The carbon tax is dead. Now what?

Mark Carney’s first act as prime minister was to scrap Canada’s carbon tax on fossil fuels, fulfilling a campaign promise designed to deprive the Conservatives of an election issue on which they had laboured long, hard and successfully. The moment was politically dramatic. Carney, after all, has strong climate credentials, having served as the U.N. Secretary-General’s climate finance envoy, among other things. But after the drama had abated, the abiding unanswered question was: Now what?

First, what will replace the fuel levy and help Canada achieve its announced climate targets? It will not be an easy feat. That tax was calculated to be responsible for between eight and 14 per cent of the mitigation under Canada’s emissions reduction plan over the next five years. Since carbon taxes are among the most cost-effective climate policies, many of the subsidies or regulations that might replace them would be more costly. (There’s some irony to the fact that the tax met its death on the altar of affordability.) And low-income Canadians in particular will be worse off for not having rebates, which significantly outweighed the payments for most.

The good news is that there are untapped climate policy options that can actually increase affordability for Canadians. They include better incentives and standards for energy efficiency in houses and buildings to help homeowners save on energy bills, and policies — such as rebates on used electric vehicles, which ultimately cost less to own and make EVs more accessible for low-income drivers. 

The 2023 climate progress report offered up no less than 31 possible new policies and measures to enhance Canada’s climate ambition. Most of those, though, would be less effective without the complement of the consumer-facing carbon tax driving people to lower their emissions.

Second, there is the matter of the output-based pricing system (OBPS) — the second element of Canada’s carbon tax. The Conservatives quickly followed Carney’s fuel levy announcement by pledging that they’d also remove the OBPS, which is levied on high-emitting firms and electricity generators. The Conservative position on this tax has been the subject of intense speculation and lobbying for months. Ultimately, they may have judged that attacking it might regain them the chance of a winnable carbon tax election.

But the OBPS is not a fuel levy. The battlefield is different in important ways. 

For one thing, consumers don’t feel it directly. They don’t see it at the pump or on their heating bills. It’s levied on industrial operations, electricity producers, mines and such. Most Canadians have never heard of it, and if they were told of it, many might agree with making polluters pay for their pollution. Also, many of the industrial producers that pay that tax are in favour of keeping it, (though all are advocating for improvements). So building a constituency against the OBPS will be challenging.

Another difference is scale. The OBPS is a much bigger tool in the climate policy toolbox, calculated to be responsible for 20 to 48 per cent of Canada’s emissions reduction plan’s mitigation by 2030. Its absence would leave a gaping hole in Canada’s climate targets.

None of that, however, means that the OBPS is untouchable. One of the reasons many Canadians were against the consumer levy is because they consistently under-estimated their rebates or did not know they were receiving them, and fundamentally misunderstand the rebate process, seeing it as a shell game: “What’s the point of taxing me and then just giving it back?” 

Ultimately, the inability of policy-makers to explain the fuel levy to taxpayers made it ripe for attack. That’s a problem, because the OBPS is similarly complex — if not more so — leaving plenty of scope for the same sort of attack.

It matters what the future holds for carbon taxes in Canada, because we need all the tools we can get to fight climate change, and cost-effective tools especially. Even with both taxes in place, and assuming all the other climate policies on deck and in the pipeline, as of 2023, we were not quite on track to meet our 2030 target. 

In the election, all parties owe it to Canadians, who are increasingly feeling the costs of climate change, to clearly spell out how they intend to compensate for the loss of carbon taxes and maintain Canada’s climate ambition.

Aaron Cosbey is a development economist with over 30 years’ experience in the law and economics of sustainable development, in areas including trade, investment, mining, climate change, and green industrial policy. He is a senior associate with the International Institute for Sustainable Development, a senior fellow with the European Roundtable on Climate Change and Sustainable Transition, and senior associate with the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development.