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Everything you need to know about Canada's carbon tax battle

It will be a key issue in next year's federal election.

by Hilary Beaumont
Nov 8 2018, 8:01pm

The idea of a national carbon tax has divided Canada, and set Prime Minister Justin Trudeau up for easy attack going into the 2019 election.

Conservatives have labeled it a tax grab at the expense of lower-income Canadians, and gone on a public relations offensive against Trudeau. Some provinces have simply refused to go along with the plan, and have mounted court challenges, although they are unlikely to succeed.

Meanwhile, experts say Trudeau’s proposed carbon tax doesn’t go far enough for us to meet our Paris goals, especially not if we build the Trans Mountain expansion. And the most recent report from the UN’s Intergovernmental Panel on Climate Change has renewed urgency for the world, including Canada, to act quickly.

Here’s a breakdown of Canada’s carbon tax, the arguments for and against it, and alternative policy options.

What is a carbon tax?

Carbon dioxide is a greenhouse gas (GHG) that traps heat in the atmosphere, and along with other GHGs, contributes to climate change. If the world wants to stabilize global temperatures, every country needs to rapidly reduce and eventually stop emitting GHGs.

The latest IPCC report released Oct. 8 found now that we’ve hit 1 degree Celsius of warming above pre-industrial levels, the world is already seeing more extreme weather, rising sea levels and receding sea ice. Limiting global temperatures to 1.5 degrees Celsius would require “rapid and far-reaching” transitions. Global human-caused carbon emissions would need to fall by 45 percent from 2010 levels by 2030, reaching net zero by 2050.

“Limiting warming to 1.5ºC is possible within the laws of chemistry and physics but doing so would require unprecedented changes,” Jim Skea, co-chair of IPCC Working Group III, told reporters.

“Carbon pricing and the right economic signals are going to be part of the mix,” he added, according to Vox.

“There’s pretty clear evidence that it’s the most cost-effective way to reduce climate change.”

A carbon tax is one policy option of many. The idea is to put a tax on carbon dioxide to dissuade consumers and companies from making choices that create emissions. The price would start low and increase over time, giving everyone time to adjust.

Nic Rivers, Canada Research Chair in climate and energy policy at the University of Ottawa, has been studying the economics of carbon pricing for 15 years. He says the idea of a carbon tax in Canada is not new, and has been kicked around since the early 2000s.

“Emitting carbon has a social cost in the form of climate change, that social cost isn’t reflected in our prices now,” Rivers explained. “We throw away, or emit carbon without considering its cost. I think that’s created perverse outcomes. This carbon tax is designed to correct those perverse outcomes.”

“There’s pretty clear evidence that it’s the most cost-effective way to reduce climate change,” he added.

What is Canada’s carbon tax plan?

Climate change is already costing Canada money. In February 2016, the Parliamentary Budget Officer declared disaster assistance program payments unsustainable, saying costs had soared too high due to damage from increasingly extreme weather. It estimated that the next five years would see it pay out nearly $1 billion a year in disaster relief, although its annual budget is only $100 million. It predicted flooding would account for 75 percent of the cost.

Ahead of the 2015 election, Trudeau promised to enact a national carbon pricing model if elected. When the Liberals took power, they gave provinces two years to come up with their own plans to put a price on carbon. Most provinces have now done that. But there are four that have refused to: Ontario, New Brunswick, Manitoba and Saskatchewan. On Oct. 23, Trudeau announced there would be a price on carbon in those provinces next year.

The federal government plans to start the tax at $20 per tonne in 2019, and increase the amount to $50 a tonne in 2022. Economists estimate a carbon tax would need to be more in the range of $200 per tonne to get results, but Trudeau’s government hasn’t said what will happen after 2022.

The government’s Greenhouse Gas Pollution Pricing Act has two parts: a trading system for big emitters, called the Output-Based Pricing System, and a regulatory charge on fuel.

Isn’t this just a money grab by the greedy government?

Critics have attacked Trudeau’s plan by pointing out that the tax will increase the price of home heating and driving, which would hit lower income Canadians harder. The proposed $20 per tonne carbon tax would mean 4.5 cents more per litre of gas, and $1 more per gigajoule of natural gas for home heating. Ontario Premier Doug Ford has called it “the biggest rip-off I’ve ever seen.”

