Canada Introduces A Carbon Tax

Canadian Prime Minister Justin Trudeau is fulfilling a campaign pledge he made in 2015 with the introduction of a federal carbon tax regime starting in 2019, under the Greenhouse Gas Pollution Pricing Act, which Trudeau claims will be revenue-neutral. Trudeau’s argument is pricing carbon pollution will give Canada a “significant advantage” in building a cleaner economy, compel businesses to develop innovative ways to reduce emissions, and create hundreds of thousands of clean technology jobs.


Background: What are the Kyoto Protocol and the Paris Climate Change Agreement?


The Kyoto Protocol is an international treaty signed in 1997 and brought into force in 2005 by signatories who intended to reduce the emission of greenhouses gases they believe contribute to man-made global warming, including carbon dioxide, methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons, and sulfur hexafluoride, in 41 countries plus the European Union to 5.2 percent of 1990 levels. The premise of the Protocol was the fear that an increase in these six greenhouse gases in the atmosphere would cause an increase of global average temperature, or global warming, and result in rising sea levels, melting glaciers and permafrost, and increase floods and droughts.


The United Nations Framework Convention on Climate Change adopted the Protocol as its first addition to its international treaty that commits signatories to develop national programs to reduce their emissions of greenhouse gases. However, signatories were held to varying targets depending on their economic circumstances, and therefore the greatest polluters, developing countries, were not required to restrict their emissions. China and the United States are the world’s largest and second largest emitters, respectively, of greenhouse gases. China is not bound by the Protocol because it is a developing country, and the United States did not ratify the agreement.


Countries that failed to meet their emissions targets would be required to make up the difference between their targeted and actual emissions, plus a penalty amount of 30 percent, in the subsequent commitment period, beginning in 2012. They would also be prevented from engaging in emissions trading until they were judged to be in compliance with the Protocol.


The Kyoto Protocol was effectively replaced in 2015 by delegates of COP21 in Paris, France who signed a global, non-binding agreement, the Paris Climate Agreement, to limit the world’s average temperature to no more than 2 degrees Celsius above preindustrial levels. A review was mandated for every five years, including developing a fund to contain $100 billion by 2020, replenished annually, to assist developing countries in their transition to non-greenhouse-gas-producing technologies.


Canada’s current political climate


Publicly, Trudeau has attempted to walk a fine line between support for the growth of the oil sands industry and development of pipeline infrastructure while insisting Canada needs federal leadership to fight climate change, as if the two are mutually exclusive.


Trudeau faces a federal election in the fall of 2019, the same year the new carbon tax will take effect. Canada’s economy continues to suffer from the recession that began in 2015 when oil prices collapsed, resulting in investment capital leaving the country, heavily influenced by the compounded negative impact of increased taxes and regulation. Particularly compared to the United States, which has introduced tax cuts and deregulation, Canada has become a less attractive and competitive environment to invest in. Canada’s Fraser Institute estimates Canadian foreign direct investment is down 56 percent from a strong economy in 2013 to the recession continuing into 2017, from $71.5 billion to $31.5 billion.


What is the response from the provinces?


The new law will only apply to provinces and territories that have not already implemented a plan for their jurisdictions. Several provinces have already introduced their own carbon taxes, including British Columbia, Alberta, and Quebec. Yet, Alberta faces a provincial election in the spring of 2019 where the official opposition United Conservatives are expected to beat the New Democrat incumbents, and they oppose the federal carbon tax and would reverse the provincial one implemented by the NDP. Ontario and Saskatchewan are challenging the federal government’s imposition of the tax in the Court of Appeal. Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Northwest Territories, and Newfoundland and Labrador are also against the federal carbon tax and are developing their own programs.


The energy industry is the foundation of Canada’s economic and social prosperity, and the carbon tax will contribute to Canada’s decreasing economic competitiveness. For example, the introduction of green energy policies over a decade ago resulted in ongoing skyrocketing electricity prices and declining manufacturing output in Ontario when coal was phased out to force industry and consumers to turn to renewable energy for electricity production.


What will the carbon tax cost?


If provinces and territories fail to either put a direct tax on carbon emissions of at least $10 per ton or adopt a cap-and-trade system, the federal government will implement a basic carbon tax of $10 per ton, rising by $10 per ton per year until it reaches $50 per ton by 2022.


  • A $20 per ton carbon tax equals a 16.6 cent per gallon surcharge on gasoline; currently the average price of gasoline in Canada is $1.43 per liter.

  • The price of coal would more than double, with a carbon tax surcharge of about $100 per ton in 2022.

  • Natural gas prices will rise to a 75 percent increase by 2022.


Tax revenue will be distributed back to the provinces from which they were generated. The provinces will then rebate 90 percent back to individual taxpayers, which are anticipated to exceed the increased energy costs for about 70 percent of Canadian households. The remaining 10 percent will provide support to particularly affected sectors like schools, hospitals, small businesses, colleges, and indigenous communities. Diesel-fired electricity generation in remote communities and aviation fuel in the territories will receive full exemption from the carbon tax.


Will a carbon tax achieve the government’s intended goal?


The theory behind a carbon tax is it creates an incentive for people and industry to choose lower emission options in order to save money, either as a tax or cap-and-trade system. Yet, green policies in Canada have significantly contributed to the sustained impact of the recession by preventing and enabling expansion of the national energy pipeline infrastructure; without access to tidewater, Canadian is beholden to continue to sell its petroleum products at a significant discount to the United States.


Only 11 percent of Canada’s carbon pollution comes from generating electricity. Canada already supplies 60 percent of its electricity through hydroelectric generation and 16 percent from nuclear, whereas only 20 to 25 percent is generated from fossil fuels. The industrial sector is responsible for the biggest chunk of Canadian carbon pollution at 40 percent, which will not be subjected to the carbon tax, but rather to an Output-Based Allocations system, which is similar to cap-and-trade.

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