Carbon Tax Hike Shows High Cost of Federal Scheme vs Quebec’s

March 31, 2021 Updated: March 31, 2021

News Analysis

The April 1 increase in the federal carbon tax to $40 per tonne highlights the high cost of the federal pricing scheme compared with the cost to Quebecers under their provincial cap-and-trade policy, whose current carbon price is roughly half that amount.

Trevor Tombe, an economics professor at the University of Calgary, said federal allowance for the Quebec approach leaves that province with a lighter burden.

“They’re able to then have a cap on emissions that declines at a certain rate, but the price that is implied by that cap is less than the current carbon tax. So in a sense, they’re not enacting as stringent a climate policy as other jurisdictions.”

Tombe said the effect of Quebec’s cap-and-trade system equates to approximately $20 per tonne of carbon emissions. However, the federal carbon tax increases from $30 to $40 on April 1, making the difference more substantial.

“There’s starting to be a pretty significant gap between the prices here and the prices in Quebec,” he said.

“It’s a challenge that the feds have said they’re going to look at and negotiate with the provinces. But at some point, there’s going to be a need for Quebec to either put a floor on the price of their cap-and-trade system that is equal to the carbon tax, or for the feds to have kind of a surtax on top of the cap-and-trade price.”

Anything less, Tombe said, defeats the purpose of a national pricing on carbon.

“The whole idea is to have uniform policy—that’s the main motivation for the federal policy. And this is a real source of difference that is not sustainable. On the one hand, I can appreciate some political expediency where they just punted on the issue, but that can’t go on forever.”

Federal carbon tax rebates somewhat mitigate the disparity. Quebecers receive no rebates under their provincial scheme, while the federal government applies and rebates the carbon tax in provinces that do not have their own system. For these four provinces, the baseline 2021 rebates for a family of four are $600 in Ontario, $720 in Manitoba, $1,000 in Saskatchewan, and $981 in Alberta.

The carbon tax rebates don’t eliminate the policy problem, Tombe said.

“British Columbia, for example, they do have a carbon tax, and it is above the federal minimum. They don’t get the federal rebate, either. So whether you get a rebate or not just depends on whether you’re covered by the federal backstop or not, not what your price is.”

Besides this, any tax is an economic drag, whether it is rebated or not, he said.

“The rebates don’t eliminate the effect of carbon taxes on GDP growth,” Tombe said. “Of course, any action to lower emissions would come with an economic cost. And that’s a fair enough debate to be had around, ‘What are the costs we’re willing to incur?’… Even the government’s own estimates do note that the policy will lower economic growth over time.”

It might also be argued that cap-and-trade approaches the emissions problem so differently from a carbon tax that it could never constitute a uniform policy.

“Cap-and-trade works by fixing the total amount of allowable emissions and then auctioning off the permits or having some market where firms can buy and sell,” Tombe explains.

“There you have certainty over the quantity of emissions, but you don’t really know what the price is going to be, because that depends on the auction. Whereas carbon taxes, you have certainty over the price because that’s fixed in the legislation, but you don’t know what emissions are going to be.”

In a 6–3 decision, the Supreme Court of Canada defended the constitutionality of the federal carbon pricing scheme. In a press conference on March 25 following the decision, Alberta Premier Jason Kenney acknowledged Quebec’s help but also noted the Supreme Court’s apparent deference to la belle province.

“Quebec actually did join us as an intervener to support provincial jurisdiction in this reference before the Supreme Court. … Mr. Chief Justice Wagner made a very deliberate point in responding to Quebec’s lawyers saying, I’m paraphrasing, ‘Don’t worry, you’ve already got your cap-and-trade scheme, you’ve got your own policy discretion, the rest of this doesn’t affect you,’” Kenney said.

“Having worked in Ottawa, it’s clear to me that Ottawa elites are much more sensitive to provincial jurisdiction and tensions within the Federation when they emerge from Quebec versus when they emerge from the West. That’s hardly a novel observation. I think today’s decision underscores that.”

Ted Morton, a former Alberta cabinet minister and a professor emeritus of political science at the University of Calgary, says although Quebec might be insulated from the effects of a mandatory national carbon tax, the Supreme Court decision that validated it threatens the jurisdictions of all provinces, including Quebec.

“They don’t [care] about carbon tax because they’re doing cap-and-trade, right? As some people pointed out, a cap-and-trade at $20 a tonne is a lot cheaper than a carbon tax,” Morton said in an interview.

“This decision at the policy level, it’s a defeat for Saskatchewan and Alberta and Ontario. But at the constitutional level, the medium to long term, it’s a defeat for all defenders of provincial rights, including, of course, Quebec.”

Section 92A of the Constitution says, “In each province, the legislature may exclusively make laws in relation to … development, conservation and management of non-renewable natural resources … [and] the generation and production of electrical energy.”

Although Alberta may want Quebec to carry its weight on carbon pricing, Morton says Quebec can help Alberta in a fight for provincial jurisdiction against Ottawa.

“I’m hoping that Kenney or someone on Kenney’s team will talk to people in Quebec City and say, ‘Look, this is not acceptable for anybody who cares about Section 92A. Remember, Section 92A explicitly includes hydro electricity use.”