Why Canada’s Federal Carbon Tax Won’t Reduce CO2 Emissions

Ottawa’s policy to reduce greenhouse gases (GHG) is based on the conventional theory that a carbon tax imposed on items with a high content of carbon dioxide will raise the price or cost of those items.

The higher price will dampen expenditure on carbon-intensive goods and services and as a result, carbon dioxide emissions will decline.

Imposed on producers, a carbon tax creates an incentive for them to find new ways to manufacture goods or provide services with a smaller carbon footprint, thereby reducing the amount of carbon tax they have to pay.

Some producers of goods and services with high carbon content may well decide to invest heavily in pollution abatement equipment to lower their emissions and thereby reduce their tax burden: the greater the decline in emissions, the lower their tax liability.

On the other hand, pollution abatement technology that significantly reduces emissions could involve very expensive upfront costs for polluters. In such cases, it may be cost-minimizing for them to pay the tax and pollute.

Moreover, if they can shift the tax forward in the form of higher prices, and if consumers ignore the disincentive of the higher price, demand for carbon-intensive goods and services will not decline and there will be no reduction in emissions.

Ottawa’s taxes on vehicle fuels and large emitters of GHGs are a case in point.

Given the low price-elasticity of demand for vehicle fuels, taxing them will do little to curb GHG emissions.

The U.S. Energy Information Administration estimates it would take a 25 to 50 percent increase in the price of gasoline to reduce automobile travel by just one percent. Four or five cents a liter won’t do it.

The British Columbia carbon tax is often held up as an example of the effectiveness of a vehicle carbon tax in reducing GHG emissions. And GHG emissions did decline in B.C. following the introduction of the tax.

But the correlation is spurious.

The B.C. carbon tax coincided with the worst recession in the province in decades, with unemployment rising sharply from a cyclical low in 2007 and staying high for five years.

Tens of thousands of people lost their jobs; commuting trips declined; holiday road trips were postponed, and fewer cars were added to the stock of autos on the road.

Yes, GHG declined but it had little to do with the carbon tax. A recent study in Nature Communications concluded that 80 percent of global carbon reductions that occurred after 2008 was due to the Great Recession.

Ottawa argues that making the vehicle carbon tax revenue-neutral by returning the revenues it generates to families will minimize the impact on jobs but still steer consumers away from the gas station pump.

But if the tax revenue materializes as Ottawa expects, that implies little or no reduction in fuel purchases.

Households may view the cheque Ottawa sends them at the end of the year as a windfall and an opportunity to book a flight for a holiday, adding to the level of GHG emissions.

The tax on “large emitters” is more complicated. The tax paid — or, in some cases, credit generated — by a facility or firm in a given year is based on: the government-stated price of carbon; the facility’s absolute carbon emissions; its output of goods; and its emissions relative to the average emission-intensity of all facilities over a lagged two-year period in a given industrial classification.

The tax liability is reduced by a factor of 0.8 for most industries.

The formula also includes subsidies for trade-exposed industries.

According to Environment and Climate Change Canada, carbon emissions have decreased in some industrial sectors and increased in others but there appear to be no overall estimates or forecasts on carbon emission reductions from the large emitters tax.

A review of Canada’s carbon tax plan by Carbon Action Tracker, a non-profit organization tracking carbon-reducing policies in 32 countries producing 80 percent of global carbon emissions, concluded:

“Based on the implemented policies under (the Paris) framework, Canada is likely to miss its Paris Agreement … target to reduce economy-wide GHG emissions by 30 percent below 2005 levels by 2030. Given the uncertainties around the potential reliance on carbon sinks, the CAT rates this target highly insufficient.”

There are good arguments for a revenue-neutral carbon tax but the GHG reductions from Ottawa’s carbon tax system will not have a major impact on carbon emissions.

To reach Canada’s commitment to reducing its GHG emissions by 30 percent below the 2005 level of 732 million tons of CO2-equivalent by 2030 will require either an immediate, drastic increase in carbon taxes or a second-best solution of imposing carbon reductions on all major segments of the economy and providing fiscal relief for those sectors where the employment ramifications of major reductions in carbon are deemed unacceptable.

Political leaders must be honest with Canadians about how the climate-change policies they favor will achieve the Paris target, what these policies will cost and when they will be implemented.

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