Carbon Pricing FAQ

Update on June 28, 2019: The Ontario Appeal's Court has ruled that the federal government's price on carbon is indeed not a tax. This article was originally written without knowledge of the legal difference between taxes and pricing. The reader should keep this in mind and take note that the Greenhouse Gas Pollution Pricing Act does not call for any taxes to be put on any Canadian. The title of this post was updated to reflect this but the content below was left unchanged.

The carbon tax has quickly become one of the biggest political talking points today in Canada and the biggest in my home province of Saskatchewan. It seems, to me at least, that those in opposition of a carbon tax are doing an effective job at spreading misinformation on the topic, while on the other hand, its proponents have failed to properly inform the general public about why they should pay a carbon tax.

In order to "clear the air" regarding the carbon tax, and instead of repeating myself over and over again in conversations, I have decided to compile a list of frequently asked questions and will do my best to answer them here. I will answer some of the most popular questions in this first part, and will answer further questions in a second post later.

I am certainly not an expert on the topics of climate change and economics, but I am passionate about getting the facts right, even if they challenge my established beliefs. I will do my best to seek out credible sources for the claims I am posting, but I am human and if I get anything wrong, please feel free to comment below with details and I will update this with any new, credible evidence.

What is a carbon tax?

A carbon tax is a tax levied on the carbon contents of fossil fuels. The goal of a carbon tax is to reduce unfavorable levels of carbon dioxide emissions and thus slow down climate change and the negative effects it has on human health and the environment. According to the fundamentals of economics, making a good more expensive, like adding a carbon tax to fossil fuels, will lower the demand for the product.

Without a carbon tax, companies and individuals that burn fossil fuels are able to avoid the social costs of emitting heat-trapping greenhouse gases. Economic theory considers pollution such as greenhouse gases as a negative externality, which have a negative effect on parties not directly involved in the transaction, resulting in market failure. By applying a tax on the negative externality (in this case, fossil fuels), the social costs of using these goods are better accounted for.

Another key point to consider is that a carbon tax is an indirect tax, much like the GST, which is levied on a transaction. This differs from a direct tax, like income and property taxes. An indirect tax is more flexible than a direct tax and allows companies and individuals to make decisions on where to spend their money in order to avoid or pass on the tax.

Essentially, a carbon tax punishes a behavior we don't want, which is the canonical right-wing, market-based approach to changing behavior.

Is climate change real?

Scientific consensus is that man-made climate change due to the burning of fossil fuels is indeed real. Even Shell, one of the biggest polluters in the world, understood it as early as the 1980s. We don't need to take their word for it though, because we are seeing the effect of climate change already today.

The extreme wildfires in California, and throughout the world are quickly becoming a much more common occurrence thanks to climate change. Warmer winters are allowing the pine beetle to spread across the Rockies in Canada, devastating forests. The tinderboxes created by the effects of the pine beetle certainly contribute to the amount of forest and wild fires we are facing, which have doubled across Canada since 1970. Summers on the Canadian prairies can now almost be guaranteed to include several days or even weeks of smokey weather.

Flooding is increasingly becoming a worrisome trend in many places, including Canada. From 1983 to 2008, the annual cost of catastrophic insurable events ranged from $250 million to $500 million. Since 2009, however, in eight out of nine years, these costs have ballooned up to $1 billion or more a year, with a $1.8 billion average.

All over the world, weather is becoming more extreme. Dry seasons are dryer, wet seasons wetter, hurricanes are more intense and coastal cities are flooding as the tides get closer. We still get snow and cold days up here in Canada, but average temperatures on the land and in the sea are increasing. Remember that climate effects the weather, and not the other way around. As a wise friend recently told me, your personality is like the climate and your mood like the weather.

One of the saddest effects of climate change, however, has been the effect on other forms of life, such as the die-off and collapse of at least 29% of the Great Barrier Reef. Most life on this planet cannot effectively adapt to this sudden change of temperature and climate patterns. In fact, human behavior such as climate change is contributing to earth's sixth mass extinction event.

Even if you do accept climate change, but argue the phenomenon we are seeing today is caused by nature, I oblige you take a look at this helpful infographic.

If you don't accept that climate change is real and disagree that we must do something about it, then there really isn't much else that will convince you here. In order to have a constructive discussion about topics such as a carbon tax, we must agree to the relevant facts, and this post assumes you at least agree that we must reduce the greenhouse gas emissions that are warming and damaging the earth.

What are the alternatives to a carbon tax?

One might ask if there is something other than a carbon tax that can effectively accomplish the goal of reducing greenhouse gas emissions. Two alternatives come to mind: regulations, and cap and trade.

Regulations would theoretically place emissions limits on businesses and individuals and could include some form of incentives to stay under the limit. In order to achieve emissions targets, the right amount of incentives and deterrents would have to be determined, and this could involve a number of different programs targeting many different types of polluters.

