When the federal government introduced a national carbon pricing plan in 2019, they said it was the cheapest and most efficient way to cut carbon pollution and it was a major part of meeting our national emissions reduction target.

Pierre Polievre says that, if elected, the Conservative Party will scrap the carbon tax and implement “real solutions” to environmental challenges. He’s been holding rallies and running ad campaigns across the country, claiming the program increases the cost of living, particularly affecting essentials like heating and transportation, which he believes disproportionately impacts low and middle-income Canadians.

So what should a reasonable person believe? No one likes paying taxes, but is Canada’s carbon pricing policy necessary to help prevent the worst impacts of climate change or is it an ineffective burden on Canadians?

A “just” concept

Carbon pricing is a simple concept rooted in the idea of fairness in the use of our common resources.

Economists use the term “negative externality” to describe situations where one party, such as a business, makes another party worse off, yet does not bear the costs of doing so.

Carbon emissions are a “negative externality” because their true social cost (e.g., health issues, environmental damage) is not reflected in market prices.

Carbon pricing aims to address negative externalities through the “polluter pays” principle: those who produce pollution should pay the costs of managing it to prevent damage to human health or the environment. Charging for carbon emissions holds individuals and businesses accountable for their environmental impact.

By imposing a financial cost on carbon emissions, carbon pricing creates a direct economic incentive for individuals and businesses to reduce their carbon footprint. This encourages investment in cleaner technologies and practices, leading to overall environmental benefits.

The money earned from carbon pricing can be used for green projects, helping communities hit by climate change, or given back to people through rebates or tax cuts. This helps to make the policy fairer.

Through carbon pricing, current generations take responsibility for their environmental impact, reducing the burden on future generations. This aligns with the principle of intergenerational justice, ensuring that future generations inherit a healthier planet.

Economically Efficient

In March 2024, over 300 leading Canadian economists signed an open letter supporting Canada’s carbon pricing policy. Economists tend to be big supporters of carbon pricing because of the evidence that it works to cut emissions in the least costly manner.

A government has three basic approaches it can take to encourage behaviours that will cut emissions:

1. Offer subsidies to encourage people to do certain things, like buying EVs for instance
2. Pass regulations to prevent things from being done (like capping the emissions that are allowed to be produced from electricity generation)
3. Add taxes to some activities to incentivize people to change their behaviour – the idea being that when something costs more (in this case fossil fuels), people use less of it.

Carbon pricing is the least costly way to cut emissions because it gives each person and business the flexibility to choose the best way to reduce their carbon footprint. Other methods, such as direct regulations, tend to be more intrusive, inflexible and cost more to implement.

While people and businesses enjoy receiving government subsidies, they tend to be costly for taxpayers. For example, a 2023 study by the Fraser Institute concluded that the Federal $5,000 subsidy for new electric vehicle purchases, as well as various provincial programs, resulted in a cost per tonne of GHG emissions saved ranging from $355 to $857. Those costs are likely even higher considering some consumers would have bought EVs even if subsidies had not been offered.

At the end of the day, taxpayers pay for subsidies through their taxes, so the cost of EV subsidies compared to the then-current carbon tax charge of $65 per tonne seems like a more expensive way to cut emissions.

Economists agree that governments can’t rely on any single policy to cut emissions, but they should make full use of the least expensive, most efficient policy measures as early and as broadly as possible to achieve their goals.

Two Approaches to Price Carbon

In practice, there are two main ways that a government can put a “price on carbon”:

A carbon tax directly sets a price on carbon by adding a surcharge to fossil fuels based on how much greenhouse gas emissions they produce.

Carbon taxes offer the benefits of:

• Price certainty: A carbon tax provides a clear, predictable price on carbon, which can help businesses and consumers make long-term planning decisions regarding investments in low-carbon technologies.
  
• Administrative simplicity: Implementing a carbon tax is straightforward, as it involves setting a tax rate and collecting it through existing tax systems.
  
• Revenue generation: Carbon taxes generate government revenue, which can be used to fund climate initiatives, reduce other taxes, or support vulnerable populations impacted by the tax.

A cap-and-trade system, also known as an emissions trading system (ETS), sets a maximum limit (cap) on the total amount of greenhouse gases that can be emitted by covered entities. Companies receive or buy emissions allowances, which represent the right to emit a specific amount. These allowances can be traded among companies, providing flexibility in how emissions reductions are achieved.

Cap and trade systems offer the advantages of:

• Emissions certainty: The cap ensures that total emissions do not exceed a predetermined level, providing environmental certainty.
  
• Market flexibility: Companies can trade allowances, allowing those that can reduce emissions at lower costs to sell their excess allowances to companies facing higher reduction costs.
  
