another problem with the Quebec model, according to University of Calgary economist Trevor Tombe, and it’s an important one. A cheaper price on carbon in Quebec means overall emissions in Canada are not going to fall as much as they would if the province was subjected to the same price the rest of the country pays. It’s a higher price that is supposed to act as an emissions deterrent.
“A uniform price across the country is generally viewed as the most efficient approach to climate policy,” Prof. Tombe told me.
Why would Ottawa have agreed to allow Quebec to continue with its cap-and-trade system when it introduced its national carbon pricing program in 2019? Politics. Forcing a carbon tax on the province would have incited a huge fight and cost the Liberals support there. But it’s precisely this kind of walking-on-eggshells approach to Quebec that has infuriated so many in the country, especially inside Alberta.
It seems especially galling that Quebec is getting such special treatment given that federal Environment Minister Steven Guilbeault is from the province. It seems a little rich for him to be lecturing the rest of Canada on the importance of the carbon tax, and the need for it to reach $170 a tonne by 2030, when those in his home province are getting a discount.
The federal government seems to be trying to nudge Quebec into accepting a higher price more in line with the rest of Canada. But nudges won’t be enough.
Ottawa could tell Quebec that if it is to continue in a cap-and-trade system it must set a minimum price on carbon equal to what prevails elsewhere in the country. (Quebec would argue that runs counter to a cap-and-trade system where the market sets the price.) Otherwise, Ottawa could tax cap-and-trade transactions. The tax could move up and down according to the gap between the federal carbon price and the average floor price on carbon under cap-and-trade.
“The challenge Ottawa faces isn’t technical,” Prof. Tombe told me. “There are ways to deal with the price differential. The challenge is entirely political.”
A cap-and-trade system is not for everyone, particularly an emissions-intense province such as Alberta. It would inject too much price volatility into the market. However, you could see Ms. Smith taking control over carbon pricing and introducing a provincial scheme like the one Rachel Notley initiated when the NDP was in office, and which was later killed by Jason Kenney.
There are billions of dollars in play that could be used, for instance, to cut personal income taxes – something that would appeal to a United Conservative Party government.
But that will not be before Alberta launches a huge battle with Ottawa over the unfairness of the current system. On that front, Ms. Smith seems to be on solid ground.