“[A carbon tax] is not a socially equitable approach, so you have to build in various rebates or compensation for income loss to low income groups,” says University of Alberta political science professor Laurie Adkin. “The right attacks this as a way to take more tax revenue from people and punishing them for needing to drive their cars and heat their homes, which is what’s happening in Alberta.”

The government has responded by announcing it will give revenues from the tax back to households in the province or territory they were collected from.

In provinces that didn’t come up with a plan, Trudeau says the government will give back the majority of the tax from the fuel charge in the form of Climate Action Incentive payments directly to residents. Those payments will be different in each province. In Ontario, for a family of four, the baseline would be $307 in 2019, increasing to $718 in 2022, the government says.

“[Research] suggests that the lowest income households actually stand to benefit from this policy.”

A study released in September by pro-carbon tax group Clean Prosperity, led by Stephen Harper’s ex-policy director Mark Cameron, found that across income levels, households will actually get back more money than they pay in carbon taxes.

It might seem strange to see a conservative backing a tax, but if pressed to choose a carbon reduction policy, companies with high GHG emissions actually prefer carbon taxes to cap and trade because the cost is more predictable.

In each province, individuals would receive an equal per capita payment. Clean Prosperity’s estimates show that in Ontario, for example, in 2019, the net benefit for a household with an income under $20,000 would be $195. That would increase to $498 in 2022. In Saskatchewan, a household with an income under $20,000 would get a net benefit of $831 in 2019, increasing to $1,863 in 2022.

“[Research] suggests that the lowest income households actually stand to benefit from this policy, that they will receive more in these carbon tax rebates than their expenditures will increase, so it does go head-on at this criticism that sometimes gets levied at carbon taxes, which is that they can have disproportionate impacts on poorer people,” Rivers explains.

After Trudeau announced the tax rebates, an Angus Reid poll of 1,500 Canadians found a slight uptick in support for the plan. In July, before the announcement, 45 percent of people supported it. After the announcement on October 23, 54 percent supported it.

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What about people who work for big emitters? Will they lose their jobs?

“Another criticism that gets levied at carbon taxes is that they can make business less competitive,” Rivers explains.

The worry is, if only Canada implements a carbon tax, and the U.S. and other jurisdictions don’t, then all of a sudden big emitters, like cement factories for example, have a new cost associated with operating in Canada. So they may choose to decrease production at factories in Canada, and increase production in jurisdictions without a carbon tax, or shut down the factories in Canada altogether and move to another jurisdiction with no carbon tax.

A cement factory in Ontario, for example, could move to Michigan, where there’s no regulation, “and then sell that same old cement back to Ontario,” says Rivers. “Now Ontario’s lost the jobs and there’s been no change in emissions. ...Again I think the federal government has done a really credible job in terms of trying to offset this threat.”

The government’s new Output-Based Pricing System for big carbon polluters sets a carbon price for the portion of an industrial facility’s emissions that are above a certain limit, rather than charging them for fuels. The system applies to industrial facilities that emit 50 kilotons or more of CO2 equivalents per year, and sets performance standards based on the historical average emissions for the sector, and trade exposure.

If facilities emit less than the annual limit, the government will give them surplus credits for the portion that is below their limit. The facility can then trade surplus credits, which incentivises them to reduce emissions.

“If I’m a cement factory for example, I have to hit a certain performance standard, so maybe I have to produce cement and the performance standard says I can only produce two tonnes of CO2 for every tonne of cement I produce,” Rivers explains. “If I can produce cement that has lower greenhouse gas intensity than that, that’s less than two tonnes of CO2 per tonne of cement, then I get credits, I get a subsidy. And if I produce cement that’s more than two tonnes of CO2, then I have to pay a penalty.”

“Initially plants on average won’t pay a penalty, but they should still face an incentive to reduce their carbon emissions but it won’t have any impact on their overall competitiveness.”

This system is set up to avoid job cuts for those big emitters, he says.

According to a report by Ecofiscal, while there are competitiveness concerns, there is also a “carbon advantage.” As other jurisdictions implement models to reduce carbon emissions, the market for low-carbon innovators grows.

Competitiveness does pose a threat in Canada, the report states, but only for a small number of industries with a small share of total economic activity.