• Incentives for innovation: The potential to profit from selling unused allowances incentivizes companies to innovate and invest in cleaner technologies.

Carbon Pricing Around the World

The first countries to launch carbon pricing policies were Finland and Poland in 1990. Now about 50 countries, and 39 subnational jurisdictions including states, provinces and cities have a carbon price system in place.

The World Bank carbon pricing dashboard says those systems cover about 24 percent of global greenhouse gas emissions. They list another 29 countries and 16 states, provinces or cities that are in the process of launching new carbon pricing systems.

Of the carbon price systems that have been launched in the world, about half are carbon taxes and the other half are cap and trade systems, although in terms of emissions covered, the cap and trade systems cover about twice the amount of emissions that carbon taxes do.

What Price is Right?

Carbon pricing systems around the world vary in terms of their designs and what sectors of the economy they cover. One of the most important variables, however, is the cost that systems impose on emissions.

Carbon pricing works by increasing the cost of using carbon-intensive products and technologies. The higher the price of using carbon-intensive fuels and products, the greater the incentive to switch and the more effective the policy.

But governments can’t just impose a high cost on an economy all in one step. Most aim to phase in those additional costs, giving businesses and consumers time to adopt lower carbon alternatives to current practices.

In 2017, as part of COP22, the High-Level Commission on Carbon Prices produced a report concluding that one tonne of CO2 equivalent emissions1¹ should be priced in the $40-$80 US range in 2020, rising to $50-$100 US by 2030, to be consistent with the core objective of the Paris Agreement of keeping temperature rise below 2 degrees.

Today the actual prices for emissions worldwide range from a low of $0.46 US (Mexico) to a high of $167 US (Uruguay) with the majority of prices not yet reaching price levels that economists would consider effective. The World Bank estimates that less than 1% of global emissions are subject to prices that exceed the recommended levels.

Some may take this underpricing of emissions as a disappointment, but it also indicates how much potential remains globally for effective carbon pricing to cut greenhouse gases.

Canada’s Carbon Pricing Patchwork

The carbon pricing system in Canada is confusing because it consists of a patchwork of both provincial and federal programs. To understand where we’ve ended up, it’s helpful to review a bit of history.

Ironically, given the provincial government’s opposition today, Alberta was the first jurisdiction in North America to launch a carbon tax when in 2007 it started taxing certain large emitting companies $15 per tonne of CO2 emitted.

In 2015, the province’s newly elected New Democratic Party government under Premier Rachel Notley introduced a broader carbon tax plan; it increased the price of emissions to $20 per tonne in 2017 and $30 per tonne in 2018. In 2019, however, the United Conservative Party government under Jason Kenney cancelled Alberta’s broad-based carbon tax but retained the provincial system for industrial emitters.

Quebec was also an early mover on carbon pricing. In 2007 it launched a modest carbon tax but more significantly in 2013, Quebec joined with California in a broader cap and trade program that allows companies to buy and sell emission permits issued by the province and the state.

Ontario joined the Quebec-California cap-and-trade market in 2018. However, Liberal Premier Kathleen Wynne was replaced by Progressive Conservative Premier Doug Ford later that year. Ford cancelled Ontario’s cap-and-trade program during his first week in office but created a carbon price policy to regulate industrial emissions.

British Columbia was the first Canadian province to launch a broad-based carbon tax in 2008, starting at $10 per tonne and increasing incrementally thereafter. BC continues to operate its provincial plan today.

Against the backdrop of this range of diverse, on-again, off-again, provincial initiatives, Justin Trudeau campaigned in 2015 on the promise of implementing a full national strategy to meet Canada’s 2030 emission reduction targets.

In 2018, the Federal Government passed the Greenhouse Gas Pollution Pricing Act (GGPPA) as a federal backstop, meaning it would apply to provinces that did not have a carbon pricing system or to those whose carbon pricing systems did not meet the minimum federal requirements. Revenue from the federal carbon tax was to be redistributed to the provinces.

How the Federal Carbon Price System Works

The GGPPA did three key things. It established a federal carbon pollution pricing benchmark as the national minimum price on carbon pollution and it created two carbon pricing systems – the Federal Fuel Charge, a form of a general carbon tax on fuel and the Output-Based Pricing System (OBPS), a cap-and-trade system that applies to industry.

The federal carbon pollution pricing benchmark was initially set at $20 per tonne of CO2 equivalent emissions, with increases planned annually until the price reaches $170 per tonne in 2030. On April 1, 2024, the price increased to $80 per tonne.

The Federal Fuel Charge applies that price benchmark to all purchases of 21 different fuels (including combustible waste like asphalt shingles or tires) that are burned to produce heat or electricity. Typically it’s the distributor of the fuel that pays the tax and the cost is passed down through the supply chain to consumers when they do things like gas up their car, pay the household gas bill or fill a propane tank.

