What the Trudeau government’s scaling back of the carbon tax means

Far from the giddy days following the Paris Agreement, Canada’s carbon tax has recently run into strong headwinds — despite recent polling that shows a majority of the public is on board.

The tax is set to come into effect in January, but Ontario’s newly minted premier, Doug Ford, is hard at work pulling the province out of its cap-and-trade system; meanwhile, Jason Kenney is looking likely to win the Alberta election next year and is promising to axe Alberta’s carbon tax.

Saskatchewan premier Scott Moe is staunchly opposing any carbon tax in his province.* U.S. President Donald Trump is running as fast as he can in the opposite direction from climate action, promoting the coal industry while mocking alternatives.

In the face of these political headwinds, earlier this month the federal Liberal government proposed to scale back its own commitment to taxing carbon — in the name of protecting international competitiveness for heavy-emitting industries.

What had been a plan to tax 30 per cent of emissions is being rolled back to just 20 per cent for most large emitters. This will mean less incentive for companies to invest in efficient technologies and processes, and less reward for companies that are already ahead of the curve.

It almost certainly means more carbon will be emitted, and that Canada’s climate goals, committed to under the Paris Accord, will be that much harder to meet.

“Clearly, competitiveness concerns are re-permeating through every policy conversation these days, and they have been doing so for a little while,” Isabelle Turcotte, interim director of federal policy at the Pembina Institute, a sustainable energy policy think tank, told The Narwhal.

“The government was somewhat overly cautious here… and [has] given a little more relief than it needed to really mitigate these risks.”

Canada’s carbon tax a moving target

Central to the new scheme is a system designed to limit the negative impacts on industries that by their nature emit lots of greenhouse gases, such as the oil and gas industry, cement manufacturers or steel mills.

The way this system — the so-called “output-based pricing system” — will work is somewhat more complex than a simple tax on emissions.

First, the government will determine the national average emissions intensity for an industry — so the amount of carbon produced per unit of production (say, a barrel of oil).

Next, it will set a target level lower than that average.

In its draft regulations in January, the government set the level at 70 per cent of the average emissions for most industries. Finally, the tax will be applied to any emissions that go above that target.

What the government is now proposing is to increase that baseline target — giving industrial sectors more room to pollute without being taxed.

Imagine three steel producers. One, Company A, is emitting 30 kilograms of CO2 for every load of steel it sells. Company B is much less efficient; it produces 60. Company C is slightly less efficient than Company A, and right on the target set by the government. Under the proposed rules, Company B would be taxed on its carbon emissions over the target, while Company A would be generating credits that it could sell to Company B. All three have an incentive to reduce their emissions, but only Company B will be paying carbon taxes.

The carbon tax plan also sets targets within — rather than across — industries. That means less carbon-intensive industries won’t benefit as much as they would if they were compared directly with big polluters.

But cleaner performers within industries — for example, a cleaner oilsands mine — will get a leg up over a dirtier one.

Carbon pricing electricity ‘awkward’: expert

It’s one thing to applying the carbon pricing system to ultra-competitive, internationally exposed industries that can’t help but produce carbon emissions — like steel.

But the new pricing system will also apply to the production of electricity, which is “somewhat awkward,” Turcotte said.

“Electricity generation is not emissions-intensive by necessity,” she said.

It’s also not exposed to pressure from international markets in the same way as steel or agricultural fertilizers are, meaning it doesn’t need the same protection from other countries that don’t have carbon prices, like the U.S.

The reasons for including electricity generation in the system are not entirely clear, although it could prevent an immediate increase in electricity prices for some consumers.

“I don’t think they had to do that, but they did do that,” Chris Ragan, director of the Ecofiscal Commission, said.

“Surprise, surprise, there’s politics that plays a role in these policy designs too — not just pure economics.”

The reasons may not be clear but the effects appear easy to predict: namely, a slower transition away from fossil fuel electricity.

Electrical generation makes up about 10 per cent of Canada’s greenhouse gas emissions, according to the National Energy Board. Turcotte said the decision to include electrical generation in the output-based pricing system could mean trouble for meeting Paris targets.

“We’re concerned by the approach to pricing emissions in the electricity sector, and we’re not sure how these align with our Paris agreement targets, and to getting to our renewable energy targets as well,” she said.

It could also mean that less emissions-intensive sectors will have to pick up the slack for the heavier polluters in meeting a national goal.

Canada’s gap between projected emissions and Paris targets is growing, something the government blamed on a combination of growth in oil and gas and “demographic changes.”

When The Narwhal inquired as to how ‘demographic changes’ relate to growing emissions, Environment Canada declined to elaborate on what relative contribution oil and gas were expected to make compared to demographics.

“We have a target as a country, and when a sector is unwilling to take leadership — when it’s given all these really enabling conditions with great incentives that actually give them the money to make those investments — it increases the burden on other sectors of our economy and of society,” Turcotte said.

International trade concerns

A major concern the federal government says it’s trying to address with the new system is the concern that Canadian firms could be put at a disadvantage relative to foreign counterparts who don’t have the same tax.

The way economists see it, a Canadian firm paying more under the carbon tax could lose customers to an American firm that isn’t paying for its emissions because the American goods would be cheaper. If the American firm started producing more while the Canadian one ramped its production down, the total pollution hasn’t actually decreased, it has just “leaked” across the border.  

Some industrial sectors are both big emitters and are exposed to competition from international trade. Nationally these sectors amount to only about five per cent of the economy, but in Alberta and Saskatchewan, it’s about 18 per cent.

“To not do anything for these sectors is to increase their costs and then walk away, and then let them shrink,” Ragan said. “The goal of climate policy isn’t to reduce emissions by shrinking our economy. The goal is to reduce our emissions by maintaining a healthy economy…but get cleaner.”

Ragan believes the government’s approach to pricing within sectors is the right way to address this problem, and says the changes in the threshold for emissions intensity are “pretty small” and “in a good direction.”

He, like Turcotte, believes government could be doing more to publicly defend the importance of a carbon tax.

The lack of a real push makes implementation harder politically than it needs to be — and opens the door for opposing parties and jurisdictions to reject the tax in favour of less elegant solutions.

“It is not well enough understood [by the public] why carbon pricing is economically the best way to do this, relative to the alternatives,” he said.

If Ottawa proceeds with its draft plan and allows for an 80 per cent threshold for most industries’ emissions intensity, Turcotte and Ragan say the next step should involve gradually lowering the cap as other trading partners introduce their own carbon pricing systems.

Essentially, this would provide incentive for companies to gradually improve operations — or face higher taxes.

There is not currently a plan to lower the cap, but an increase in the tax rate itself is built in, from $20 per tonne to $50 per tonne by 2022.

*This article has been updated to reflect this fact that Scott Moe is the current premier of Saskatchewan, not Brad Wall.