Carbon Pricing in Canada

Carbon pricing is an effort by government to raise the cost – by taxes or by regulation – of carbon-based fossil fuels, in the hope of reducing their use, thereby limiting greenhouse gas emissions to combat climate change. In 2016, Prime Minister Justin Trudeau announced a national climate-change policy that included a system of carbon pricing across Canada. Under the plan, each province must adopt carbon pricing by January 2018, or Ottawa will impose its own carbon levy in that jurisdiction.

Greenhouse Effect
The rays of the sun reach Earth (1) and are reflected upwards (2). The balance of heat gained and lost is upset by gasses and particles in the atmosphere (3). These gasses act like the glass in a greenhouse, preventing the heat from escaping (4).

Emission Reduction Promises – and Failures

Climate scientists have been warning for decades that the release of carbon dioxide and other gases into the atmosphere was creating a so-called greenhouse effect, trapping heat in a way that over time would drive up average global temperatures and cause other dangerous disruptions in the climate. Under the mantle of the United Nations (UN), countries met in Japan in 1997 and signed the Kyoto Protocol, in which richer nations committed to reduce their emissions over the next 15 years.

While United States president Bill Clinton signed the Kyoto deal, he was unable to secure Congressional ratification and the US remained outside it. In Canada, Liberal prime minister Jean Chrétien signed the Kyoto Protocol in 1997, but failed to introduce comprehensive climate policies that would achieve the promised emission reductions. Prime Minister Stephen Harper took power in 2006 and was deeply opposed to the Kyoto deal, which required emission reductions by industrialized countries but not by developing nations that were still trying to lift their citizens out of poverty.

Carbon pricing was a major issue in the 2008 federal election. Then-Liberal leader Stéphane Dion promised a carbon tax in the campaign, but his party was soundly defeated by the Conservatives. Harper promised a cap-and-trade system, because at the time it appeared the US government would pass a similar plan. After the election, however, he jettisoned the idea when the US effort stalled.

Since the 2008 election, Conservative members of Parliament have routinely condemned any proposed carbon price as a job-killing tax. Harper agreed at a UN summit in Copenhagen to an emission-reduction target, but undertook little action to achieve it. By the 2015 election, Canada’s Conservative government was widely criticized for being a laggard in the international effort to avert the worst impacts of climate change.

Carbon Tax or Cap and Trade

Carbon pricing plans impose a cost on the combustion of fossil fuels by industries and consumers – either directly through a tax, or indirectly through a cap and trade system. In a market economy like Canada’s, prices help regulate the supply and demand of goods and services. By influencing the price of a commodity like gasoline, through carbon pricing, governments aim to discourage its use, and thereby reduce the emissions that result from its consumption.

Oil Refinery
The refinery in Come By Chance, Newfoundland

The most direct form of carbon pricing is a carbon tax. It is levied by governments on industry, but it is often passed on to consumers in the form of higher prices for gasoline or home heating fuels. The carbon tax is paid by large industrial facilities and by distributors of natural gas and of petroleum products like gasoline, diesel and heating fuel. The carbon dioxide emission per unit of each fuel is calculated by government, and each taxable party (each industrial operator or distributor) must report their fuel usage and pay the tax based on that usage. Companies such as gasoline marketers and natural gas distributors pass along the added cost to consumers. However, some large industrial emitters have less control over prices and have an incentive to invest in emissions-reduction technology to reduce their costs.

Cap and trade is a more complicated system of carbon pricing that begins with a government imposing a cap on carbon emissions within its jurisdiction. The overall cap declines over time to meet a pre-determined target. The major consumers or distributors of fossil-fuels – large industrial plants, natural gas utilities and marketers of petroleum products – have their own declining caps set by the government in order to meet the broader provincial objective. The pricing occurs because governments allow those capped entities to buy and sell emission rights, thereby creating a carbon market. The most efficient companies – those that reduce emissions below the government-set allocation – can then sell the excess allocations to companies that find it cheaper to buy emission rights than invest in the reductions themselves. Thus, the market essentially sets the carbon price.

Provincial Carbon Pricing Programs

When Justin Trudeau became prime minister in November 2015, three provinces had some form of carbon pricing and a fourth, Ontario, was moving to implement a plan. The Prime Minister declared that any national carbon price would build on existing provincial plans.

In March 2007, Alberta had launched emission regulations for large industrial operations like oil sands plants. Alberta set limits for greenhouse gases from the industrial facilities and charged companies $15 per tonne of carbon dioxide (CO2) for any emissions above the limit. In November 2015, the New Democrat (NDP) government in Alberta introduced a more aggressive carbon tax plan, with an industrial levy of $20 per tonne in 2017, rising to $30 in 2018.

