People cross-country ski in the cold weather with an industrial plant in the background, in Toronto, on Feb. 4, 2022.Nathan Denette/The Canadian Press
As the federal Liberals may have mentioned once or twice, a carbon tax is the least painful way to drive down greenhouse gas emissions. The motivation to avoid its pinch increases as the price on carbon rises, leading individuals and businesses alike to conserve and to innovate.
The Liberals have touted that economic theory for years, and used it to batter their Conservative opponents. Look past the Liberals’ rhetoric, however, and the importance of carbon pricing starts to fade somewhat.
For a start, carbon pricing on fossil fuels and on industries will contribute less than half of projected reductions in Canada’s greenhouse gas emissions, even using the most generous assumptions. And the federal government now appears to be much more focused on layering regulations and subsidies on top of carbon pricing rather than fixing its shortcomings.
The most egregious example is the push to impose an emissions cap on oil and natural gas producers. Even assuming that a cap on emissions does not end up being a cap on production – a far from certain conclusion – Ottawa’s proposal is still needlessly intrusive micromanaging.
One of the great marvels of properly designed industrial carbon pricing is its agnosticism about where greenhouse gas reductions should come from. Indeed, a molecule of carbon dioxide has the same impact on global warming, whether it is emitted by a refinery in Alberta or an aluminum smelter in Quebec or an electric-vehicle battery plant in Ontario. Price signals push each to reduce emissions, without the need for specific rules and timelines.
By contrast, Environment and Climate Change Minister Steven Guilbeault is writing a rulebook just for the oil and gas sector. Unsurprisingly, that heavy-handed intervention has led to a confrontation with Alberta – again, a contrast with the collaborative approach taken by Ottawa and the province over economywide industrial carbon pricing.
The politics of that fight work nicely for both the federal Liberals, who can claim they are cracking down on the oil industry, and for Alberta Premier Danielle Smith, who can assert that she is standing up to Ottawa. Great politics, perhaps, but not at all helpful in the drive to reduce greenhouse gas emissions, particularly as legal challenges to Ottawa’s expanding reach make their way through courts. As this space said on Wednesday, Ottawa should move expeditiously to resolve those legal questions.
But the Liberals are on more solid legal and political ground with carbon pricing, particularly the version that industry pays and is not as visible to irate voters. There are obvious steps to take to improve the power of carbon pricing.
One of the most obvious would be to establish a firm floor for carbon pricing on fossil fuels that includes Quebec, building on the move in July to end the effective exemption of the Atlantic provinces from carbon pricing. Quebec is nominally adhering to the federal carbon price, but in reality, its cap-and-trade system has resulted in a much lower burden. In the most recent auction in August, the settlement price of a tonne of carbon credits was $47.46, less than three-quarters of the supposed federal floor carbon price of $65.
Another key reform would be to make the federal fuel charge truly revenue neutral, by returning all proceeds directly to consumers and businesses rather than holding back 10 per cent as a green-economy slush fund. Those refunded proceeds should include the hundreds of millions of dollars in GST that Ottawa charges each year on its carbon tax.
The biggest opportunity to boost carbon pricing is in its industrial incarnation. The government has exempted too large a percentage of industrial emissions from the reach of carbon pricing, notionally to protect export-sensitive industries and to avoid imports from displacing domestic goods. Those exemptions need to be scaled back more quickly.
A carbon tariff would allow Ottawa to act much more aggressively, in that imported goods would have carbon pricing applied in equal measure. The federal government could use those funds to neutralize the disadvantage Canadian exporters faced in overseas markets. Such a tariff would need to be put in place in conjunction with the United States, and the European Union, which is already moving in that direction.
There is a role for smart regulations and subsidies to play in supplementing carbon pricing. But the Liberals should take to heart their own rhetoric, and refocus their climate policy on improving, not subsuming, carbon taxation.