The tax is applied to each fuel based on the amount of greenhouse gasses it emits. For instance, when combusted, gasoline emits about 1.8 kg of CO2e per litre. The current federal benchmark rate of $80 per tonne, works out to about $0.08 per kg – so a litre of gas attracts a fuel charge of about $0.143 per litre. That means a typical fill-up costs about $7.87 in fuel charges.

Similarly, one cubic meter of natural gas produces about 1.55 kg of CO2e when burned so each cubic meter currently carries a $0.12 carbon tax charge. If a moderately-sized home using natural gas for cooking and heating uses 4,500 cubic meters in a year, the owners will pay almost $560 in fuel charges this year.

The industrial component of the Federal plan, the Output-Based Pricing System (OBPS), applies to businesses with larger carbon footprints, such as oil producers, chemical manufacturers, automakers and coal or gas power plants. 

It’s called an output-based system because instead of paying the carbon price on the fuel for their operations, these businesses pay based on a portion of the total emissions they produce in providing products or services (ie: their output). This recognizes that large industrial emitters create emissions that can go beyond just their fossil fuel use.

The portion of emissions subject to carbon pricing is determined by industry taking into account international competitive factors. This is to protect Canadian industry and to avoid “carbon leakage”, where an industrial emitter chooses to move production to a country where emissions policies are less stringent.

The OBPS applies automatically to companies that produce more than 50,000 tonnes of CO2e emissions annually.  Companies with emissions between 10,000 tonnes and 50,000 tonnes can also choose to opt into the program. 

In 2021, there were 562 companies that reported emissions above 50,000 tonnes, and about 1,000 more who reported emissions between 10,000 and 50,000 tonnes.

How Proceeds Are Used

Given the touchy world of federal-provincial politics, federal officials are quick to point out that all direct proceeds from the federal pricing system are returned to the province or territory where they were collected.

Most prominently, the Federal Fuel Surcharge program returns about 90% of proceeds directly to households, delivered quarterly by cheque or direct bank deposit through the Canada Carbon Rebate payments (formerly known as Climate Action Incentive payments).

Federal officials say this system makes life affordable by returning money to families and that eight out of ten households get more money back than they spend on the fuel charge.

The amount of the rebate is primarily determined by household size – there is a base amount for an individual and the amount increases for each eligible child in the household.

The amount also varies by province. That’s because depending on the province a person lives in, they will have higher or lower emissions due to things beyond their control, like how the electricity is generated in the province.

For example – a family of 4 living in Alberta can expect to receive $1,800 in rebates in 2024. Since the Federal Carbon price is now $80 per tonne, that family is being reimbursed for the taxes it would have paid on 22.5 tonnes of emissions.

If that family has an actual carbon footprint of less than 22.5 tonnes of CO2e, then they get more rebates than they paid in taxes.

The Federal Government says the rebate is structured to be progressive, meaning it disproportionately benefits lower-income households. Lower-income households typically have a lower carbon footprint. Think of a family who lives in an apartment and uses public transport vs. a wealthier family who lives in a large detached home with two cars in the garage. Wealthier households typically lead lifestyles that lead to more emissions.

However because the rebate is fixed on household size, any household that reduces its emissions will increase the net benefits it receives from the program.

Of course, all of this only applies to the provinces under the Federal program. British Columbia and Quebec have their own general carbon pricing systems. These provinces do not return rebates to individuals and they say they use the proceeds to promote environmental sustainability and economic resilience in the face of climate change challenges​.

Federal Standards

The Federal system exists as a backstop for the provinces that have not implemented their own carbon pricing system or have a system that does not meet the minimum Federal requirements to ensure consistency and effectiveness in reducing greenhouse gas emissions across the country.

These standards include several key components:

1. A consistent minimum carbon price: The minimum carbon price starts at $80 per tonne of CO2 equivalent in 2024 and increases by $15 per year, reaching $170 per tonne by 2030. This predictable increase provides certainty for businesses and consumers and encourages investments in cleaner technologies.
   
2. Common scope and coverage: All provincial and territorial systems must cover a broad set of emissions sources, similar to the federal backstop. This ensures that all major sources of emissions are subject to carbon pricing, promoting comprehensive reductions across the economy.
   
3. Clear price signal: The systems must maintain a strong price signal to reduce emissions – that means emitters need to be able to identify how much they are paying – that is what creates the incentive to change behaviour and cut emissions. Measures that directly offset or hide the price, such as certain types of rebates or tax reductions, are not permitted.
   
