Canada’s political environment is really easy to model – whatever is in the best interests of Ontario and Quebec tends to become national policy, irrespective to the impact it has on jurisdictions west of Ontario.
Let’s look at the proposed national carbon tax, which will take the carbon tax from $30/tonne CO2-equivalent in 2020 to $170 in 2030:
2019 – $20/tonne
2020 – $30/tonne (+10)
2021 – $40/tonne (+10)
2022 – $50/tonne (+10)
2023 – $65/tonne (+15)
2024 – $80/tonne (+15)
….
2030 – $170/ton
To put this into context, at CAD$40/ton, a gigajoule of natural gas has a carbon tax of CAD$1.99/GJ applied to it. At CAD$170/ton, that is CAD$8.44/GJ. The AECO market price for natural gas at the moment (note, it is December when there is peak demand) is CAD$2.53/GJ. The projected carbon tax at the end of the decade will be over three times the commodity cost. Needless to say, this puts Canadian companies that rely on natural gas consumption at significant cost disadvantages over jurisdictions that do not impose such taxes (the United States, for one).
Let’s take a look at electricity generation, for example.
On the electricity generation side, we see that 99% of Quebec’s electric generation comes from non-carbon taxed sources – Hydro (94%) and Wind (5%). Ontario’s non-carbon taxed electricity (91%) is Nuclear (57%), Hydro (24%), Wind (8%) and Solar (2%).
Electricity generation is about a third of energy consumption. A really good illustration is provided by the Lawrence Livermore Labs (this was linked to from one of Peyto’s president’s reports):
You can find detailed Canadian data here, albeit not in such a convenient manner.
One issue is that it takes a lot of energy to extract energy (and resources such as iron ore, copper and pretty much anything else in the ground), and of course this puts Alberta, Saskatchewan and British Columbia at a significant disadvantage with this cost regime.
The political aim with this carbon tax continues to be levying a tax that purports to be country-wide, but the impact is concentrated on a regional basis which conveniently happens to be in areas where there is the least support for the ruling party in government.
For those of you that claim there is a corresponding payment to individuals, while this might be true at first, it is performed to get initial acceptance while the proverbial frog boils in the pot. The rebate will be whittled away and eliminated over the coming years in the name of equality. This will come in the form of income testing these “climate action incentive” payments. Eventually the threshold will be lowered to the maximal vote-buying point and any pretense of the tax being “revenue-neutral” will be eliminated, similar to what happened in British Columbia when they dispensed of the notion in 2017. I wrote about the myth of carbon tax revenue neutrality for another publication back in December 2018.
As an example, in British Columbia, it is estimated in the 2020/2021 fiscal year that the carbon tax will raise about $2 billion in revenues, or about $400 per British Columbian. About $300 million in total is estimated to be directly paid back to people (initially called the “Climate Action Dividend” but renamed “Climate Action Tax Credit” as the word “dividend” appears to be dirty with the current BC NDP government) – normally this Climate Action Tax Credit is $174.50/person that earns less than $35,748 (or family income of $41,708), but this was topped up to $218 due to COVID-19. For relation, the median family income in BC is around $90,000.
In terms of the net carbon tax revenue, the $1.7 billion the BC government collects is free for them to do whatever they want. Nationally, it will work the same way, at least for the provinces that do not levy their own carbon taxes.
The decision to raise carbon taxes across Canada does not cost the ruling Liberal party much politically, but will allow them to raise disproportionately high revenues from those areas and enable the redistribution to their vote-friendly base, namely Ontario and Quebec. Such is the nature of politics and power.
Agree with everything but one – I don’t see how carbon tax is in the best interest of Ontario. Houses are still heated by gas, cars are still moved by petrol… Not to mention our hydro rates, which should not be subject to carbon tax, but who knows? There’s ongoing pressure to close Pickering nuclear in the next 5 years, so…
Feels like there is significant opportunity for renewable energy production in provinces like Alberta. Too bad Greengate Power isn’t public.. Possibly Capital Power?
I agree with some of the points your post Sacha, especially the “what’s good for Central Canada is good for Canada” bit. However, if we assume that Canada is serious about reducing carbon intensity though and that our pledges are somewhat real (and if they are not, then this is another climate change denying discussion), a carbon tax is the best way to do it. As Dmitry points out, everyone pays the tax based on the carbon intensity of the fuels they choose to power their lives.
The whole tax neutrality conversation is a distraction IMO. You are surely correct in that it is a type of trojan horse and that ultimately these funds will be general government revenue. So what though? The only real argument against this is a neo-liberal, starve-the-beast, belief that government will expand to the size of the revenue they can get away with. Taking the view that we get less of what we tax, carbon taxes are a better form of revenue generation than, say, income taxes. Arguments related to neutrality or substitution though are really about total government extraction from the economy, not carbon taxes in particular. They are just the latest to the party.
