If Canada is serious about cutting carbon dioxide emissions, most economists agree a carbon tax is the cheapest and least heavy-handed way for the government to do it.
Yet that fact has been swallowed up by a divisive debate over how much the federal government’s proposed tax would impact Canadian families. The tax will see Canadians pay at least $20 per tonne of carbon dioxide emitted starting in January and rising to $50 per tonne by 2022.
Some are predictably leery. The Conservative Party forced a filibuster last week to “get the truth” about carbon tax costs, while Ontario premier-designate Doug Ford announced plans to axe the province’s cap-and-trade agreement and challenge the federal carbon tax on the basis that it’s a money grab that won’t help the environment. In Alberta, Opposition United Conservatives leader Jason Kenney has promised to do away with the tax altogether if elected in 2019.
It’s easy for people to get hung up on costs, says Dale Beugin, executive director of Canada’s Ecofiscal Commission. But no matter what Canada does to get its emissions down to meet its commitment under the Paris climate change accord, it’s going to require money.
“It’s not a question of carbon pricing or nothing,” Beugin says.
“It’s a question of carbon pricing or regulations, carbon pricing or subsidies, and from an economist perspective, it’s pretty clear that carbon pricing is the lowest cost way.”
Carbon taxes work by encouraging people to change their habits, says Danny Harvey, a professor in the University of Toronto’s geography department. The idea is that by hiking costs associated with high carbon dioxide emitting fuel and energy sources, you make it more enticing for people to use greener cars and to better insulate their homes.
“We’re sort of nudging people in a different direction,” Harvey says.
But at what threshold does a carbon tax go from a financial inconvenience to actual incentive for change?
Even once the tax reaches $50 per tonne in 2022, Harvey says it’s unlikely to induce widespread change on its own. That tax level would only add between 10 and 12 cents per litre to the price of gas, he says. “To get a wholesale shift to more efficient vehicles and to get industry to shift, … it’s going to have to rise to $100 or $200 a tonne.” In other words, the cost to fill up has to jump substantially if people are going to trade in gas guzzlers.
How hard hit families will be by the tax depends on their consumption habits, says Jennifer Winter, an economist with the University of Calgary who crunched the numbers on how carbon taxes might affect Canadian households. Albertans are relatively high energy users, according to the 2013 data Winter used, and that means they could pay the most.
“If there’s no behavioural change on the part of those households, then yes, Alberta’s citizens would likely feel the highest impact,” she says. “On the other hand, because they feel the highest impact, they’re most likely to have a behavioural (change).”
Although he wants to see the carbon tax increase more over time, Beugin says even lower carbon tax levels can start to impact people’s choices.
“We respond to prices all the time, every day,” he says. “When grapes are more expensive, we buy something else and it’s exactly the same thing with carbon pricing.”
A slow ramp-up is actually good, given how contentious the discussion is, says Sara Hughes, an assistant professor in political science at the University of Toronto.
“There’s still a lot that needs to be sorted out,” she says, like cost and what to do with the revenue.
“A lot of the debate gets hung up on where the money’s going to go, what kind of projects are going to get funded,” Hughes says. “That can be almost the most important part because there can be a lot of distrust around how money’s going to be spent that erodes confidence.”
British Columbia has taxed gasoline, fuel and natural gas for a decade. The carbon tax started at $10 per tonne in 2008, rose to $30 per tonne in 2012 and froze there until this year. The now-$35 per tonne tax will increase by $5 per tonne each year until it hits $50 per tonne in 2021. Initially, the tax was made revenue neutral by coinciding tax cuts, but the government plans to use revenue from the new increases to support moves toward energy efficiency.
It hasn’t hurt B.C.’s economy, says Stewart Elgie, chair of the Smart Prosperity Institute and professor of law and economics at the University of Ottawa. In the decade B.C. has had its carbon tax, he says it’s “outperformed” the rest of the country on emission reductions while the province’s economy has grown twice as fast.
“Carbon pricing is the anchor policy that we need,” Elgie says.
It should be combined with energy efficiency standards, investments in clean technology and green infrastructure, such as transit.
It’s smart to start the tax low, he says, even though $50 per tonne in 2022 won’t be enough to meet Canada’s Paris commitment to reduce emissions in 2030 to at least 30 per cent less than what they were in 2005.
Gradual increases can work, Elgie says, because “what you’re trying to do is change investment decisions by firms and households that are really looking to a five to 10 to 20-year horizon.”
It’s unavoidable: the world is moving toward a low-carbon economy, he says. In one or two decades, more buildings and cars will run on lower-carbon technology and more jobs will be tied to the greener economy. Canada’s choice, Elgie says, is to be on the leading or trailing edge of the change.
The longer the country waits, Beugin says, the worse the impact on the economy will be.
“We’re seeing more and more signs of a changing climate and more and more signs that we’re locking ourselves in to potentially really significant and really costly climate impacts across the economy,” he says.
“Better to get going now and pay less now than pay more later.”