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With the recent Supreme Court ruling, you may be asking, "What is the carbon tax in Canada and how does the carbon tax work? Also, are carbon taxes effective and good for Canadians?" After talking to an expert at the David Suzuki Foundation, we’ve got answers to your burning questions.

If you’re paying attention to the breaking news headlines, you may have seen that the Supreme Court of Canada ruled that the carbon tax is indeed constitutional. In rendering his verdict, Chief Justice Richard Wagner wrote: “Climate change is real. It is caused by greenhouse gas emissions resulting from human activities, and it poses a grave threat to humanity’s future. Parliament has jurisdiction to enact this law as a matter of national concern.” That’s quite a statement.

But what is the carbon tax and how does it affect Canadians? How does the carbon tax work and are carbon taxes effective? We’ve reviewed the research and have answers—including insight from an expert at The David Suzuki Foundation. Here’s everything you need to know about the carbon tax and why it’s good for Canadians.

What is the carbon tax?

The carbon tax was first introduced in 2018 as the Greenhouse Gas Pricing Act. It was put in place as the central driving force behind Canada’s goal of achieving net-zero emissions by 2050. But contrary to popular belief, the carbon tax is not a tax—it’s a carbon pricing program that’s been mislabelled by political parties that oppose the program. It’s actually a carbon pricing program.

“The federal carbon tax is not a tax,” says Gideon Forman, Climate Change and Transportation Policy Analyst for the David Suzuki Foundation. “People use [the word] ‘tax’ but the courts found that it’s not a tax. It’s a regulatory fee that is designed to change consumer behaviour.”

The carbon pricing program helps our current pricing for high-emissions activities better reflect the actual cost of pollution, hoping that if we make carbon-polluting activities (like driving an inefficient car) more expensive, we can incentivize Canadians to change their habits and choose more eco-friendly options.

How does the carbon tax work?

There are two parts to the carbon tax:

  • A trading system for large industries (also known as the output-based pricing system)
  • A fuel charge (this is the aspect that affects the average Canadian, as it impacts the goods and services you buy, particularly fuel)

The federal carbon pricing sets a minimum fee on carbon pollution. This fee applies to any province or territory that does not have a pricing system already in place. The current price is $30 per tonne of carbon dioxide released. This amount will rise gradually every year, reaching $170 per tonne by 2030.

Who pays the carbon tax?

Not every Canadian pays the federal carbon price. The federal program is a backstop for provinces that do not have their own carbon pricing program or if their program is deemed insufficient.

That means only a handful of the provinces in Canada are subject to federal carbon pricing. Here are the provinces with their own carbon pollution pricing programs already in place. These provinces do not participate in the federal program:

  • Quebec, Nova Scotia, The Northwest Territories & British Columbia

Some provinces only have a partial carbon pollution pricing system. In these provinces, the federal government’s program applies to areas and industries with insufficient coverage in the provincial program. These provinces are:

  • Prince Edward Island, Alberta, Saskatchewan & New Brunswick

Finally, these provinces have no provincial carbon pricing program, and Canadians who live in these provinces are subject to federal carbon pricing.

  • Ontario, Manitoba, Yukon & Nunavut

Who qualifies for carbon tax rebate?

Carbon pricing does not collect revenue directly from Canadians. You won’t see a fee subtracted from your wages or have to account for when filing your taxes. Instead, carbon pricing is applied to goods and services from industries that emit higher greenhouse gas levels. The most common way you’ll see the impact of carbon pricing is at the gas pump.

That said, the federal government recognizes that not every Canadian can afford to pay the actual cost of pollution and that carbon pricing might be a financial burden on some. For this reason, almost all of the revenue collected through carbon pricing is paid back to middle and low-income Canadians so that the fees do not unfairly burden them.

These payments are called Climate Action Incentives and are made directly to individuals and families. If you live in one of the provinces subject to federal carbon pricing you’ll claim your payment amounts through your income tax return. The amount you’ll receive depends on where you live. Not all provinces pay the same fees because each province emits a different amount of greenhouse gas emissions, but on average, the typical Canadian family will receive a higher dollar amount back in their Climate Action Incentive Payments than they’ll pay in federal carbon pricing fees.

For example, the average Ontario family of four will pay $362 extra due to the carbon pricing program, but they’ll receive $436 back for a net benefit of $74.

In contrast, the average Albertan family will pay $534 through the carbon pricing program and receive $880 back for a net benefit of $346.

There are also extra accommodations and exclusions. For example, suppose you live in a small community or rural area and driving long distances is a normal part of your commute. In that case, you have a fossil fuel-intensive lifestyle, and will pay more than your share of the fees levied by carbon pricing. To offset this, you can claim a supplementary benefit equal to 10 percent of your baseline amount.

Want to do even more good for the planet? Learn how you can be an eco-conscious investor with ESG, SRI, and Impact Investing: How Do They Differ?

Where does carbon tax money go?

The goal of the carbon pricing system is not to raise revenues. The vast majority of revenue that is collected goes back to Canadians as Climate Action Incentive payments.

“The federal carbon price is not about raising revenue for government,” says Gideon. “It’s a fee designed to get a change in consumer behaviour, for people to use less fuel which creates greenhouse gases. It’s not designed to bring more money into the federal treasury.”

The remaining revenue is used to support schools, hospitals, businesses, colleges, universities, and municipalities.

“If you look at the average amount of cost from the federal pricing system versus the amount of money that Canadians get back, there is actually a net benefit to Canadians,” says Gideon.

Does carbon tax work?

Canada’s federal carbon pricing program has been a hot political topic since it was introduced. The most common argument against carbon pricing is that it won’t work, will suppress economic growth, and punish low-income Canadians who can’t afford the extra cost added to goods and services. The last claim is unfounded since all low- and middle-income Canadians subject to carbon pricing will receive their contributions back as Climate Action Incentive payments.

The claim that carbon pricing doesn’t work is less clear-cut. Still, there is a mounting body of evidence that carbon pricing fees effectively reduce greenhouse gas emissions without hindering economic growth.

One of the best world examples of how a carbon pricing program can work is in British Columbia. The province of BC introduced the first North American carbon pricing in 2008, and it’s been in place long enough to measure the benefits. It was not politically popular at the time and started at $10 per tonne of carbon, rising to $30 by 2012.  But the results of the regulatory fee were excellent. The economy did not collapse—in fact, it grew faster than neighbouring provinces. Greenhouse gas emissions were also reduced by 5-15%.

Same for Sweden: it also implemented a carbon pricing fee back in 1991, decades before their North American counterparts (talk about riding the wave!). Since its inception, Sweden has seen its emissions fall by 27%, while its gross domestic product rose by 83%.

The Verdict: The Carbon tax is good for Canadians

If the Supreme Court ruling has settled anything, it’s that climate change is a threat to Canada’s prosperity and that the federal government has the right to implement sweeping changes to combat it. Carbon pricing has a track record of helping achieve those goals and is a good tool in the arsenal of combating climate change without financially harming Canadians.

And experts like Gideon agrees: “The scientific consensus is that climate change is an emergency, and the Supreme Court in their decision recently, upholding the federal carbon pricing system, said the climate change is a threat to the country—in fact, a global threat. So we have to get our emissions down, [and] carbon pricing is one of those ways. It spreads across the economy and gives consumers and businesses an incentive to be more efficient, to use less fuel.”

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