Western Canadian extraction of O&G is only impacted by the carbon tax to the extent that the energy used in extraction is fossil-based (and of course ultimately by demand-side weakness as consumers avoid their products – which is the point!). For example, the installation a nuclear reactor to replace natural gas and diesel in bitumen mining in Alberta, would help avoid the carbon tax. It is precisely these types of investments that ought to be encouraged and the carbon tax achieves it way better than regulation can.
In fact, pollution pricing is neo-liberal idea that worked exceedingly well for NOX and SOX pollution in the 1980s and 90s. I think it is wrong-headed for the right to be so universally hostile to it.
I did a lot of studying of the design of the acid rain treaties many years ago when examining the Kyoto Protocol. The acid rain treaties worked because it was a local problem with huge and obvious incentives to fixing it (such as not transforming the great lakes into vinegar pools and having rainfall with pH levels that really did a good number on marble features on buildings). And perhaps coincidentally, this was an Ontario-Quebec issue (in addition to the USA rust belt).
With CO2 it’s another story. The issue is global. I think it’s pretty obvious that most of Asia and especially China are not interested in playing ball except to provide lip service while western jurisdictions encumber a huge layer of costs on themselves and becoming noncompetitive in the process, for nearly zero benefit, except to the taxing agency.
This is clearly nothing to do with reducing CO2 emissions, bur rather an excuse to levy another tax in the name of “putting a price on pollution”.
NOX and SOX trading schemes emerged when “cumulative effects” began to be taken seriously by regulators. They were precisely not local issues in the way regulators dealt with industry previously, which was to limit emissions at the point of discharge to prevent acute human, animal and environmental impact. Acid rain was local in the sense you use it (certain areas, like the Great Lakes were being impacted the most and yes they were politically important in Canada) but the sources were not local – they were located over a large geographic area. Regulations had to be approached differently.
I was handed my first CO2 file almost 20 years ago while working for a large Fortune 500 company with the mission – “figure out how we can make money on this”. With the obvious success of NOX and SOX trading very fresh at the time, it was a no brainer that people got excited about it for CO2 also and carbon trading schemes started to proliferate around the world.
I have to disagree with you vociferously on this one Sacha. Relying on strawmen like “China won’t do it so we shouldn’t either” leads only one way – no CO2 reductions.
The effects of a molecule of SO2 or NO2 emitted from Thunder Bay, Ontario are most likely to be seen in or around Thunder Bay (wherever it gets scrubbed out with rain). Considering most of the industry was located in Ontario/Quebec (and the ‘rust belt’ states in the USA) this got the attention of the politicians. The ambient level of it in the atmosphere (short of lightning strikes) should be zero. Since it is relatively easy to measure, and since there is a very obvious cause-effect relationship with lower pH levels of rain (with its negative consequences) it is ripe for co-operation and why we just don’t hear about it anymore. Countries like Russia can emit all of it that they want and ruin their own environment and for the most part this doesn’t affect us. Also the emissions arrangements for acid rain were clearly not for a tax grab.
With CO2 it’s all different. For one, a molecule of CO2 doesn’t get scrubbed, it can be emitted from India, Brazil or wherever and it’ll have a global impact. I think this has been argued many times over and over the internet so I won’t get into it further, but suffice to say even if we (North America, Europe) decided to simultaneously commit literal 100% mass suicide, it would have a negligible effect on the CO2 trajectory in the longer run once the “human vacuum” got filled up by the various other countries. The CO2 trajectory goes up as long as our population grows and our standard of living increases as we harness energy. Nuclear (if we indeed get serious about electrification) will make a dent in the slope of the curve but my point is that there is no political solution on the table that feasibly will allow for the abatement of global CO2 emissions. Right now, Canadian policy is just shooting ourselves in the feet for very little absolute return and very negative net return.
Your points are good ones. With NOX/SOX, it was relatively easy to lasso all of the relevant actors and force them to participate. They had no choice and everyone was in the same boat. This is the primary difference with CO2. However, trading NOX/SOX and CO2 reductions are the same in the sense that they set up a capital allocation efficiency among participants – some of those NOX/SOX emitters avoided extra scrubbing by buying credits from those that could afford to make the investments.
With CO2 it has been impossible to lasso all of the relevant actors. Every country on the planet matters (and to your point, some MUCH more than others) and not all are willing to do something (also that the rich world can, arguably, afford it and the rest can’t is not a minor part either). This is why, despite two decades of lots of talk, we are still where we are. Nonetheless, politics and tax grabs aside, many people want action and it looks like they are going to get it.
I realized that we are talking slightly different things. My points are more from a carbon markets perspective (creation of credits and selling them) and that the tax functions like can function like that. To your point, I think, carbon taxes only work like credit markets if the cash is recycled back to participants and they have flexibility as to whether they make any changes to their carbon usage (at their discretion and marginal cost/benefit). If the state doesn’t give it back, it is a tax and it doesn’t work like the NOX/SOX market except in a very round-a-bout way where the taxee gains some benefit from government investment in programs and services. I realize that this last bit is a big IF and the subject of serious debate.