One of the Liberal government’s marquee policies that promised to address climate change by dramatically reducing greenhouse gas emissions in Canada at little cost has transformed into a toxic political football.
Now, with a federal election less than a year away — if the Trudeau Liberals survive that long — an important decision needs to be made: what to do with the commodity-based carbon tax?
Political acceptability is key for any emissions-reduction policy. However, two other factors are even more important.
The first is effectiveness — demonstrating the measure achieves its goal of lowering overall emissions. The second is fairness — ensuring equity, particularly when it comes to any impact on lower-income households.
Organizations
Topics
Underwhelming data on real-world impacts
For more than a year, the Liberal government has been promoting its carbon tax as a quasi-social program, frequently arguing that eight in 10 households are better off. But is that claim true?
A lot of opinions circulate on the topic of the carbon tax. Yet, conspicuously absent are updated evaluations using actual data.
As part of graduate-level studies in sustainability economics, MBA students at the Asper School of Business at the University of Manitoba evaluated the ongoing effectiveness of the carbon tax. In addition, a team recently specifically investigated its fairness.
Spoiler alert: the findings are not pretty.
To understand how we got here it is important to return to where it all began. The genesis of the carbon tax in Canada was in British Columbia, which introduced the levy in 2008. It was lauded, with investigations suggesting that big reductions would be possible.
But what happened? Time-series analyses of total transport-related emissions over 18 years from 2005 through to the end of 2022 were used to compare B.C. with Sweden. Both have incorporated carbon taxes, Sweden starting in 1991 and B.C. starting in 2008.
The two also had comparable levels of emissions in 2005. The results for the two jurisdictions were starkly different from that point onward.
Since 2005, Sweden has steadily reduced its carbon emissions, dropping them by an average of 400,000 tonnes annually. In B.C. emissions have steadily increased by 300,000 tonnes every year.
It’s the score that counts
In other words, Sweden’s carbon tax is a success. B.C.’s carbon tax, meanwhile, comes in as a question mark at best.
B.C. was once extolled as an environmental leader but has performed poorly on reductions. It was already noted as being in the bottom half of provinces by 2019. According to updated data for 2022 (specifically looking at Table A.7), B.C. got worse in relative terms, ranking third from the bottom compared to other provinces.
Thus, adoption of B.C.s carbon tax system now appears unjustified.
Further useful analysis involves the federal backstop system on carbon pricing as applied to two designated liquid fuels — on-road gasoline and on-road diesel in four provinces: Alberta, Saskatchewan, Manitoba and Ontario.
A three-year period from 2020 through 2022 was examined using 2019 as the baseline. Emission reductions by 2022 totaled about 3.8 million tonnes. This modest figure is further complicated by context.
While one might be drawn to ascribing the reduction to the application of the carbon tax, other factors – notably the impact of COVID-19 measures on overall economic activity, including energy use – played a prominent role.
The ROI of a carbon tax
Cumulative carbon-tax payments on the two fuels over three years totaled more than $9.1 billion, which means the resulting raw cost of recorded reductions was $2,400 per tonne. Reducing the cost by excluding the proportion actually returned to households, including rebates, the revised cost of reduction translates to about $290 per tonne.
To put that in perspective, the federal environment minister announced in 2023 that new modelling showed the social cost of carbon should be increased to $260 per tonne, not $50 as under previous modelling.
This value effectively represents the “cost of doing nothing.” As a result, the cost per tonne of reduction due to a carbon tax turns out to be higher than the cost of doing nothing.
Numbers reality check
On the question of equity, the Asper School team of Jonathan Alegria, Ramy Penner and Ryan Tan focused specifically on Manitoba for the 2021-22 fiscal year. Total proceeds collected in the province were $369 million, corroborated through multiple sources, which allowed a breakdown in terms of fuel types and applications, both direct and indirect.
Direct costs associated with household vehicles using gasoline translated to about $117 million, representing the largest single slice of the carbon-tax pie in Manitoba. Two other important figures presented, however, were problematic and appeared to come out of thin air without justification.
The average rebate was stated as $705 per household. However, that figure was determined to be unrealistically high and mathematically impossible given the terms of the rebate formula and the nature of Manitoba’s population and household makeup.
Based on 2021 census data, a more realistic average rebate would be no greater than $614 per household.
At the same time, the average cost of the carbon-tax system was stated as only $462 per household. This value was unrealistically low and not based on complete real-world data.
While the nature of pass-through down supply chains was fully acknowledged in the design of the carbon tax, it appears to have been downplayed or ignored in reporting.
Diesel is a good example, entirely indirect. Based on reasonable pass-through this translated to more than $73 million, the second-largest cost faced by households. Combining direct and indirect costs, a more realistic average cost would be $652 per household.
Boiled down, rather than a purported average net rebate of $243 per household in Manitoba, this analysis showed an average net cost of $38.
The same analysis also uncovered inherent biases against lower-income households, with equity not considered in the rebate formula; a “fiction of progressivity,” with no guarantee that lower-income people are better off; a lack of transparency on tax pass-throughs; continuing lack of adequate support for public transit as an alternative to expensive private vehicles; lower-income Canadians not filing taxes and therefore being ineligible for rebates; adverse impacts on Indigenous Peoples; and inflationary effects that appear more significant than suggested.
Under the microscope, it becomes apparent the federal commodity-based carbon-tax system not only is not living up to its promise to reduce emissions, it is also short-changing the very Canadians who can least afford it.
From both a policy and a political perspective, a prudent move for the federal government would be to replace the commodity-based carbon tax system with measures that are fairer and more effective. The real question is whether the Liberal government is prepared to make such a bold about-face with the clock ticking on the next election.
This article first appeared on Policy Options on Nov. 6, 2024. It is republished here under a Creative Commons license.
