Carbon pricing systems, intended to help Canada reduce its greenhouse gas emissions and fund local green projects, have now been established in all provinces and territories across Canada. However, on closer examination, their implementation has highlighted significant shortcomings: a lack of fairness and a lack of consistency.

In December 2016, the Pan-Canadian Framework for Clean Growth and Climate Change was agreed to by the federal and territorial governments and every province except Saskatchewan, which argued it would intrude on provincial rights. The framework required each province and territory to implement a carbon pricing system to help reduce Canada’s greenhouse-gas emissions by 30 percent below 2005 levels by 2030. Provinces and territories had a choice of systems: an explicit price-based system (as British Columbia chose), a cap-and-trade system (Quebec) or a hybrid of the two (Alberta).

The federal government also developed its backstop system, an output-based pricing system (OBPS) for industries with emissions exceeding 50 kilotonnes of CO2e (carbon dioxide equivalent) per year and a carbon levy on the carbon content of all liquid fuels (such as gasoline, diesel and fuel oil), natural gas and electricity produced from emissions-intensive energy sources such as coal, petroleum coke and natural gas. The backstop could be adopted by any province or territory.

Regardless of the system, the cost of emissions increases over time, thereby making emissions-intensive energy sources more expensive. In the case of the backstop, the incremental carbon price starts at $20 per tonne in 2019, increasing by $10 per tonne each year to $50 per tonne by 2022. For example, the carbon levy on gasoline rises to 11.05 cents per litre in 2022 from 4.42 cents per litre in 2019. The annual cost increase for gasoline is 2.21 cents per litre.

Price-based systems such as the backstop include a provision to return part of the revenue to taxpayers in order to reduce the impact of the carbon levy. But shouldering some of the cost is what experts hope will encourage Canadians to change their habits — consuming less energy and switching to low-emissions energy sources.

Carbon pricing was originally to go into effect across Canada in 2018. However, given the time required to develop the systems, provinces and territories were given until September 2018 to submit their proposals to the federal government for assessment. The backstop was used as the benchmark for the assessments. Any provincial or territorial system that failed to meet these requirements would have the backstop imposed on it by the federal government.

The federal government announced its decisions in October 2018. As a result, all provinces and territories now have some form of carbon pricing system that will start in early 2019. Most systems proposed were approved, but Saskatchewan, Manitoba, Ontario and New Brunswick have had the federal backstop imposed because their systems did not meet the minimum requirements. (These provinces plan a court challenge over the decision.)

The systems being used in Atlantic Canada are of particular interest because the region’s provinces have large rural populations, experienced weak GDP growth between 2008 and 2017, have some of the lowest median household incomes in the country and rely disproportionately on fuel oil and electricity for heating, reflecting, in part, the limited availability of natural gas in the region.

New Brunswick’s original proposal, a climate fund supported by revenues from a provincial OBPS and a portion of the provincial transportation fuel tax, was rejected by the federal government. As a result, New Brunswick households will pay the backstop rate for all energy products except electricity. In an apparently political move, the federal government dropped emission costs for the Belledune coal-fired power station to about $1 per tonne from $20 per tonne.

Nova Scotia developed an in-province cap-and-trade system covering emissions from electrical generation, industries emitting more than 50 kilotonnes of CO2e per year and distributors of liquid fuels and natural gas. Companies with emissions above their cap will pay $20 per tonne in 2019; this rises by 5 percent annually. The federal government approved the program. Since cap costs will be passed on to customers, Nova Scotians will pay an extra 1 cent per litre for liquid fuels in 2019, rising to 1.2 cents in 2022, and 0.10 cents per kilowatt hour (kWh) in 2019, rising to 0.19 cents per kWh in 2022.

Prince Edward Island’s original program, an OBPS applied to the province’s sole large emitter and incentive programs to reduce emissions, was rejected by the federal government. Subsequent negotiations resulted in a two-year agreement to apply a carbon levy to road transportation fuels and to exempt home-heating fuel and electricity for 2019 and 2020. The provincial fuel excise tax can cover a portion of the carbon levy. Consequently, PEI consumers will pay an additional one cent per litre on gasoline and other transportation fuels in 2019, rising to two cents in 2020. (A new carbon pricing agreement between the federal and PEI governments will be required for 2021 and 2022.)

Newfoundland and Labrador’s system, similar to the federal backstop, targets industrial emitters and includes a carbon levy on fuels except home heating and off-grid diesel electricity generation in remote communities. This plan was accepted by the federal government. The impact on the average consumer will be mitigated somewhat because the provincial government was allowed to repeal the province’s temporary gasoline tax of four cents per litre and replace it with the federal carbon levy of 4.42 cents per litre in 2019. The levy increases by 2.21 cents per litre in subsequent years.

