Cost and Incentives of Canada’s Carbon Tax

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For many Canadians, there is no more heated topic at the moment than the carbon tax.  While there has been much yelling and gnashing of teeth, the actual raw impact numbers have been difficult to come by.  The National Post and Globe and Mail recently released their thoughts on the fully-costed numbers arrived at by Dr. Jennifer Winter from the University of Calgary.

Here are my major takeaways:

  • Based on the $50-per-tonne 2022 target, the average household in British Columbia will pay $603 in carbon tax.
  • The average household in Nova Scotia will be $1,120.
  • The rest of us are somewhere in between.
  • Dr. Winter’s Twitter account stated the following in response to the National Post article: Importantly, I assume no behavioural change on the part of households, no energy efficiency improvements, and do not include how policy support to large emitters affect costs. I also don't include rebates which mitigate costs further. And I use 2013 energy use data.
    My numbers are essentially a high-water mark. They say what a carbon price *could* cost Canadian households, not what current policy proposals *will* cost Canadian households. I hope to produce more accurate numbers in the future – but I have papers to write!

While a carbon tax will certainly affect my pocketbook, I’m actually more interested in the phenomenon from a purely economic/rational behaviour angle, and I’m interested in hearing what everyone else thinks.

Most of all, what I want to know, is will the carbon tax actually accomplish was it’s supposed to?!

What Is a Carbon Tax?

A carbon tax is essentially what happens when public policy wonks, who have read dozens of economics textbooks, create a policy designed to achieve a desired outcome.  

In this case, the idea is that if we charge people to use carbon, a rational consumer will use less of it.  Thus, efficiently lowering the overall amount of carbon that we’re putting into the air. Economists would be quick to point out that by “putting a price” on carbon, we’re guaranteeing that it will cost the least amount of pain possible to get to the desired result, as opposed to government regulation that would almost assuredly be much less efficient.  Economists generally believe that trying to artificially control the supply of something is much more difficult and inefficient than trying to control demand through a transparent pricing mechanism such as a carbon tax.

The “problem” being solved here is that we currently use too much carbon being used.  I think it’s fair to say that at this point most (but not all) climate scientists believe that we’d be better off with less carbon being used.  This means using less fossil fuels like natural gas and oil. Right now, when you pay for gas to put in your car, you are paying the cost of taking oil out of the ground, refining it into something useful, adding whatever is needed, getting it to a retail gas station, and then putting it in your car.  The cost of this, plus a profit margin (and taxes) is what you pay at the pump for gasoline. What you don’t pay for is the alleged damage that you’re doing to the world’s environment. Generally, when we don’t pay for things, we tend to use a lot of them. (Way more than when we have to pay – why not, it’s free right?!)  This is known as the Tragedy of the Commons and here is a great little primer on it.

I’m not really interested in debating whether releasing carbon is bad for the environment.  That’s a conversation to have on not-a-personal-finance-blog. It’s also a topic I’ve noticed has become almost impossible to change anyone’s mind on – which is sad considering it’s a pretty damn complex topic that we should probably be curious about and open to the idea that we don’t know everything there is to know about it.  What I’m most interested in talking about here, is how much money is getting taken out of our wallets, and will we actually change our behaviours to save more money?

Why Do Some Provinces Pay More than Others?

While the actual tax-per-tonne will be the same across Canada, the provincial differences come from taking into account the unique consumption patterns of carbon across the country.  For example, provinces on the low end such as B.C. and Quebec generally use less fossil fuels (likely due to their warmer temperature and hydro electricity capacity respectively). Higher impact provinces such as Nova Scotia, New Brunswick, Alberta, and Saskatchewan not only have relatively high home heating costs, but also depend on more fossil fuels to generate electricity.

This article in Maclean’s by economist Trevor Tombe gives a rough breakdown as to how households are likely to feel the pinch (both directly and indirectly).  There are are obviously many variables to take into consideration, but some general rules of thumb are:

  • If you drive close to the Canadian average and use 2,000L of gasoline per year, your direct gasoline costs will be 30-50% of your overall carbon tax bill.
  • To heat the average home in Canada for a year takes about 90 gigajoules of natural gas, and the carbon tax is going to add about $230 per year to those costs – or somewhere around 30%.
  • The rest comes from fossil-fuels burned to create electricity.  For example, my home province of Manitoba has invested billions of dollars in hydroelectricity capacity, and consequently, does not have to burn much fossil fuels at this time.
  • Indirect costs are very difficult to quantify because it’s tough to know how much the cost of food, or really any business that heats a bricks-and-mortar location or depends on transportation will go up.  Most estimates range somewhere between 1% and 5% for most industries.