In 2008, British Columbia ushered in North America’s first broad-based carbon tax. It was initially set at $10 per tonne of CO2 emitted, and rose to $30, where it has remained since 2012. The money raised by the provincial government was used to reduce other taxes. As a result, the tax was said to be “revenue-neutral,” in that the government took in no additional money after accounting for the additional tax cuts.

After imposing a modest tax on fuel users starting in 2007, Québec launched a cap-and-trade program in 2013. Under that system, Québec joined with California in a “carbon market” that allows industry in either jurisdiction to buy and sell emission “allowances” that are issued by the province and state. The minimum price for those allowances in 2017 is C$13.56 per tonne, and it rises each year.

By early 2016, the Ontario government signaled that it would proceed with its own cap-and-trade plan in 2017. It is expected to join the Québec/California market – the only broad-based cap-and-trade market in North America – in 2018.

2015 Election and Paris Climate Summit

In the lead-up to the 2015 federal election campaign, Liberal leader Justin Trudeau promised to work with provinces to adopt a Canada-wide plan for carbon pricing, one that would allow provinces to impose their own plans so long as they met federal standards. The New Democrats accused the Liberals of deferring to the provinces and having no real plan for a carbon price. The NDP proposed a national cap-and-trade plan. The Conservatives warned about a “job killing carbon tax” and promised to implement long-delayed emission regulations on industries such as the oil sands.

Justin Trudeau
Prime Minister Justin Trudeau came to power promising to adopt a Canada-wide carbon pricing plan.

The election was held just six weeks before the Paris climate summit. There were high expectations for a Paris deal that would drive global emissions lower and limit the average global temperature increase to less than 2°C. After winning the election and becoming prime minister, Trudeau arrived in Paris in December and signaled a major course change for Canada, vowing to show leadership that he said had been lacking under his Conservative predecessor, Stephen Harper.

Trudeau had key premiers join him for his appearance at the opening of the Paris summit, including British Columbia’s Christy Clark, Alberta’s Rachel Notley, Saskatchewan’s Brad Wall, Ontario’s Kathleen Wynne and Philippe Couillard of Québec. The Paris summit ended with an international agreement in which each country made its own commitment to reduce greenhouse gases (GHGs); Canada promised to reduce GHGs by 30 per cent from 2005 levels by 2030.

Vancouver Declaration

Three months after Paris, Trudeau convened the premiers in Vancouver and reached a broad agreement on the need for a national strategy to meet the Canada’s 2030 emissions-reduction target. In the Vancouver declaration, the premiers committed to “transition to a low carbon economy by adopting a broad range of domestic measures, including carbon-pricing mechanisms, adapted to each province's and territory's specific circumstances.”

Some premiers insisted they had not agreed to adopt carbon pricing in their own provinces. Saskatchewan’s Brad Wall and Nova Scotia’s Stephen McNeil argued they had alternate measures that effectively imposed carbon-related costs on their electricity system. They said they were not prepared to accept broad-based carbon pricing that would also cover gasoline and home heating fuels.

Debating a National Carbon Price

In Vancouver, the first ministers decided the governments should establish working groups to hammer out agreements in four key areas of climate-change policy: carbon pricing; other measures to reduce emissions; development and adoption of clean technology; and helping communities adapt to the impacts of climate change. The federal insistence that all provinces and territories must face a broad-based carbon price prompted the most heated political debate.

People in western provinces and in Newfoundland and Labrador were suffering from a deep slump in oil prices that drove up unemployment. Alberta and Saskatchewan, in particular, led the country in greenhouse gas emissions per person, due not only to oil and gas production but a heavy reliance on coal-fired electricity. Led by Saskatchewan's Brad Wall and federal Conservative Party interim leader Rona Ambrose, conservative politicians argued carbon pricing would inflict further punishment on the weakened western economies.

Exhaust pipe of a car

Trudeau and Alberta's Rachel Notley said carbon pricing was an essential part of a credible climate strategy. They argued governments must adopt strong climate policies for two reasons: so Canada does its part in the international effort to address the issue, and to win public support for the continued development of the GHG-intensive oil sands sector.

Trudeau’s National Plan

In October 2016, despite continued disagreement from some provinces, Trudeau stood in the House of Commons and announced the federal government’s carbon-price plan. All provinces and territories would be required to have a carbon price in place by January 2018 – either a tax or a cap-and-trade system. For those using a tax, the levy needed to be at least $10 per tonne to start, then rise by annual $10 increments until it was $50 per tonne in 2022. For provinces opting for a cap-and-trade approach, each one’s emissions cap had to be sufficiently lowered over time as to allow Canada to meet its 2030 GHG target.