The impact of the different pricing systems is illustrated by the annual costs and the cost per tonne of emissions paid by two prototypical households in Atlantic Canada, where fuel oil and electricity are the predominant energy sources for heating.

Each prototypical household has an annual energy demand of 2,800 litres of gasoline (two vehicles) and 10,000 kWh of electricity (for lighting, appliances and hot water). For space heating, a household using fuel oil consumes 2,000 litres (using an 85-percent efficient furnace) and 18,300 kWh in an electrically heated household (assuming baseboard electric heating).

Emissions from liquid fuels (gasoline and fuel oil) are the same for all provinces, while emissions from electricity depend on the energy mix of the provincial electricity provider. The annual costs and cost per tonne of emissions for the oil-heated house are shown in figure 1, while figure 2 shows the results for the electrically heated household.

The cost per tonne, which includes all emissions (whether they are priced or not), indicates how close each household is to paying the incremental cost per tonne set by the federal backstop.

Since Newfoundland and Labrador and Prince Edward Island are exempt from paying for electricity or heating oil emissions, oil-heated households are required to pay only for gasoline emissions. The Nova Scotia household pays the provincial rate for all its emissions, while New Brunswick pays the backstop cost for gasoline and heating oil emissions, but not for electricity emissions.

If households are using oil for heating, the one in New Brunswick has the highest annual cost, starting at $239 in 2019 and increasing to $593 by 2022, followed by Newfoundland and Labrador ($12 in 2019 and $197 in 2022) and then Nova Scotia ($58 in 2019, rising to $77 in 2022). PEI’s costs are shown only for 2019 ($28) and 2020 ($56) since the province’s carbon pricing agreement with the federal government ends in 2020.

Residents of Newfoundland and Labrador and Prince Edward Island have the same annual cost for electrically heated homes as they do using an oil-heated home since electricity is exempt in both cases. In New Brunswick, the annual cost is significantly lower because the emissions intensity of electricity is less than that of oil, and electricity is not charged the backstop price; by 2022, the annual cost is $324. However, in Nova Scotia, the annual costs are higher because emissions costs for electricity rise faster than for fuel oil; for example, in 2022, the cost is $87.

When households use electricity for heating, Newfoundland and Labrador’s emissions are lower; however, the annual costs remain unchanged, meaning that the cost per tonne rises ($16 to $27 in 2022). New Brunswick would experience a cost-per-tonne decline when switching from oil to electric heating ($40 to $22 in 2022). The cost per tonne would decline slightly if Nova Scotia households switch to electricity. The cost per tonne in Prince Edward Island would be unchanged. None of the households pays anything close to the backstop’s incremental cost per tonne regardless of the fuel used for heating.

These examples illustrate shortcomings in Canada’s approach to carbon-pricing.

The first is the lack of fairness. All individuals and families living in New Brunswick can claim a Climate Action Incentive rebate when filing their annual tax returns. The amount is based on family size rather than income. Since costs incurred must be carried all year, low- or middle-income earners could be subject to economic hardship. In such cases, rebates should be given more frequently, as is done in Alberta.

The rebate does not take into account the types of energy or quantities used. Households with annual costs that exceed the rebate must cover any shortfalls, while ones with annual costs under the rebate effectively receive a bonus.

Second, there’s a lack of consistency. Newfoundland and Labrador, Prince Edward Island and New Brunswick proposed using road taxes to cover all or part of the cost of transport emissions, yet only Newfoundland and Labrador’s and Prince Edward Island’s proposals were approved. The annual costs, incremental costs and cost per tonne vary across the four provinces for the same type of fuel.

Finally, it’s important to note that Canada now has a price on carbon, but many economists argue that in systems such as those in Atlantic Canada, the price is too low to make an impact on emissions levels.

As Canada’s Ecofiscal Commission has noted, regardless of the system chosen, it is essential that carbon pricing programs apply an equal price to emissions across jurisdictions. One of the cornerstones of fairness in taxation is horizontal equity. In carbon pricing, two households of similar incomes, demographics and energy usage should be treated and impacted equally regardless of province.

Canada’s carbon pricing system needs to be redesigned. If it is to gain widespread acceptance, it must be fair and consistent. If it is to make a significant contribution to Canada’s emissions reduction targets, it must be more stringent.

Photo: Shutterstock/Andrii Medvednikov

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