Opinion: The Carbon Tax is Canada's Missed Opportunity

Carbon pricing is one of the most contentious issues in Canadian politics, dividing the nation from east to west and between urban and rural. With the electorate increasingly recognizing climate change as an urgent issue (Williams, 2021), the Canadian government has implemented numerous unprecedented measures to reduce emissions. These include the highly controversial carbon tax, which aims to place a financial cost on emissions, thus incentivizing green innovation and environmentally friendly lifestyle changes (U.S. Congress JCT, 2016). The Greenhouse Gas Pollution Pricing Act (GGPPA), enacted in 2018, stipulates that Canada’s national carbon tax plan will begin at $20 per tonne of carbon in 2019, increase to $50 per tonne in 2022, and then increase by increments of $15 every following year until ending at $170 per tonne in 2030. This will be implemented in provinces without carbon taxes that meet the national standards set by the GGPPA. However, inflationary economic challenges have led many to question the necessity of such a tax that would further increase the cost of living. The Canadian government should reconsider the ethicality and fairness of the current carbon taxes, which result in severe economic losses in certain provinces, increased job polarization, and disproportionate financial losses for lower and middle-income households.

Unless the federal government makes substantial investments toward a green-energy transition to offset economic losses in the oil and gas industry, the carbon tax will disproportionately affect the economies of Alberta and Ontario. The oil and gas industry is a key pillar of Canada’s economy, accounting for over 9.5% of Canada’s GDP, or around $187 billion, and employing over 1.5% of Canada’s total workforce (Alahdad et al., 2020). However, the oil and gas industry is not evenly distributed among Canada’s provinces, with Alberta receiving the majority of the industry’s jobs—over 78% (Alahdad et al., 2020). McKitrick & Aliakbari’s (2021) study found that the 2030 carbon tax ($170 per tonne) would cause 86,830 permanent job losses in Ontario and 30,139 in Alberta. Proportionally, these permanent job losses are much higher for Alberta, due to its smaller population compared to Ontario and British Columbia. Regarding GDP, the same study found that Alberta is projected to suffer a 2.4% drop in GDP, British Columbia will suffer a 1.8% drop, and Ontario will suffer a 1.5% drop. (p. 13-14) The provincial governments of Alberta and Ontario generate more revenue per capita than the national average by virtue of natural resource extraction, which largely consists of oil and gas—especially in Alberta. Under Canada’s Equalization Program, this means that this additional revenue is redistributed to provincial governments which generate less revenue per capita than the national average. The Equalization Program uses existing data on provincial, and not projected revenues, meaning that only the revenues from 2021 will be used to calculate equalization payments (Equalization Payments, 2022). In practice, this means that a portion of provincial government income in Alberta and Ontario will be redistributed to other provinces, regardless of projected future losses in their economies because of the carbon tax. Transitioning away from fossil fuels will be inevitable if Canada wishes to prevent climate change, and carbon taxes are a powerful tool that can encourage this transition. However, if such a transition takes place, Alberta and Ontario will suffer disproportionate economic losses compared to other provinces lacking a substantial oil and gas industry, thus aggravating disunity and regionalism in Canada. Therefore, to promote fairness among provinces, the federal government must either prioritize funding green-energy transition in provinces with a strong oil and gas industry or alter the Equalization Program to account for projected losses.

Carbon taxes accelerate job polarization by reducing middle-class manufacturing and resource extraction jobs for low to mid-skill workers. Carbon taxes increase the cost of production for industries that produce emissions, use fossil-fuel-derived raw materials, or rely on transportation. These criteria include practically every industry, although resource extraction and manufacturing are the most affected. At the current stage of the carbon tax, which taxes carbon at $50 per tonne, the increase in production cost for all Canadian industries is an estimated 2.4% (McKitrick et al., 2019). Production costs will only increase as carbon taxes increase to $170 per tonne in 2030. Canadian manufacturing and resource extraction will become uncompetitive with imports, resulting in “carbon leakage”, where environmental policies that increase the cost of production result in offshoring (Cairns, 2011). Offshoring of Canada’s manufacturing jobs has already occurred, with over 14% of manufacturing jobs (322,000) disappearing from 2004-2008 (Statistics Canada, 2009, p. 11). On the other hand, oil and gas industry jobs have remained largely stable (Statistics Canada, 2021), with Indigenous peoples accounting for 6.3% of the oil and gas industry workforce, compared to 3.3% of Canada’s total workforce (Oil and Gas Sector, 2021). Carbon taxes would reduce resource extraction employment, and further reduce manufacturing employment. The disappearance of manufacturing and resource extraction jobs would accelerate the formation of an “hourglass economy”, where high-paying middle-class jobs for low to mid-skill workers disappear in favour of low-paying jobs, thus polarizing the job market between high earners and low earners. Compared to other highly industrialized countries, Canada has suffered relatively mild job polarization (Speer & Bezu, 2021, p. ix). This can be credited to Canada’s resource extraction industry, which “act[s] as a ballast against labour-market disruption” by creating middle-class jobs for low to mid-skill workers. Manufacturing and resource extraction are two of the few industries where individuals lacking post-secondary credentials can secure a middle-class income (Speer & Dijkema, 2020, p. 3). Unfortunately, with its current implementation, carbon taxes would harm both industries. While concerns over the role of Canada’s polluting industries in climate change are legitimate, the Canadian government must understand the impact climate change policies will have on the ability of those lacking post-secondary education.