4. Output-Based Pricing System (OBPS): Industrial carbon pricing plans must include mechanisms to prevent carbon leakage and avoid abusive loopholes that undermine emission reductions.
   
5. High-quality offset credits: If industrial emitters use carbon offset credits they must meet standards to ensure they represent genuine emission reductions.

The federal standards ensure that all carbon pricing systems in Canada are stringent and effective in reducing greenhouse gas emissions while providing flexibility for provinces and territories to tailor their systems to local needs​.

As things stand today, there is a mix of carbon pricing policies across the country.

BC, Quebec and the Northwest Territories operate independent provincial/territorial systems that meet federal standards. The Federal system applies in Manitoba, Yukon and Nunavut. The Federal Fuel charge also applies in Alberta, Saskatchewan, Ontario, New Brunswick, Nova Scotia, PEI and Newfoundland, but each of these provinces operates their own carbon price system for industry.

But does carbon pricing work to cut emissions?

So, if you’re still with me after this review of international and domestic tax policy, I have to say I admire your attention span. You’re a special person and I thank you! We get to answer the million-dollar question together – does carbon pricing actually cut emissions?

It’s a tough question to answer for two reasons.

The first is that it’s hard to specifically assess the effects of carbon pricing because governments rarely implement just one program to address climate issues. The good or bad effects of the program tend to get blended in with whatever other programs and policies the government has implemented.

The second reason is carbon pricing programs start with a very low price which increases over time. For instance, Canada has had a national carbon price for six years, but only recently has the price risen to a level economists believe is effective in cutting emissions.

Most other nations with carbon pricing still have prices that are lower than what is thought to be the effective rate. That means most assessments of carbon pricing are based on pricing that is very low and less likely to motivate people to change their behaviour to cut emissions.

So bearing that in mind, the evidence to date still supports the effectiveness of carbon pricing in cutting emissions. In their March 2024 open letter, 300 leading Canadian economists pointed out:

Since federal carbon pricing took effect in 2019, Canada’s GHG emissions have fallen by almost 8 percent, although other policies were also at work.

An Open Letter from Economists on Canadian Carbon Pricing, March 2024

Academic studies also point to the effectiveness of carbon pricing.

A May 2015 paper published by Duke University and the University of Ottawa reviewed the effectiveness of carbon pricing in British Columbia from its launch in 2008 to 2015. Again the carbon price was relatively low, starting at $10 per tonne and increasing to $30 throughout the study period.

Despite the low price, researchers concluded: “… that the tax has reduced emissions in the province by 5–15%. At the same time, models show that the tax has had negligible effects on aggregate economic performance…”.

Finally, a recently published meta-analysis of evaluations across 21 carbon pricing schemes worldwide, found that introducing a carbon price “yielded immediate and substantial emission reductions” of greenhouse gas emissions ranging from 5% to 21%, despite the low level of prices in most instances.

So, should we “Axe the Tax?”

The short answer looks to be no. It’s an effective and efficient way to change behaviours and cut greenhouse gases. That’s why carbon pricing is being adopted in more and more countries around the world.

Carbon pricing is also critical to Canada’s emissions reduction plan. The Canadian Climate Institute, an independent climate think tank, estimates that federal and provincial carbon pricing, for industries and consumers, will account for almost half of Canada’s emissions reductions by 2030.

But as we’ve seen in the news for the past few months it’s a very tricky thing in a democracy for a government to sell voters on the benefits of increasing taxes. It’s a bitter pill for many to swallow, and it hands opposition parties a wonderful stick to beat the government with.

Opposition parties typically emphasize that carbon pricing will harm the economy but they generally leave out some really important points. The first is how much the economy is being harmed and will be harmed by the effects of climate change. The second is the economic growth that has and will come from investing in a renewable energy transition.

The carbon pricing issue is not likely to go away anytime soon and it’s quite likely it will be the central debate in Canada’s next federal election scheduled for Fall of 2025.

No matter who wins in 2025, Canada’s government will need an effective way to cut our emissions in line with the obligations we undertook with the Paris Agreement. If we don’t, Canada will incur resentment and repercussions from the global community of nations committed to fighting climate change.

A recent article in Policy Options makes a great point – if a new government “axes the tax” it will have to put forward a new plan. It would make sense that they would want one with a track record of having the lowest cost on consumers and industry, minimal impact on inflation and a proven history of reducing emissions. 

That plan is the carbon tax. 

1. CO2 equivalent emissions (CO2e) is a metric used to compare the emissions from various greenhouse gases based on their global warming potential (GWP) relative to carbon dioxide. It expresses the impact of different gases in terms of the amount of CO2 that would have the same warming effect over a specified period, typically 100 years. This allows for the aggregation of different greenhouse gases into a single number to assess their overall contribution to climate change. ↩︎