If a province refused to adopt a carbon price or if its plan was insufficient, Ottawa would impose its own tax on the province. However, Trudeau promised to rebate any revenue raised from a federal levy to the provincial government, to be used as it saw fit.

Again, Saskatchewan’s Brad Wall and Nova Scotia’s Stephen McNeil were the most vocal opponents of the plan among premiers. Wall argued his province’s farmers and oil and gas industry would be hurt. McNeil argued rural Nova Scotians had little choice but to drive long distance and should not be penalized by an additional tax on gasoline. Six weeks later, McNeil reached an agreement with the federal government to impose a cap-and-trade system on fuel distributors in his province, but not on the electricity sector where the province already had an ambitious emission-reduction plan.

In December, Trudeau met the premiers again and concluded the Pan-Canadian Framework on Clean Growth and Climate Change, which included his national carbon-pricing plan. In addition to Premier Wall, Manitoba’s Brian Pallister refused to sign. Pallister had announced that Manitoba would adopt its own carbon-pricing plan, but it was unclear whether it would meet the federal requirements. After the meeting, the Manitoba premier tied his refusal to sign the climate deal to a dispute over federal health care transfers and his demand that Ottawa provide more money.

Brian Pallister
Brian Pallister, photographed in 2014.
Wall, Brad
Brad Wall, premier of Saskatchewan. Wall is one of the province's youngest-ever premiers (courtesy Office of the Premier of Saskatchewan).
Christy Clark, Premier of BC
(courtesy of the Government of BC)

After the agreement, the three other Atlantic provincesNew Brunswick, Prince Edward Island and Newfoundland and Labrador – all committed to have provincial carbon-price plans in place by 1 January 2018.

The opponents’ case was strengthened in November when Donald Trump became the US president. Trump expressed skepticism about the need for aggressive climate-change policy, while his political opponent, Hillary Clinton, pledged tough action. Carbon-price critics now worry that Canada’s economic competitiveness will be hurt if this country imposes higher environmental costs on industry, while our American trading partners do not. Still, the Trudeau government defends the policy, saying the cost of transitioning to a lower-carbon economy will pay off in the longer term as the effects of climate change become even more apparent.

Impacts of Carbon Pricing

Canada’s foray into carbon pricing is something of an economic and environmental experiment. No country has real experience with a carbon tax, and the European Union’s cap-and-trade system has been plagued by design flaws.

Cap-and-trade supporters contend that approach is preferable because it targets emission levels directly through the cap, which can be lowered over time. However, as seen in Europe, there is a concern that a government will succumb to political pressure and issue too many emission permits, thereby undermining its own cap.

Proponents of the carbon tax rely on a classic truism in a market economy: that raising the price of a good – in this case, GHG-emitting fossil fuels – will reduce the consumption of it. But it is unclear how high a tax is needed to obtain the desired reduction in emissions. Economists who study the issue suggest that, to meet Canada’s 2030 GHG target, the carbon tax in 2030 would rise from $50 a tonne in 2022 to $125 a tonne, or about 28 cents per litre of gasoline. However, federal and provincial governments do not intend to rely exclusively on carbon pricing to meet their GHG targets. Governments at all levels are planning a host of other regulatory measures and subsidies to encourage a reduction in energy conservation and a switch from fossil fuels to lower-carbon sources.

The economic impacts of carbon pricing remain hotly debated. A 2016 study by the World Bank concluded the adoption of carbon prices has little impact on a jurisdiction’s economic activity or competitiveness. However, it cautioned that the impacts will grow as the price levels rise. A study of British Columbia’s carbon tax suggests the province’s revenue-neutral carbon tax succeeded in driving down GHG emissions without inflicting damage on the economy. However, BC froze its levy at $30 per tonne, and there is some evidence that certain industries – refining and cement producers – were hurt by the tax.

Coal-fired power plant

Governments in Alberta, Ontario and Québec have sought to ease the impact on large, energy-intensive industries to avoid cost burdens that would lead companies to shift production out of their provinces. Canadian business groups worry that the economy will suffer as governments here move forward with carbon pricing, but the American government moves in an opposite direction. President Donald Trump, who took office in January 2017, vows to reverse US federal government climate-change regulations in an effort to reduce costs on business. However, many US states are proceeding with their own plans, particularly efforts to use more renewable power.

Trudeau has rejected calls to slow the implementation of climate policy in response to Trump’s pro-business agenda. He says that, as the evidence of climate disruptions grows stronger, all countries will have to transition to low-carbon energy system. Those countries that move now will be better prepared for the future, he argues.

Further Reading