“Most provincial economies are not both emissions intensive and trade exposed, and so are not highly vulnerable to competitiveness pressures,” the report says. “As more Canadian provinces and U.S. states move forward with carbon pricing policies, these pressures are further diminished, suggesting that even the competitiveness pressures identified in this paper may overstate the actual impact on business.

“Also, as emitters respond to the carbon price over time, by reducing emissions and improving energy efficiency, their carbon costs will fall. Overall, the business community should not perceive carbon pricing as a significant economic threat.”

Won’t building the Trans Mountain pipeline expansion cancel out gains from the carbon tax?

“That’s a good question,” Rivers says. “It’s certainly the case that building the Trans Mountain pipeline [expansion] will cause Canadian emissions to increase.”

The whole point of expanding the pipeline is to access markets where Alberta and Canada can get a better price for our oil. Better prices mean increased investment in oil and gas extraction in Alberta, which will increase emissions.

According to the National Energy Board, construction from the project would generate a little over one million tons of CO2 equivalent GHGs, or one megaton of CO2. That’s about the same as 287,500 cars driving for a year, according to government estimates. Most of that is from land clearing. After that, it would generate about 407,000 tonnes of CO2 each year associated with electricity. The NEB requires that these emissions be offset, by planting trees, buying credits or other means.

But that figure doesn’t include upstream and downstream emissions, or indirect emissions like changes in land-use.

According to a report by Environment and Climate Change Canada, the government projects the upstream emissions associated with the expanded pipeline would be 21 to 26 megatons of CO2 equivalent per year. About 13 to 15 megatons of that would be from added capacity due to the expansion.

The ECCC also noted in its report that oil by rail produces more emissions. So, without a pipeline, moving crude by rail “would result in higher direct transportation emissions in Canada.”

A 2014 study by Simon Fraser University climate economist Mark Jaccard estimated the vast majority of emissions from the pipeline, 89 percent, would be downstream. His estimate was 71.1 megatons of CO2 each year, from refining, distributing and burning bitumen once it’s exported from Canada.

So the pipeline expansion would cancel out the government’s estimated gains from the carbon tax — by a lot.

Assuming the construction emissions are offset as required, and looking only at the upper estimates of upstream emissions from the expansion plus the SFU estimate of downstream emissions, the pipeline expansion would produce 86.1 megatonnes of carbon a year. That doesn’t include indirect emissions.

Now, consider how much the federal government expects to reduce emissions using its carbon tax. A report the government released on April 30 estimates the carbon tax would reduce emissions by 80 to 90 megatonnes by 2022. That’s over a three-year period. And they haven’t said what happens after that.

So the pipeline expansion would cancel out the government’s estimated gains from the carbon tax — by a lot.

And those estimated gains could be overblown, according to Jaccard.

Jaccard said the government is imagining “a hypothetical world in which there is no carbon pricing anywhere in Canada. Which of course is not true.” The government’s estimate assumes Alberta, B.C., Ontario and Quebec don’t already have a price on carbon, which they do — although premier Doug Ford has cancelled Ontario’s cap-and-trade scheme.

Jaccard told VICE News it’s important to note that we can’t assume a fixed rate of emissions from the oil sands, and that oil sands production emissions could be driven down toward zero with the right policies. “Of course, neither the Canadian nor the Albertan governments have promised to regulate these emissions rapidly down in the Paris time frame,” he added.

Does Canada’s carbon tax go far enough to meet our Paris goals?

No, it doesn’t.

In December 2015, Canada and 194 other countries agreed to limit average global temperature rise to well below 2 degrees Celsius, and try to limit the increase to 1.5 degrees Celsius. Canada committed to reducing emissions to 30 percent below 2005 levels by 2030, which itself is not an ambitious goal.

Every expert VICE News spoke to said the carbon tax plan alone would not meet Canada’s Paris targets.

To achieve the Paris commitment, a Canada-wide price on carbon would have to start at $30 per tonne and rise $15 annually to $200 in 2030, according to a 2016 report by Simon Fraser University.

B.C.’s price on carbon, in place since 2008, probably gives a clearer picture of what to expect. It started at $10 per ton and increased to $30 per ton in 2012, where it halted. Like the federal tax, it is revenue neutral, meaning the province gives the money back to households through rebates. A 2015 analysis found the policy had reduced emissions by five to 15 percent.