What Will This Mean for You?

When asking how a carbon tax will affect your wallet we need to dive into two main questions:

1) How much carbon do you use?

2) How is your province using the money they take from the carbon tax?

3) Will you change how you live in order to save money!

In answering #1 you basically have to look at what province you fit into, think about about cold your winters are, if you use natural gas to heat your house, the fuel efficiency of your vehicle, how much you drive, and how much electricity you use.  If you want to try to factor indirect costs, use the chart from this Maclean’s article to get a rough estimate (multiplying current spending by 1.04% or so on all transportation or heat-dependant business will likely give you a ballpark figure). It’s worth considering that these numbers are at the $50-per-tonne 2022 level.

When we get to #2, we’re looking at some really nerdy math and economics talk.  Basically, it’s possible for you to actually GET MONEY BACK from the carbon tax.  In other words, if you happen to live a carbon-friendly lifestyle, and your province embraces something called revenue-neutral carbon tax, then you might get a tax-rebate that give you more money than you would have otherwise had.  

The idea here amongst traditional economists is that a carbon tax DOES NOT have to be a “tax grab”.  The government could theoretically take money in from a carbon tax. Count how much they took in – then give the money back to people through lowering their income tax bill.  Now how you decide who gets what money back is another issue; however it’s possible (indeed this was how BC implemented the program) to have a carbon tax, and know that that government is not taking in and spending any more overall money than before.  Consequently, the idea is to make heavy-carbon users feel financial pain so that they modify their practices, while not placing more of a tax burden on the overall population.

Now, it’s very very important to understand that not all provinces are going to do a “revenue-neutral/economist dream” carbon tax plan.  From the preliminary reports, most provincial governments are looking to take the money generated from the carbon tax and spend it on lots of things.  On a personal level, this doesn’t surprise me as most provincial governments have a very hard time giving up tax revenue as they try to balance budgets being stretched by more social programs and quickly-escalating healthcare costs.  

Basically, we need to understand that everyone has a different idea of what to do with this carbon tax money.  I think most people can be separated into three main camps:

1) I am staunch fiscal conservative.  Don’t take any more money from my wallet.  Make this tax revenue-neutral and refund as much of my money through the income tax system as possible.

2) I am a provincial government and am scratching and clawing for any way possible to balance my budget.  I’m likely to throw a lot of sand in the air, move a bunch of spending numbers around, but basically, thank you for this increased tax revenue, it’s going to help us pay for the stuff that helps a lot of people.

3) I am very concerned about the environment, and I think that this money should be used to reward people making environmentally-friendly decisions such as buying an electric car, installing solar panels or geothermal heating, and/or using electricity.

Obviously number three would give the strongest incentives to change our behaviour, but would also be the most strongly felt change to our spending patterns.  If I’m in a province that decides to go the #3 route, I’m definitely crunching some numbers on buying an electric car, installing energy efficient appliances and windows, and/or putting in some solar panels.  If the government is going to give you free money (aka subsidies) you have to take a serious look at those options.

What Will You Do?

This is by far the most interesting question to me, and none of the numbers above really delve into this at all.  We don’t really have any way of predicting how the Carbon Tax will affect our decisions. (Which is the whole point of this exercise by the way.)

In other words, if the carbon tax does what it’s supposed to, and causes some degree of financial pain to heavy-carbon users, will we change the way we do things?  If so? To what degree?

For example:

  • Will you install a heating system that automatically uses less energy when you’re not home?
  • Will you pay the premium to buy an electric vehicle?
  • Will you downsize your gasoline-powered vehicle? (This is a very interesting data point for me as Canadians love buying SUVs and pickup trucks even if we don’t need them.)
  • Will you invest in an energy efficient home that makes use of insulation, better windows, geothermal heating, better furnaces, solar panels, etc?
  • Will you consider using less water and modifying the internal temperature of your house a bit less? (Cooler in winter, warmer in summer.)
  • Will companies fly their employees less often?
  • Will you bike to work more often?

Should We Cushion Specific Groups From a Carbon Tax?

I think there are certain niches of people that can’t help but use more carbon and whether or not we should help them is an interesting question.  This is a hot topic where I live in rural Manitoba (close to rural Saskatchewan).

