Carbon Tax Impedes Hopes of Exports, Investment Driving Canadian Economy

Another blow to Canadian business competitiveness

A woman fills up in Toronto on April 1, 2019. Gas prices rose by 4.42 cents a litre with the introduction of the federal carbon tax on that day. (The Canadian Press/Christopher Katsarov)

NEWS ANALYSIS

A long-standing gripe of businesses in Canada is their competitive disadvantage relative to the United States, which experts say has been exacerbated by the newly implemented federal carbon tax.

It also works to counter the Bank of Canada’s mantra that exports and business should drive the economy, given the level of household indebtedness, says Philip Cross, senior fellow with the Macdonald-Laurier Institute public policy think tank.

“You have to wonder what is the underlying goal of policy-makers here,” Cross said in an interview. “We have a policy that encourages households to spend more and penalizes the competitive position of businesses when they’re trying to invest and export.”

Courtesy of the federal “backstop” carbon tax enforced in Ontario, Manitoba, New Brunswick, and Saskatchewan, gas prices went up by 4.42 cents a litre on April 1 and will go up by 11.05 cents a litre in April 2022. Other fuel prices rose by varying amounts.

Now that the four Conservative-led provinces have the federal carbon levy, with the feds providing rebates to most of those province’s consumers, the big loser is small and medium-sized business.

Tax experts say British Columbia got it mostly right when its carbon tax scheme was revenue-neutral—accompanied by corporate and income tax cuts. But that’s no longer the case in B.C. and for any other province, which speaks to the “tax-grab” criticism.

“If we try to change the world by ourselves, it’s not going to work. It’s not going to make any difference. We’re just going to hurt our firms,” Cross said.

He says Canada should just do what the United States does when it comes to climate change policy. That way, the policy doesn’t become a relative disadvantage to Canada’s businesses.

Cross cites the United States reducing its GHG emissions as factories switched from coal to natural gas due to the drop in its price. Thus it appears possible for countries to reduce GHG emissions without explicitly having a policy targeting them.

The Canadian Chamber of Commerce also made it clear that the costs of new climate policies should be offset by other regulatory reductions. The organization is concerned about the tax inefficiencies, which also render compliance challenging and increase costs on small businesses and households.

“We’re getting the German regulatory scheme without having the massive German industry,” said Kenneth Green, senior director of natural resource studies at the Fraser Institute, in an interview.

Many doubt the tax’s effectiveness in reducing greenhouse gas (GHG) emissions meaningfully. Economists say energy demand is inelastic—consumers and businesses can’t simply flick a switch and not use it.

The Canadian government admits that the anticipated effects of the current level of the carbon tax won’t be sufficient to meet Paris targets. And that includes the cost of the carbon tax rising by $10 a tonne for the next three years.

The reality is that the level that the carbon tax has to reach to truly change energy consumption—academic economists suggest $150 to $200 per tonne or even much higher—is wholly unpalatable and politically unfeasible.

‘Virtue Signalling’

Gas prices fluctuate on a weekly basis. And given the rebates the majority of households will receive—with some expected to be more than what they pay in carbon taxes—the new tax isn’t expected to change people’s behaviour.

“It’s a virtue-signalling tax,” Green said. “It’s a posturing of ‘We’re eco-friendly,’ but it’s not really going to do something measurable.”

Aside from the issues of the carbon tax’s implementation, inefficiency, and whether or not it meaningfully moves the needle on energy consumption, a big pushback comes from Canadians’ dislike of consumption taxes like the Goods and Services Tax (GST), which have seen widespread implementation across Europe.

“North Americans are very suspicious, very anti-consumption tax compared to Europe,” Cross said. On the other hand, Canadians are accustomed to income taxes, which date back to World War I, when they were introduced to fund it. Acceptance of income taxes has become entrenched given their inclination toward making the rich pay more.

Cross and Green have wide-ranging doubts about how governments are implementing carbon taxes.

“I think it was very naive of governments to have ignored that historical context,” Cross said. “Governments that ignore history do so at their peril.”

Green takes issue with the government abandoning revenue neutrality in order to spend on climate change initiatives it deems worthy.

“The whole point of the exercise is you’re going to tap the knowledge of the market to encourage people to find lower cost ways to reduce green house gas emissions,” he said, adding that now it’s the government picking winners and losers in the energy sector.

Green adds that the introduction of the levy in Canada “violates every tenet of the economic textbook model of carbon taxes.”

Business Uncertainty

Virtually every economic activity leads to carbon emissions, and a carbon tax makes things more expensive. The goal is to make people and businesses cut back, but this leads to economic contraction.

The Parliamentary Budget Officer estimates that the carbon tax would result in a 0.5 percent ($10 billion) hit to the GDP in 2022, compared to a scenario without one.

Across the country, different provinces employ different schemes. They include cap-and-trade, which the previous Ontario government had been working to implement. And of course, the current situations may change after provincial and federal elections.

All this makes it more difficult for businesses to plan capital spending.

“There’s one thing we know firms don’t like—it’s uncertainty,” Cross said.

And as firms adjust by either raising prices or lowering the quality of inputs to maintain a certain cost structure, consumers’ rebates will effectively get clawed back from the un-rebated sectors of the economy, says Green.

He expects an increase in cross-border shopping, with American goods that are not carbon-taxed becoming cheaper.

“The U.S. border is not very far away for most of the people in Canada,” Green said.

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