Cap and trade involves having a central authority that allocates or sells a limited number of permits to discharge specific quantities of a specific pollutant per time period. Polluters are required to hold permits in amount equal to their emissions. Polluters that want to increase their emissions must buy permits from others willing to sell them. In theory, polluters who can reduce emissions most cheaply will do so, achieving the emission reduction at the lowest cost to society. Cap and trade is meant to provide the private sector with the flexibility required to reduce emissions while stimulating technological innovation and economic growth.

Both carbon taxes and cap and trade are price-based tools, and are efficient because they spread the cost of abatement across the entire economy. Contrast that with regulations, which are less flexible, and would be complicated and costly to enforce. With a price on carbon, companies can choose how they reduce their carbon footprint, instead of being forced to take specific actions.

Compared to cap and trade, however, a carbon tax is even simpler to administer. The Canada Revenue Agency already provides the infrastructure for taxing a particular item. The addition of a new tax would be relatively simple.

More discussion on the topic of carbon pricing vs. regulations can be found here.

Aren't taxes bad?

Some people might think taxes in general are bad. They may see taxes as something someone in an ivory tower is taking away from their hard-earned income. The problem here is that all first world countries with the highest standards of living in the world have various forms of taxes. In many cases, the highest taxed countries also have the highest standard of living (the Scandinavian countries, for instance).

We can thank taxes for things such as police and fire protection, national defense, roads, parks, healthcare, education and social assistance. Not every service can be offered effectively by the free market and the profit-motive. For instance, the goal is to keep people out of hospitals and prisons, but if these institutions had a profit-motive, there would be a conflict of interest between them and society. Instead, we pay taxes and elect representatives to lead these government programs and institutions in an effort to make society safe and opportunistic for everyone.

Problems occur, however, when our elected representatives do not spend our tax revenues wisely. This is where having an informed opinion and thinking critically is important at election time. We must hold our representatives to account, and ensure we are being taxed efficiently and that those revenues are being used effectively. The carbon tax is no exception.

What exactly is being taxed?

The federal government is imposing $20 per tonne of carbon dioxide emitted into the atmosphere starting in 2019. The tax will increase by $10 per year until it reaches $50 per tonne by 2022. This would be applied to any business or individual who consumes carbon-emitting fossil fuels, from gasoline, to propane, to coal, to natural gas. The amount applied would depend on how much carbon the particular fuel emits. Dirtier fuels such as coal, would be taxed much higher than less-dirty fuels like natural gas.

Does Ottawa get to decide what to do with carbon tax revenues?

In provinces that don't already have a pricing plan meeting the federal government's minimum standards, they will collect the carbon tax directly. 90% of the revenues will then be returned to families, while 10% will be returned to institutions that aren't able to pass the cost to the end-user, such as hospitals and schools. Revenues collected in a particular province, stays in that province, such as is the case for provincial income taxes that are collected by the Canada Revenue Agency.

Won't this make families worse off?

Humans are generally poor at planning for the future and are driven by instant gratification. This stems from our time as hunter and gatherers, when how we are getting our next meal was a daily concern. Today, most of us are fortunate enough to not have to live like that (though homelessness and poverty regretfully still happens). Despite this, humans are still instinctively motivated by quick rewards. Its a primary factor in our love for games and social media.

That being said, an effective carbon tax forces us to think about the problem now, instead of reacting later when it is likely far more expensive to resolve. Think about it like a retirement savings. An investment in our future generations. Climate change is already costing us today and its only going to get worse. Instead of gambling with our children's futures, we must invest in them now and help them avoid the consequences of our present actions and inaction.

So, although families will end up paying higher costs for food, power, heating and transportation now, we are making sure they don't suffer even higher costs down the road, by proactively creating a low-carbon society and economy. The present costs can be mitigated however, by changing behavior such as using public transit, commuting more efficiently and installing energy efficient appliances and fixtures. Some jurisdictions are making a carbon tax more affordable by issuing rebates directly to families, such as is the case in B.C. and Alberta, while, as mentioned above, the federal government will issue rebates to families for carbon taxes it collects in provinces that don't have their own carbon price plan.

Why should we do something other countries are not doing?

Canada's emissions account for about 1.6% of global greenhouse gas emissions. So why should we put a price on carbon when there are far worse polluters out there? What it comes down to is more than just setting an example, but to cooperate and coordinate with other leaders of the world and welcoming other relatively small countries into the fold. This editorial piece in the Globe explains this in further detail, using a common philosophical problem. When it comes to China, they are actually ahead of their Paris Agreement targets.

Coming in Part 2 maybe one day

I will answer the following questions, and any others that pop up (please comment below if you would like me to take a look at any other areas not listed):

• Does a carbon tax really work?
• Why is Ottawa making decisions for the provinces?
• Won't this make our businesses less competitive internationally?
• What about Canada's "carbon sinks"?