Take for example a local farmer.  They require a certain amount of gasoline and diesel fuel to conduct the business of farming.  This cost is basically inescapable. There are a few things you could probably do on the margins to cut a few percentage points off of the energy need, but you need energy to move large powerful machines, as well as deliver the product to market.  Now, if we lived in a closed economy where the farmer could just efficiently pass along their costs to a Canadian consumer – and we’d consequently all pay for that farmer’s increased costs – that’d be one thing. But of course, that’s not how an international economy works.  If an American farmer growing the same crops doesn’t have those increased fuel costs, they will obviously have a massive advantage when it comes to producing a product at a lower price. Many Canadian consumers might do the rational thing and purchase the US-grown crop for their kitchen tables at lower prices AND even more worrisome is what Japanese or European consumers might buy to cook with.  Clearly this will make the Canadian farmer less competitive if the government doesn’t offset their costs in some way. These farmers aren’t alone by the way, think of the construction industry, retail sales, and countless other services.

Then, to top it all off, these rural farmers HAVE to drive places.  In our rural areas it would require a MASSIVE effort to use a bike as a main form of transportation.  The distances we must cover daily are not comparable to urban-Canadians’ daily needs. We made the decision to live rurally before these huge incentives that penalize drivers were introduced.  Is it fair that we now have to carry an oversized amount of the carbon tax burden? Maybe it is, but I think you might have a hard time convincing some folks. Now – do we all need 4×4 huge trucks or large SUVs to get around?  No, we don’t. As much as we think we do – we don’t. Sure, that truck is helpful 5-10 times a year, but the vast majority of the time, most of us rural folks could get by with driving a compact car, or fuel-efficient (electric?) mid-size sedan just fine.

So, should we help out certain folks who are going to feel this pinch in a way they deem unfair?  Well… economists will tell you that, that’s going to blunt the effectiveness of the overall program and that you’re going to have to raise overall carbon taxes to get the reduction in carbon that you were originally aiming for.

So… What’s Going to Happen?

After reading quite a bit about this stuff… I honestly have no idea what is going to happen.

There is so much misinformation out there on all sides of this debate (though probably more on the anti-tax side) that I think there is a strong chance provincial leaders will fight the federal government to a standstill on the issue and we may not even see a carbon tax introduced in many places.  Most people don’t really have any idea how or what this tax does.

I think there is also a strong chance that the carbon tax goes into play and pinches people just enough that they scream, but not enough that they actually change their daily life a whole lot.  If you think about how much money you have to earn in order to pay $1,000 more in consuming things, that’s a lot of money – BUT spread over hundreds of different transactions, it’s not a transparent tax that people will easily internalize.  Interesting to note that many economists think we’ll have to hit the $100-$200 per tonne range before we see actual behavioural shifts.

I think that unfortunately there is very little chance that we will get to see the unfiltered results of an interesting pure economic experiment.  If we had a pure revenue-neutral carbon tax, I would be really interested in seeing how people would respond – and it wouldn’t have nearly the overall effect on our wallets that many predict it would.  But it seems there is very little chance we’ll see this reality, as environmental activists crusade to use the tax on more subsidies for environmentally-friendly products, provinces look to shift money around to hide their prior borrow-and-spend tendencies, and most people remain confused about how this whole thing will look and if the carbon-environment connection is even a real thing.

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Kyle is a high school humanities teacher by day, and freelance personal finance author by night. He has been published in academic journals, and has also co-authored the book "More Money for Beer and Textbooks". In his free time Kyle likes to limp up and down a basketball court and pretend to be a tough guy in a boxing ring.

2 Comments

  1. Sully on July 2, 2018 at 7:13 pm

    Great post, nice details and well researched!

    I would love to see a breakdown of typical Canadians instead of “average canadians”. As a no car/apartment dweller in Toronto, I wonder how much I’d be down (or up, fingers crossed for a carbon dividend).



  2. Phil Plasma on July 8, 2018 at 10:35 am

    I live in a suburb of Montreal and take transit, often. I do have a van, but even now I am decreasing the driving I do as filling the 70L tank has risen to almost 100$ each time. I have done quite a bit of reading on this topic also; 50-70$ per tonne is not enough, but it is a good place to start. If it was to increase, predictably, over five years, to end at 150$ per tonne, this would give people time to change their ways, with the knowledge that if they don’t, they will really feel the pinch. In terms of revenue neutral, into the general govt coffers, or into greening things; I’m with you on this; I’d want to see the carbon tax collected distributed back out to Canadians, less whatever administrative costs there are to operate this.

    You raise a valid point about the imbalance of carbon consumption across geographies (rural vs urban) and industries (farming vs others). If the prices of locally produced goods go up as a result of the carbon tax; perhaps a media campaign to ‘Buy Canadian’ (where possible) would be called for.

    As always I find your posts well thought out and researched.



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