(Environment and Climate Change Minister Steven Guilbealt and Prime Minister Justin Trudeau)
Federal Carbon Tax Impact according to Canada’s Fiscal Watchdog
On April 1st, Canada's national carbon price saw a hike from $50 per tonne of emissions to $65 per tonne. The carbon tax has two primary levies:
“(1)a regulatory charge on fossil fuels like gasoline and natural gas, known as the fuel charge, and (2) a performance-based system for industries, known as the Output-Based Pricing System.”
A new report published by Canada’s fiscal watchdog, the Parliamentary Budget Office, has revealed new insight into the country’s national carbon pricing scheme from 2023 to 2030.
The report indicates that the net fiscal impact is positive for low-income and middle-income individuals who receive more money from carbon tax rebates than they pay into the tax itself.
However, the economic impact of the carbon tax is negative for most income levels as it reduces wages, capital, employment level, and business investment. Furthermore, on either a fiscal or economic basis, households lose a small percentage of their disposable income compared to if the carbon tax wasn’t there, Thus, the overall impact (including fiscal and economic in combination) is negative.
Including only the fiscal impact results in a net gain for low-income and middle-income Canadians.
The Government is Losing Tax Revenue from the Tax
Contrary to popular belief, the carbon tax results in lost revenue for the federal government over the short and long term. This is because almost 100% of the revenue gained from the tax is redistributed to individuals through the Climate Action Incentive Payment rebate.
And although there is also a small increase in sales tax revenue due to price increases from goods and services affected by the carbon tax. The total lost revenue reaches into the negative by a reduction in personal income tax revenue (from reduced wages, employment, capital inv, etc).
This year, the government is losing nearly $2 billion. By 2030, the government will be losing $7 billion in revenue. Thus, the government is losing money from the carbon tax
It is worth noting though, the government’s actual total personal income tax revenue will increase over time. Thus in a way, the government is using that income tax revenue as payments for the carbon tax rebates. Or in other words, the government’s total tax revenue would've been higher without the carbon tax.
The argument that Carbon Tax Reduces Emissions
According to a review by the University of Ottawa, the analysis showcases that British Columbia’s carbon tax scheme (implemented in 2008) reduced GHG emissions by between 5%-15% based on several impact factors.
Although such data isn’t available at a national level since the carbon tax was only just implemented in 2018. The federal government is likely expecting similar studies indicating drops in GHG emissions to prove to voters that the federal carbon tax scheme is working. Essentially, the government is expecting the age-old taxation argument of “when you tax something, you get less of it.” to work with reducing emissions.
Indeed, whether the carbon tax is a net gain or a net loss depends on what factors you look at; the primary purpose of the carbon tax is to reduce emissions, not raise revenue or increase transfer payments.
Canada’s Environment Minister, Steven Guilbeault, states that the PBO does not account for the benefits the carbon tax causes. Namely, spurring clean tech innovation to reduce emissions and economic benefits on transitioning to a greener economy. Guilbeault says the PBO is “looking only at one side of their ledger book.”
On the other hand, Conservative leader Pierre Poilievre has made it a staple that if his party were to come into power, he would “axe the carbon tax.” However, recent moves made by the federal government to ensure contractual obligations on reducing emissions based on the tax will make it fiscally expensive for any future government to reduce or eliminate it. The Conservative leader has yet to make a policy response on this.
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