Give it to me straight: does a carbon tax hit lower-income families harder?

Does carbon pricing hit lower-income families harder?
Climate and Energy

by Mel Cappe

It’s a good question: if we tax carbon, will lower-income Canadians end up paying proportionately more than their wealthier neighbours?

Let’s start by looking at the objective of a carbon tax. What we’re trying to do is make sure people consider the real cost of using fossil fuels, including the environmental cost of the greenhouse gas emissions those fuels create. When consumers pay the full cost, they’ll make wise choices.

However, we don’t want low-income Canadians to be unduly disadvantaged by a carbon tax.

The fact is that poorer families spend a larger share of their income to heat their homes than wealthier families do. If we go ahead and tax fossil fuels, people with lower incomes will pay even more to stay warm.

So what do we do? We need to add protection for lower-income Canadians — but it has to be the right kind of protection. The answer is not a carbon subsidy, where people who earn less pay less for the fuel they use. We still want to encourage everyone, regardless of income, to find the least carbon-intensive ways of heating their homes, traveling to work and so on.

The better solution is to give some of the carbon tax revenue back to low-income families in a grant that’s tied to income, rather than the amount of fossil fuel they use. That’s exactly what B.C. has done with its low income climate action tax credit.

It’s also true that lower-income Canadians have fewer discretionary choices. Heating with natural gas produces less carbon emissions than heating with oil, for example, but if you’re renting an apartment, you probably don’t have any control over the type of heat you use.

The point here is that we’re not trying to solve climate change for next year. This is a big problem, and we’re aiming for long-term solutions. So let’s look at what’s going to happen to the housing stock over the long run if we tax carbon.

We’re going to see more people insulating their houses. We’re going to see more people switching from oil to natural gas. We’re going to see more people installing solar panels. Over the long run, the housing stock will adapt, along with the kinds of cars we drive, the buses we use and so on. And that gives everybody better options.

What we’re trying to do is send the right price signals, so consumers consider climate consequences of their decisions. With the right protections in place for lower-income families, pricing carbon does just that.

To learn more about carbon pricing and how this is a cost-effective way to reduce GHG emissions, check out the interactive summary of our report “The Way Forward: A Practical Approach to Reducing Canada’s Greenhouse Gas Emissions“.

About the Author

Mel Cappe is a professor at the University of Toronto, in the School of Public Policy and Governance, as well as a Commissioner of Canada’s Ecofiscal Commission.

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