In its April 30 report, the government says the carbon tax is one of a group of policies, and “was never intended to be the only policy” to reduce GHGs. The plan includes phasing out coal-fired electricity by 2030, reducing reliance on diesel in remote communities, improving vehicle efficiency, developing a clean fuel standard, cutting methane emissions from the oil and gas sectors, and more. However the carbon tax is Canada’s main policy.

Economists like Rivers are in favour of a carbon tax because it’s the most cost-effective policy, but even he concedes that Canada’s carbon tax likely won’t make a dent.

“A lot depends on what they do after 2022 … but they haven’t told us,” said Rivers. “Does it keep on going up? Does it stay flat? So it’s a bit hard to tell exactly what the long term consequences of this policy are without knowing that, but certainly at $50 a tonne, it’s unlikely to be a really substantial reduction.”

While Adkin agrees the carbon tax would work as one policy in a larger toolkit, she says for it to be really effective, it needs to be in the range of $200 per tonne, which is “a politically impossible thing to do.”

“So if your whole policy rests on a carbon tax, you’re basically saying you have no serious intention of reducing greenhouse gas emissions by the amount required. This is what the Liberals are doing unfortunately, because they are not regulating the large emitters, they are talking about a pretty small carbon tax with a rebate system, and it will have some impact, but it’s not going to allow us to achieve even their Paris targets that were adopted in December 2015.”

“We should be on a war footing right now,” Adkin says. “We should be throwing everything we’ve got at this.”

What are the other policy options?

The 2016 Simon Fraser University report suggests the government implement flexible regulations in transportation, electricity generation and heavy emitting industries, in conjunction with a modest carbon price of $40 by 2030. This approach would be an easier sell politically, the paper states, and research has shown the transition in California has been driven by flexible regulations.

Canada could require large emitters to internalize the cost of carbon pollution, Adkin suggests. We heavily subsidize big carbon polluters, including in the oil and gas sector. The government could slash those subsidies and invest the money in renewable energy.

Cap and trade is another option. Quebec is doing it. Ontario was doing it, until Ford cancelled the plan and became one of the loudest national voices against carbon pricing.

“We should be on a war footing right now.”

The basic idea is that the government sets a cap based on its emission reduction goals. Gradually the cap is lowered, forcing companies to either lower their emissions on site, or buy offsets so that the reductions are achieved somewhere else.

“There are different designs that make the system more or less porous,” Adkin explains. “The best way to go is a hard cap where there aren’t many options to actually escape reducing emissions because there’s always a danger of simply displacing them to someplace else.”

Cap-and-trade is more effective in reducing emissions than a carbon tax, she says, because the cap provides certainty. But big emitters don’t like it because the price of offsets or emission credits depends on demand, so it’s not predictable.

What is the biggest threat to Canada’s carbon tax plan?

Although some provinces have threatened court challenges over the carbon tax, the federal government has jurisdiction. So, for the time being, threat neutralized. The question is whether Trudeau can survive the drama of both pipeline expansion delays and the divisive carbon tax through the 2019 election.

Trudeau has pushed forward on the Trans Mountain pipeline expansion to please Alberta, and championed the carbon tax hoping to demonstrate national action on climate change.

“There’s a real division in this country, politically, over whether this is an appropriate policy or not, and so the next federal election I think will be important in determining whether this is a long-lived policy or short experiment,” Rivers says of the carbon tax.

“The government is walking a tight rope on this issue,” Rivers continued. “Obviously pipelines don’t please everybody, and carbon taxes don’t please everybody. And it’s tough to get it right for a federation with pretty different provinces, with pretty different economic bases and different politics. So I think politically they did what they had to do. I don’t know what other approach they could have taken that would have been politically acceptable.”

UBC political science professor Kathryn Harrison agrees.

“I don’t think the federal government has any option but to move forward at this time [on the carbon tax],” she told VICE News in an email. “I don’t think Justin Trudeau can afford another major policy reversal in an election year.”

A reversal on the carbon tax would be a step back from Canada’s Paris climate commitments, and would undermine plans most provinces and territories have already made.

“The Liberals banked on a two-part deal — carbon pricing in exchange for a new pipeline.” Now that they’ve bought the pipeline, Harrison says, “if they don’t move forward with the carbon tax they’ll lose any remaining credibility on the environmental file.”

Cover image of steel mills in the Hamilton waterfront harbour. Nathan Denette/The Canadian Press