In late May, amidst smoky skies from wildfires in northern Alberta, Premier Jason Kenney tabled Bill 1 to end the provincial carbon tax. The carbon tax has been a contentious topic both provincially and nationally. Kenney has argued the levy has no effect on reducing greenhouse gases, whereas Prime Minister Justin Trudeau argues the price on pollution is the best solution to reducing natural disasters, like wildfires. Politics aside, there is no denying that climate change is a serious problem. The planet’s temperature will not stop increasing and wait for the best solution to be discovered.
What is the carbon tax and how does it work?
The carbon tax is a tax on transportation and heating fuels, including diesel, gasoline, natural gas, and propane. The theory behind the carbon tax is that the increased prices will encourage people to change their behaviour. For example, to save money on gasoline, people may start carpooling, taking public transport, or decide to walk or ride a bike to close destinations.
“That’s the theory. Whether it actually does that or not is really a different question,” says Mount Royal University professor Tim Taylor, noting that increased gasoline prices on the weekend likely won’t prompt someone to cancel a trip.
“But if the prices go up permanently, do you change your behaviour? Maybe. A lot of it depends on if it’s significant to you or not,” says Taylor.
How effective was the provincial carbon tax?
This question is where things get a bit more complicated because the emissions data is not immediately available. To learn if carbon pricing does reduce emissions, other jurisdictions where it has been in place longer need to be examined. British Columbia, which introduced a carbon tax in 2008, is one such place.
“Estimates vary but they do tend to find that emissions are somewhere between five and 15 per cent below where they otherwise would have been,” says Trevor Tombe, an associate professor in the department of economics at the University of Calgary.
Taylor agrees it is difficult to tell exactly how effective the carbon tax is in reducing emissions, but cites the correlation between the high price of gasoline and Europeans seeking out smaller, more fuel-efficient cars as evidence of behavioural change that reduces greenhouse gases.
“If you put the price of something up, people tend to buy less of it, or find ways to be more efficient,” says Taylor.
Provincial carbon tax versus federal carbon tax
Alberta may no longer have a provincial carbon tax, but starting January 1, 2020, the province will be under the federal carbon pricing plan. So how does the federal plan differ from the provincial one?
Tombe explains there are two areas in which the federal tax will differ from the provincial tax. The first difference is the price of the federal tax is lower, starting at $20 per tonne, or an additional 4.4 cents per litre of gasoline. That’s $10 less than the provincial tax. However, the price will increase to $30 per tonne in 2020, and eventually reach $50 per tonne, or an additional 11 cents per litre of gasoline, by 2022.
The second difference is the federal carbon tax is broader.
“There were some conventional oil and gas operators that were temporarily exempted from the Alberta carbon tax,” explains Tombe. “And based on what was done in Saskatchewan, they’re not exempt in the federal one.”
Those are the two key points of how the federal carbon tax differs in terms of design from the provincial one. The other major point of variation is how the rebates are distributed.
Under the provincial carbon tax, single Albertans who earned less than $47,500 per year and families who earned less than $95,000 per year would receive a rebate for the carbon tax. This means 40 per cent of the money went toward household rebates. The other 60 per cent went toward city transit, lowering the small business tax and green technology.
Under the federal carbon tax, 90 per cent of the revenue will be returned in rebates, regardless of your income.
This is because the federal carbon tax is revenue-neutral, meaning the taxed money will be redistributed back to individual taxpayers.
“The federal rebates are larger and universal. So almost every household will receive more once the federal system ramps up to $30 per tonne,” says Tombe. As the carbon tax increases year by year, the rebates are promised to increase as well.
The economics of the carbon tax
The “no environmental gain, all economic pain” slogan used by carbon tax critics is simply not true when it comes to the carbon tax, Tombe says.
“It goes against all the evidence,” he explains. “There are some people who won’t respond, but others who will respond a small amount, and others who might respond a large amount.”
Tombe adds that the individual behavioural and business changes may be large or small, but they are certainly not zero.
The opposing argument, that there is no economic cost from the carbon tax, is also inaccurate, says Tombe.
“The carbon tax, like any climate policy, is going to come with a cost.”
What is the cost of the carbon tax on employment? It is frequently touted as a “job killer” by critics, but is this an accurate statement?
A paper done by Akio Yamazaki, a University of Calgary PhD graduate, showed that British Columbia did not experience a reduction in unemployment from the carbon tax. However, a response piece by another University of Calgary graduate showed that there is evidence of employment losses for workers in the energy sector and it takes time for these workers to shift to other careers.
“Most of our modelling suggests there probably is a modest negative effect on employment,” says Tombe. “But that is true of all policies, it’s not unique to the carbon tax.”
Tombe suggests the best way to view the carbon tax is to acknowledge that there will be inevitable economic costs to improve the environment.
“We have to ask ourselves if it is worth taking action on auto emissions and doing our part to address climate change,” he says.“And I think most people would probably say ‘yes.’And then the question is, how do we support workers that are displaced in energy-intensive sectors?”
How is cap and trade different from the carbon tax?
The idea behind the carbon tax is the government set price of carbon encourages people to cut their carbon emissions to avoid paying the tax. Cap and trade works by the government setting a limit (or cap) on the amount of carbon that can be used. The market then influences who can reduce emissions the most efficiently.
“So for example, if you’ve got two companies, A and B, and one company takes $50 a tonne to reduce their carbon, and the other only takes $20, the cap and trade encourages the company with $20 to do more trade than with the company where it would cost $50,” explains Taylor.
“The challenge of cap and trade is it requires a stable market,”he adds. “Otherwise people are a little leery of investing in trading carbon emissions.”
Will the nationwide carbon tax work?
Canada’s Paris Agreement plan is to reduce greenhouse gas emissions by 30 per cent below 2005 levels by 2030. Whether the carbon tax will achieve this is difficult to tell as no other jurisdiction has ever engaged in such a large scale fee and dividend approach as Canada’s federal carbon tax does.
“We don’t really have a lot of experience to go on there,” says Tombe. “We will see how it works out in a couple of years.”