Originally published in the Canadian Business Quarterly
By Chris Benjamin and Thomas Thomas Arnason McNeil
Climate change is here, and it’s ugly. Three years ago, British Columbia experienced a heat wave that killed more than 600 people. Financially, it was also one of the most expensive disasters in the province’s history, and one piece of the near $35 billion climate change will cost Canada by 2030.
Last summer on the East Coast, the Government of Nova Scotia spent $122 million more than planned on extreme weather events, which included unprecedented wildfires covering significant tracts of the province, and what one mayor called “biblical” flooding, which killed four people. This tragic loss of life was accompanied by uninsured property damage worth hundreds of millions of dollars.
For those of us who focus our careers on assessing these dangers and proposing realistic solutions provincially and nationally, it is distressing to see political parties at all levels toss (and fumble) around rhetoric about carbon pricing, now irrevocably slandered as the dreaded “carbon tax.” The dangers noted above are too serious (and only worsening) to turn legitimate efforts to reduce Canada’s greenhouse gas emissions into political footballs for the sake of temporary gains in the polls.
This is a time for solutions. Any political party wanting to be taken seriously must present a range of policy tools to address the climate crisis. Carbon pricing is not our only policy option, but it is an effective means of reducing greenhouse gas emissions.
What is carbon pricing?
Carbon pricing, commonly referred to as the carbon tax, is one of several methods of putting a price on pollution. It is comprised of two policies: a large-emitter trading system designed to increase the cost of industrial carbon emissions and a fuel charge. The latter policy is usually experienced as paying a few cents per litre more at the gas station, or for your home heating bill.
These policies are essentially a solution to the problem of ‘free pollution’. Pricing products a little higher results in fewer of them being produced, which is why we should tax things we don’t want, like pollution, rather than things we do want, like renewable and efficient energy.
As normally structured, when we buy gas or oil, we do not pay for the cost of the pollution it causes. That can include anything from asthma treatments to ocean cleanups spills. Economists call these uncounted costs ‘externalities,’ which represents a cost incurred by one party but received by another. You smoke around me, I get lung cancer.
The carbon “tax” adds that cost back to the price, giving us the true cost of the fossil fuels we use, or something closer to it anyway. That tax provides a predictable government revenue that accounts for these hidden costs and directs a portion of that money towards less polluting options. For example, getting homes off fuel and onto more efficient heat pumps. Or helping drivers switch to electric cars.
Consumers are incentivized to choose less polluting (often healthier) options like taking the bus, walking, or cycling, when those options are available.
To be effective, carbon pricing must account for different levels of responsibility borne by different polluters. The person who smokes outside is less likely to hurt my lungs than the one smoking in my living room.
The biggest carbon polluters in Canada are large companies either producing or heavily using fossil fuels, such as mine operators and transport truck companies. Ideally, such companies are already financially motivated to use less fuel more efficiently.
Carbon pricing is designed to increase that motive by creating a predictable market price for big polluters. The price for a unit of carbon should be set to equal the damage done by its pollution. This is difficult to calculate, but in economic theory the market should correct the price over time.
The fact is this system is having an impact. Recent reporting by the Canadian Climate Institute found provincial and federal carbon pricing has significantly reduced greenhouse gas emissions in Canada, and that they policies will account for nearly half of reductions by 2030.
In Canada, anti-carbon price politicians are campaigning based on the idea that these methods of carbon pricing are inflationary, but the fuel-price increases are marginal for a typical consumer. Ninety percent of Canadians either break even or come out ahead due to a quarterly rebate cheque, which varies in size by living situation and whether one lives in the city or country, where public transportation is less likely. Carbon pricing has been around for decades, and the first North American carbon tax was introduced in BC in 2008.