The financial burden of carbon taxes falls disproportionately upon lower- and middle-income groups. An important concept in analyzing the effects of a carbon tax on different income groups is the concept of regressive taxes. Regressivity in taxation is when the effective tax rate increases as income decreases. Regressive taxation results in lower earners paying a larger percentage of their income compared to higher earners. A study by Williams III et al. (2015) found that a “carbon tax on energy prices is somewhat regressive, consistent with earlier studies”. (p. 210) The regressivity of carbon taxes is a result of numerous factors, however the most prominent is that lower to middle-income earners already spend a greater proportion of their income on fuel, as they are less able to afford electric or fuel-efficient vehicles, and are more reliant on commuting. However, as long as carbon taxes are revenue neutral, and reimburse lower to middle-income taxpayers, the regressive nature of the tax is e greatly reduced (Yunis & Aliakbari, 2020, p. 1). In Canada, this reimbursement is accomplished through the Carbon Action Initiative rebate. However, according to a report by the non-partisan Parliamentary Budget Officer Yves Giroux, current carbon tax rebates only reimburse the lowest-income households. Middle and lower-income households are only reimbursed in part (Lévesque, 2022). Even if Canada’s carbon tax was truly revenue neutral, which it is not, other increases in taxation are not addressed at all. The CAI does not account for the increase of GST (or HST in Ontario), which is charged on top of the carbon tax, effectively “tax[ing] a tax” (Rabson, 2018). GST revenues from the carbon tax amounted to over $250 million, which was not accounted for in ensuring the revenue neutrality of the carbon tax (Osman, 2019). Being a consumption tax, the GST itself is also regressive (Department of Finance Canada, 2017). The carbon tax is effectively two separate regressive taxes, consisting of the direct carbon tax, and the indirect increase of GST/HST. Lower- middle-income earners are not only reimbursed in part, but are disproportionally affected due to the regressivity of carbon taxes and the GST/HST. As such, the carbon tax exacerbates financial inequities, putting into question the fairness of the carbon tax in its current implementation.

British Columbia’s carbon tax is often cited as an example of the economic success of carbon taxation.

Yamazaki’s (2017) study found that the British Columbian carbon tax resulted in a “small but statistically significant 0.74 percent annual increase in [aggregate] employment over the 2007-2013 period.” (p. 3) Additionally, British Columbia’s carbon tax had no significant effect on the province’s GDP (Elgie & McClay, 2013, p. 8). However, upon closer examination, the effects are not as positive as initially suggested. Yamazaki’s study found that the carbon tax potentially “reduces average hourly and weekly wages by 1.8 and 1.6 percent at the rate of $10/t CO2e (carbon dioxide equivalent), respectively”. However, it was acknowledged that this decrease was partially a result from an increase of employment, which naturally reduces wages by increasing the labour supply. (p. 30) Nevertheless, this decrease of wages can also be attributed to job polarization, as the same study found that British Columbia’s manufacturing industry suffered severe job losses as a result of the carbon tax. The basic chemical manufacturing industry suffered a 37% drop in employment, while the pulp, paper, and paperboard industry suffered a 10% drop, and the primary metal and non-metallic mineral processing industry suffered a 16% drop. These job losses were made up for by various increases in middle to high income service industries, including insurance, education, healthcare, and technology (Yamazaki, 2017, p. 33-34). However, it can be assumed that manufacturing employees, many of whom lack post-secondary education in relevant fields, were largely unable to secure employment in high-skill service and tech industries. While British Columbia’s carbon tax did result in a small aggregate increase in employment, job polarization also increased. As highlighted in previous paragraphs, these polarizing effects will be experienced more severely in provinces with a substantial oil and gas industry.

Over 3,600 economists, including 28 Nobel Laureate Economists and Reagan-nominated former U. S. Federal Reserve chair Alan Greenspan, have signed the Economists’ Statement on Carbon Dividends (ESCD). The ESCD declares carbon taxation to be one of the most effective emission reduction measures. Unfortunately, the ESCD’s ideal carbon tax differs significantly from the federal government’s carbon tax. As an example, the ESCD proposes that a “gradually rising” carbon tax slowly replaces carbon regulations, thus allowing companies greater short-term financial capital to invest in clean energy alternatives. Relaxing carbon regulation, while contrary to “oil is dead” rhetoric, is necessary if government policymakers wish to adhere to economic reality, and slow down job polarization. Without increasing capital through deregulation, Canada’s economy, especially the manufacturing industry, cannot be expected to innovate clean energy alternatives without downsizing or offshoring. Additionally, to “maximize fairness and political viability”, the ESCD calls for true revenue neutrality. Canada’s carbon tax is decidedly not revenue neutral, and thus disproportionately affects lower-middle-income households. Lastly, Canada’s carbon tax, by unequally impacting different provinces, exacerbates regionalism and a uniquely Canadian problem: Western alienation. This essay does not seek to refute the concept of a carbon tax. Instead, carbon taxation must be recognized as a policy based on sound economics—if implemented correctly. Overall, the divisiveness and inequities of the current carbon tax can largely be attributed to poor implementation and a failure to prioritize economic reality over rhetoric. If Canada seeks to live up to its image as a global leader in climate change policy, the flaws of the federal carbon tax highlighted in this essay must be corrected.

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