Q: “What is a carbon tax?”
A carbon tax is a fee paid to the government upon the purchase of fossil fuels, which are major sources of the well-known, planet-warming gas: carbon dioxide. Most Canadians already pay some kind of extra carbon-based fee for fuels, either in the form of an explicit price per ton of CO2 (like in BC) or on the form of a cap-and-trade system (like in Ontario and Quebec). The new federal programme will enforce a consistent cost country-wide, which is important for businesses (who have been asking for consistent and clear carbon pricing for years) and for consumers (who benefit from consistent business pricing and taking action to slow climate change).
This means that the price we all pay for fuels like gasoline, oil, or natural gas will go up, but slightly. In provinces not yet charging a carbon tax, consumers can, for example, expect to pay about 5% more at the pump.
Q: “Where does the money go?”
To provincial governments. What they do with it is a province-by-province decision. The outline of the proposed federal law says that the Canadian government will step in to enforce a minimum level of carbon pricing across the country, should some provinces not have their own schemes in place by the deadline. But even then, the tax collected by the feds will be returned to the provinces, and the provinces are free to use the revenue as they see fit.
Unlike a normal tax, which can be used by the federal or provincial governments to pay for public services like hospitals, fire departments, road maintenance and schools, a carbon tax is usually designed to raise money specifically for projects that help reduce greenhouse gas emissions. Ontario, for instance, announces that “every dollar collected through cap and trade must be invested – in a transparent way – back into projects that reduce greenhouse gas pollution.”
The federal announcement of the carbon tax suggests that revenue could be used for priorities “including to address impacts on vulnerable populations and sectors and to support climate change and clean growth goals”, however, it appears that they will not require that carbon tax revenue be used in these ways.
Q: “So, the purpose of the tax is to reduce carbon dioxide emissions?”
Yes, but not at first. When the tax is first introduced, it will force people to pay a small additional amount on fossil-fuel-based energy. For someone who drives a car, this may amount to a few extra dollars per fill-up. For most people, paying a few extra dollars every now and then is not enough of a deterrent to affect how much they choose to drive. People are likely to continue driving just as much, and emitting just as much pollution, despite the extra cost. As the amount of carbon tax increases, however, the deterrent effect will grow stronger.
However, even an inexpensive carbon tax can provide a lot of revenue that can fund ecologically responsible projects that will drive innovation and progress in the whole sector of low-carbon energy. For example, providing seed money to establish extensive networks of electric-car charging stations would make it more practical and affordable for people to buy zero-emissions electric cars. Once that kind of critical infrastructure is in place, more people will choose environmentally friendly alternatives because it they will become more convenient and affordable.
These effects ultimately work together: once carbon tax rates rise enough to actually act as a deterrent, people will hopefully be driving gasoline-powered cars much less than they do now both because they are too expensive and because eco-friendly options will have become an established, low-cost alternative.
Q: “Why don’t we rely on the free-market to invest in environmentally-friendly projects?”
It’s true that more and more companies are going ‘green’ all the time, but the reality of the situation is that far too many parts of our economy are based on fossil fuels. For example, virtually every part of the construction, agriculture, manufacturing, and natural resource sectors currently need large amounts of coal, oil, and natural gas to operate and be profitable. Our economy as a whole is very carbon-based, and as such requires large-scale, systematic change rather than piecemeal solutions.
Individual companies and projects often come up with new, sustainable approaches and ideas, but we can’t count on a purely market-based demand for environmentally friendly innovation quickly enough or widely enough. Governments can introduce rules that apply equally to everyone, and can use carbon tax revenue to fund both public services and large-scale, private-sector innovations that will benefit everyone, which means they have a far greater ability to make meaningful changes compared to any given company.
More generally, the market has so far failed to be effective at producing ‘green’ solutions because our usual concepts of market prices, competition, and opportunity simply don’t take climate change and other environmental impacts into account. A carbon tax is one way to make market forces respond to the reality of climate change because it offers a price and investment mechanism that (at least partly) reflect the real economic and environmental impacts of how we do business. Making climate change matter in concrete economic terms will be a powerful strategy to move us more quickly toward a low-carbon economy.
By Ryan Smith & Steve McCullough
Prairie Climate Centre