ANALYSIS: Ottawa Will Doom Its Own Carbon Tax With Additional Policies, Says Public Policy Expert

While carbon pricing has turned into a political debacle for the Liberals, a leading public policy and tax expert suggests the tax itself isn’t the main problem
ANALYSIS: Ottawa Will Doom Its Own Carbon Tax With Additional Policies, Says Public Policy Expert
Heating oil, more widely used in Atlantic Canada for home heating than other parts of the country, is delivered to a home in this file photo. (John Rucosky/AP Photo via Tribune-Democrat)
Rahul Vaidyanath
11/8/2023
Updated:
12/13/2023
0:00
The carbon tax has been challenged right up to the Supreme Court. It’s been ineffective in reducing emissions. And it’s been widely criticized for increasing inflation and hitting Canadians’ wallets even after federal rebates.

While carbon pricing has turned into a political debacle for the Liberals, a leading public policy and tax expert suggests the tax itself isn’t the main problem. He says Ottawa’s overall strategy to achieve emissions-reduction goals by introducing additional policies in essence shows a lack of belief in the effectiveness of the carbon tax.

“The carbon tax is going to be doomed in Canada because of the approach being used,” Jack Mintz, president’s fellow at the University of Calgary’s School of Public Policy, told The Epoch Times on Nov. 7.

The approach, Mr. Mintz said, involves a host of complementary—or effectively replacement—policies like subsidies and mandates for electric vehicles, and clean fuel regulations, with the intent of avoiding the need to raise carbon taxes even higher.
“The federal government decided a long time ago that the carbon tax is not working very well in reducing emissions. And so they’ve got to go to these other policies,” Mr. Mintz said.“They’ve introduced themselves doubts about the carbon tax with these complementary policies, even though they don’t know whether the complementary policies are going to work,” he added.

Carrot Versus Stick

Prime Minister Justin Trudeau on Oct. 26 announced a three-year pause on the carbon tax for heating oil. Accompanying the pause on that federal fuel charge was a subsidy program for Atlantic Canadians to buy electric heat pumps.

Mr. Mintz called the move a “tremendous error on the part of the federal government” due to the additional politicization of the carbon tax. With another policy and exemption, it brings into question the levying of a carbon tax in the first place, he said.

Rating agency DBRS Morningstar said in a Nov. 6 commentary that the Liberals’ policy change on heating oil and the related discussion is a “continuation of a long-standing issue in Canada on the disproportionate impact of federal policies related to climate and the environment on predominantly resource-producing provinces.”

DBRS Morningstar added that Ottawa’s move is another sign of the continuing trend away from a universal carbon tax toward more industry-specific regulations like zero-emission vehicle targets, clean fuel regulations, and the oil and gas emissions cap.

Energy policies have historically relied on a “stick” approach—which includes carbon pricing—to enforce greenhouse gas emissions targets until more recently, noted Ravikanth Rai, senior vice-president of energy, utilities, and natural resources at DBRS Morningstar.

In a transcript of his comments for Credit Outlook Canada 2024, published Oct. 12, he said that “both Canada and Europe are now gravitating toward the carrot approach to entice businesses to build and maintain a presence outside the U.S.”

Mr. Rai said the United States has not taken the “stick” approach but adopted the “carrot” approach instead, which involves tax credits, incentives to use cleaner energy, and subsidies to promote green innovation.

But Mr. Mintz pointed out in a Financial Post op-ed on Oct. 31 that “mandates, regulations, and subsidies are bound to be ridden with cronyism and political favouritism,” whereas carbon taxes, though unpopular, are economy-wide and “neutral.”
The principle, Mr. Mintz explained, is that the market can then decide how to adjust to the tax, instead of having the government pick winners and losers.

Carbon Tax and Inflation

The Bank of Canada is mandated to hold inflation at 2 percent, but the carbon tax is an extra complication.

Economics professor at the University of Calgary Trevor Tombe told The Epoch Times on Nov. 3 that if the central bank succeeds in its mandate, then “the carbon tax doesn’t actually increase price levels but just changes relative prices between items.”

“One could then say that the carbon tax increases interest rates and slows economic growth. That affects affordability, of course, but not through prices. Instead, the effect is through incomes and productivity,” he added.

Thus the carbon tax would force the BoC to hold a higher level of interest rates to keep inflation at 2 percent, all else equal.

Speaking in Calgary on Sept. 7, Bank of Canada governor Tiff Macklem said the carbon tax raises inflation each year by 0.15 percentage points.
However, in its calculation arriving at this figure, the BoC only considered the direct impact on the consumer price index components most clearly affected by the tax, like gasoline, heating oil, and natural gas. It excluded any indirect effects, for example from increased costs along the supply chain. The central bank explained this calculation in a letter sent in response to professor Sylvain Charlebois of Dalhousie University’s Agri-Food Analytics Lab.

Mr. Tombe estimates that the indirect effects would add 0.05 percentage points to inflation, for a total of 0.2 percentage points. But he cautions that this add-on can’t be known with certainty, unlike the 0.15 figure that is readily calculable.

But then, while testifying before the House of Commons finance committee on Oct. 30, Mr. Macklem said eliminating the carbon tax would provide a one-time reduction to inflation of 0.6 percentage points—a completely different way of looking at the impact on inflation.
Mr. Tombe estimates that this figure would grow to about 0.8 percentage points when factoring in indirect effects. Thus, that would be a one-time reduction of 21 percent given the latest year-over-year inflation reading was 3.8 percent in September.

Punitive Tax Hurts Atlantic Canada

The federal carbon tax went up to $65 a tonne on April 1 and is slated to go up every year by $15 a tonne until 2030, when it will cost $170 per tonne.

“We have kind of an odd situation where we’re going in a direction completely different than the United States,” Mr. Mintz said, noting that the United States, aside from a few states, does not have a carbon tax.

In his FP oped, Mr. Mintz also noted that Canada’s average carbon tax or cap-and-trade price was US$40 per tonne in 2021, significantly higher than the US$4 average across 71 countries at the time.

Carbon taxes have been a hard sell in a lot of countries, Mr. Mintz said, adding that other countries grant a lot of exemptions and thus the effective carbon tax rate is low.

The carbon tax adds over 17 cents to a litre of heating oil in most provinces, and Ottawa plans to raise it to more than 45 cents a litre by 2030.
Inflation for September was higher than the 3.8 percent national average for three of the four Atlantic provinces, and gas prices accelerated the most in Eastern Canada. Energy was up 5.4 percent.

The four Atlantic provinces became subject to the federal carbon tax in July.

Rahul Vaidyanath is a journalist with The Epoch Times in Ottawa. His areas of expertise include the economy, financial markets, China, and national defence and security. He has worked for the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York, and Los Angeles.
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