The facts about carbon pricing in Canada

Hamilton industrial site
Climate and Energy

In 2019, every jurisdiction in Canada will have a price on carbon. It is the culmination of four years of work to develop a more coordinated approach to climate policy across Canada. Provinces had the opportunity to design their own carbon pricing systems. The federally designed carbon pricing policy (aka, the “backstop”) will come into effect on April 1 in provinces that elected not to design their own systems. Let’s look at a few key facts about the backstop.

Affordability is a priority

The federal carbon pricing backstop will apply in Ontario, Manitoba, Saskatchewan, New Brunswick, Yukon, and Nunavut. As with every other province, the carbon price will start at $20/tonne, and rise by $10 per year until it hits $50/tonne by 2022. The federal government will return 100% of carbon revenues to the province or territory it was collected from.

Yukon and Nunavut requested the federal backstop, so the federal government will return the revenues to the territorial governments to use how they see fit.

The four provincial governments that declined to design their own systems will not have control over the revenues. In these provinces, 90% of carbon-pricing revenues will go directly to households. The federal government will return the other 10% to businesses, schools, hospitals, and other large facilities.

The federal backstop prioritizes affordability. Roughly 80% of households will receive more in rebates than they pay in direct carbon prices, and 70% will receive more in rebates than they pay in total carbon prices (direct and indirect). Since the top 20% of households generally spend more on carbon-based fuels, they will generally pay more than they receive in rebates until they change their behaviour and reduce their emissions. These rebates will help households with the cost of transitioning to a cleaner economy.

Average carbon costs and rebates under the federal backstop
Average carbon costs and rebates under the federal backstop

Rebating the revenues doesn’t undermine the carbon price

You might be asking, what’s the point of pricing carbon if you’re just giving the revenues back? Rebates help with affordability, but they don’t change the incentive to pollute less. Households get the rebate no matter what. The size of the rebate is fixed based on where someone lives and the size of their family.

However, households can take action to avoid paying the carbon price, lowering their carbon cost and collecting the rebate.

Here’s an example. If you’re an average Manitoban household, you emit 11.6 tonnes of greenhouse gases a year. At $20/tonne, you would pay the provincial average of $232 in carbon prices. You also receive the average federal rebate of $336 when you file your taxes. Your house has a gas-fired furnace and your house is a little drafty, so you install some high-end weather-stripping along your doors. This allows you cut your natural gas consumption by 10%. At $20/tonne, you will save about $9 on carbon costs, and you still get the $336 rebate.

As the carbon price rises, investments like this will make more and more sense. Small changes allow us to reduce our carbon footprints and save money at the same time (see here for another example that uses public transit). As carbon prices rise gradually over time, so will rebates.  The combination of the rebate and the price create incentives for shrinking your emissions, without affecting your purchasing power.

Big polluters are still paying the carbon price but use a different system

The federal system calls on everyone to pull their weight—big polluters included. Households pay a carbon price, so does industry. Households get support, so does industry. The nature of this support is different, because the concerns of industry are different from the concerns of households. The priority for businesses is to ensure that they have an incentive to reduce emissions while protecting competitiveness and jobs.

This separate output-based pricing system is carefully designed to the needs of large emitters. And there is a broad consensus that it is a sound approach. Even provinces that prefer regulatory approaches to carbon pricing are using a similar type of system to target large emitters.

But will it reduce emissions?

Putting a price on pollution has a track record of success. In the 1980s acid rain was killing forests and water sources and nibbling away at the steel in bridges and buildings. The U.S. put a price on sulfur pollution and slashed power plant emissions by 36% in just 14 years.

Here in Canada, carbon pricing has delivered results for over a decade. The evidence shows that British Columbia’s carbon tax has measurably reduced gasoline, diesel, and natural gas consumption, and shifted consumer demand to cleaner cars.

More evidence arrives with each passing year. Brand new data suggests that Alberta’s carbon price has coincided with a cleaner electricity grid. Between 2017 and 2018, coal-fired electricity production fell by 21%, while gas-fired electricity production jumped by 34%.

Alberta’s story parallels the United Kingdom’s, which has seen a sharp drop-off in coal power since implementing its carbon tax. Good analysis has identified the carbon price as a key driver of change in the U.K. Carbon pricing is also working in many countries in Europe and Asia, including China. Canada is far from uncharted waters here.

Simply put, putting a price on pollution—any kind of pollution—works. We have proof that it works. Even at low prices like the ones in B.C., carbon pricing is bending the curve without any significant impact on jobs or economic growth.

Will carbon pricing work? Yes. Is Canada doing enough? No. We have made progress, but current policies are not enough to meet Canada’s targets. We will need more ambitious policy over time, including higher carbon prices.

Moving together

Carbon pricing is a practical and fair approach to meeting Canada’s climate targets. It ensures that polluters pay for the costs that their pollution imposes on others. Other policies don’t have that advantage; they require governments to pick and choose where and how to reduce emissions. As a result, those policies cost more.

Carbon pricing’s flexibility makes it the lowest-cost policy to reduce emissions. It has not made a major economic impact in any jurisdiction that has tried it, one way or the other. Claims that it will not work or will damage Canada’s economy simply don’t hold up to analysis and evidence.

The effects of climate change are unfolding before our eyes, in our own backyards. Canadians are ready for a serious plan and they want to do their part. The federal backstop helps ensure that everyone does.

10 Myths about Carbon Pricing in Canada

Read our latest report. Canadians want a serious plan to take action on climate change. And they deserve an honest discussion about our options. The facts are out there. Let’s use them.

 

2 comments

  1. Avatar
    Nathaneal MacDonald

    What is stopping these companies from just increasing the cost of their services to offset the fee or even profit from this by increasing the cost not just to offset the tax but to profit?

    • Brendan Frank
      Brendan Frank

      Hi Nathaneal,
      There are very good and important questions. Companies will indeed pass on as many of these costs as they can. But in a competitive marketplace, companies also look for ways bring costs down so that their products are cheaper than their competitors’. In the short- and medium-run, they will look for ways to decarbonize their operations so that they don’t have to pass the costs on. As we state in the blog, the carbon rebates will cover both the direct costs (i.e. gasoline and home heating) and the indirect costs that companies pass on through higher prices for 70% of households.

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