Ironically, given the current positioning of Canada’s biggest political parties, pollution pricing is a historically conservative concept, because it is based on market economics. Half a century ago it was proposed by free-market champions like William F. Buckley Jr. and Milton Friedman of the Chicago school of economics, and their many followers from federal conservative parties around the world. Preston Manning, the godfather of Canada’s modern conservative movement, is one of many to support carbon pricing based on these principles.
Now, more than seventy countries of varying political stripes have some kind of pollution pricing, including the entire European Union. Most countries making significant progress in transitioning to a renewable, low-carbon energy grid have some form of carbon pricing in place.
Why the controversy?
The anti-carbon-price rhetoric has landed an effective political blow. This is despite the fact the Bank of Canada estimates the carbon tax is responsible for less than 1/120th of inflation in this country in recent years.
The terminology matters, in no small part because a catchy “axe the tax” rhyming scheme has gained traction at political rallies across the country. It is clearly a form of populism, but in a democracy, popular opinion counts for a lot.
The question we need to consider though, is who does the carbon tax hurt? We have heard the Prime Minister defend the tax as revenue neutral, meaning it’s more about shifting priorities than it is about funding government projects or departments.
The rebates are key. They are aimed at rewarding the majority of Canadians who pollute less and incentivizing the rest of us to make changes.
But the rhetoric has found resonance for a reason. In times when recovery from a global pandemic, supply-chain disruption, and global conflict have spiked oil (and food and housing) prices, people are worried about paying monthly bills. A recent poll found half of Canadians living cheque-to-cheque, unable to squirrel anything away for a rainy day.
Further tarring the image of the carbon tax is the fact that we pay the price of gas upfront, sometimes months before our cheque is deposited. That deposit is not indexed to our level of income, so the doctor uptown gets the same amount as the housekeeper downtown.
Canadians want affordability solutions from their government. Should the carbon tax survive, its success will one day be assessed based on how revenue (the portion not used on rebate cheques) is applied to make cost-saving technologies like heat pumps and electric vehicles more affordable for more people. This should include lower-tech heating solutions like improved insulation and building envelopes.
Entrepreneurial efforts on energy efficiency must be supported and harnessed toward systemic improvements to our building stock, so that renters and lower income homeowners can also benefit from technological improvements. Revenue should create an opportunity for economic reconciliation with Indigenous partners, who have been leading the renewable-energy revolution. At last count by Indigenous Clean Energy, in 2020, there were 197 medium-to-large renewable energy projects with Indigenous involvement in Canada. Several dozen more have since been announced worth well over $40 billion.
Regardless of one’s political stripes, it is important not to lose sight of the benefits of carbon pricing as politicians, manufacturers of gas-consuming vehicles, and oil companies pitch easy, short-term non-solutions to our financial woes. It is also worth remembering that the Government of Canada has little to no control over the global price of fuel.
Carbon pricing is a helpful tool to support an economic transition
The reason more than 200 economists signed an open letter in support of Canada’s carbon tax is because it is a market-based solution they believe is the lowest-cost means of reducing greenhouse gas emissions. Taxing carbon is a low-impact (compared to increasing income tax) disruption to the market that discourages greenhouse gas emissions and encourages greater efficiency.
Carbon pricing will also be judged in part in conjunction with how well Canada manages climate change in real time, planning for and responding to more frequent and severe natural disasters. The Government of Canada’s 2023 report “Funding climate change adaptation” estimates that every dollar invested in adaptation measures can save $15 in recovery costs. This still doesn’t account for related healthcare costs of pollution, let alone the tragic loss of human life.
A carbon tax is not the only way to fund the necessary and beneficial transition to a low-carbon economy, nor is it a replacement for the massive investment needed for true solutions. But as the economists point out, it is a policy that benefits us financially, environmentally, and socially. And there is no reason carbon pricing shouldn’t complement and support those large-scale investments.
The climate crisis demands that our political leadership use every policy lever available, including carbon pricing.
Chris Benjamin and Thomas Arnason McNeil are Senior Energy Coordinators with the Ecology Action Centre.