Trevor Tombe: The carbon tax is dead

Whatever you think of the carbon tax as a policy, it’s days may be numbered. The same government that introduced it delivered the potentially fatal blow. All because of home heating oil. And all with seemingly little thought.

Consider this: on October 24, in response to an opposition Conservative MP asking that the carbon tax be removed from home heating, a government minister rejected the idea. Carbon taxes “put more money in the pockets of Canadians”, he said, and removing the tax would “make pollution free again.” 

Fair enough. Agree or disagree, this has been the government’s main argument for years.

But just three days later, the prime minister removed the carbon tax from heating oil in order to “lower energy bills for Canadians.”^{1Quite the change from when they first levied the tax on heating oil in Atlantic Canada, saying it would “make life more affordable”.}

It was a stunning reversal. And a highly damaging one.

Whether you like carbon taxes or not, the rationale is simple: provide an incentive to lower emissions and let individuals and businesses decide how. 

Economically, it’s cheaper than the alternative, centrally planned regulatory approaches.

It’s also fair. Everyone should face the same cost for each tonne they emit, whether that’s in Alberta or Nova Scotia, manufacturing or services, big or small. A tonne is a tonne is a tonne.

The government now rejects all of this.

Yes, exemptions can sometimes be justified. But very rarely. 

A carbon tax encourages people to consider the full cost of their actions. Those with easy, low-cost ways to avoid emitting will. But some (perhaps even most) actions we take are not particularly responsive to a carbon tax, at least in the short term. Economists call them “inframarginal” emissions. If there was a way to identify these activities in advance, then exempting them would have no effect on the overall level of emissions. Diesel for electricity generation in remote northern communities may be one example.

That argument doesn’t work here, though. And even if there was such an argument for home heating oil, then it would apply equally well to natural gas.

As a result, pressure to exempt other fuels will only increase.

“The federal government has decided that one part of Canada with one type of home heating is worthy of a carbon tax break, while those living elsewhere using another type of home heating do not,” said Alberta’s Premier Danielle Smith in response. She’s right. Federal Conservative opposition leader Pierre Poilievre agrees and is calling for an exemption for all forms of heating.

In Saskatchewan, Premier Moe is not just calling for more exemptions, he’s announced that SaskEnergy will stop collecting the carbon tax on natural gas as of January 1, 2024.^{2This will be interesting to watch since this is essentially instructing a crown corporation to violate federal law.}

The federal government will eventually cave.

For this reason, the move also subtly weakens carbon tax incentives nationwide, even for non-exempt fuels.

How? Carbon taxes not only affect behaviour today in response to the current price; they also affect behaviour based on what we anticipate future prices to be. After all, future prices influence today’s purchases of durable goods like cars and appliances.

But now people and businesses will rationally (and likely correctly) expect additional carve-outs for additional fuels in the future. The entire future path of Canada’s carbon tax is now no longer credible.

Even the temporary “three year” pause for heating oil is likely permanent.

When the federal government started to levy the carbon tax in Atlantic Canada on July 1, it involved a sharp increase from $0 to $65 per tonne on heating oil. That was a sudden shock that will only grow larger since, in three years, the tax (if it still exists) will be $110 per tonne. If immediately moving to $65 per tonne was too much, how will $110 be easier?

On top of all of this, the move complicates federal-provincial cooperation by irresponsibly inflaming regional tensions. (Heating oil is commonly used only in Atlantic Canada, where Liberal fortunes have been collapsing.) 

There were already questionable regional inequalities in the system, of course. Québec, in particular, received favourable treatment. But the transparently political nature of this move makes it even worse.

Perhaps I should not be surprised. The signs were there for a while. 

Many in government have long opposed carbon taxes. Environment Minister Steven Guilbeault has, in my view, done more damage to Canada’s system of carbon pricing than anyone else by vigorously pursuing policies like capping oil and gas emissions, which completely undermines the broader system.

While I support carbon taxes, I base that support primarily on how efficient they are. If one cares about the economy and environment, broad-based carbon taxes are hard to avoid. But while the economics are clear, the politics may just be too difficult. 

The carbon tax may soon be dead. And we’ll have the heating oil exemption to thank.