If Canada Won’t Tax Gas to Cut Emissions, Who Will?

Canada’s carbon tax was supposed to be different. Unlike the proposed cap-and-trade scheme in the United States or the European Union’s carbon trading system, Canada’s program was not a kitty for green energy subsidies. The tax would be split into two pieces: a charge on large industrial emitters, largely raised through provincial systems where more intensive emitters buy credits from those that emit less, and a tax on consumers that took the form of a charge on fuels, including gasoline. And the best part: The bulk of the revenue raised by the tax would be returned to provinces and individual taxpayers.

Five years after it was put in place, however, Canada’s new Liberal prime minister, Mark Carney, scrapped the consumer half of the tax as one of his first acts in office. In doing so, he was trying to cut off a potent line of attack from the opposition Conservative party, whose leader, Pierre Poilievre, has tried to center upcoming national elections on the issue. Polling from earlier this year showed that overall support had fallen from 56% in 2021 to 45% today, while Liberal support for the tax had fallen even further, from 83% to 70%.

This was despite reams of outside and official data showing that most Canadians benefited from the tax, at least in terms of (Canadian) dollars paid compared to those received in rebates. Per Canada’s Parliamentary Budget Officer, Ontario households in the median quintile (i.e. between the 40th and 60th percentile) came out $117 ahead on average this year. And although the tax did have a slight negative effect on economic growth of 0.6%, according to PBO estimates, that study didn’t take into account the value of lower greenhouse gas emissions.

If a carbon tax and dividend can’t work even in Canada, it appears to confirm a distressing truth for climate activists — that even if people are concerned about climate change, they don’t want to pay very much to fix it.

Popular discontent with the tax — especially among Conservative voters — picked up dramatically in 2022, alongside rising gas prices. The thinking goes, “if the price of gas goes up, it’s the carbon tax,” Kathryn Harrison, a professor of political science at the University of British Columbia, told me. But while it’s true that the carbon tax makes gas more expensive, the tax is a fixed charge, meaning that any big jump in gas prices cannot possibly be its fault. Then again, when gas prices are already high, anything extra can feel especially noxious.

“People hate the idea of a tax,” Harrison said. “When they know there’s a tax, they perceive the impact as much greater than it has been.”

There’s also a strong political element to how people feel about a carbon tax. Along with fellow researchers Matto Mildenberger, Erick Lachapelle, and Isabelle Stadelmann-Steffen, Harrison examined rebate programs in Switzerland and Canada for a 2022 paper published in Nature Climate Change, and found that the simple matter of dollars (or francs) and cents could not overcome the carbon tax’s well-established political identity. In Canada, Conservative voters tended to underestimate the rebate’s size more than Liberals did.

Carney’s shift

Carney is in some sense an odd figure to ditch carbon pricing. Before his leadership campaign, he was a prominent figure in climate finance, heading up climate transition investing at Brookfield Asset Management, a huge renewable investor and developer, and was the co-chair of the Glasgow Financial Alliance for Net Zero, a financial institution decarbonization group. Ideally Carney told a BBC interviewer at the 2021 COP26 Summit in Glasgow, “we would have a global carbon price.” And though that would have to vary depending on a company’s relative economic position, “everyone should try to have a price on carbon,” he said.

In canceling the tax on Friday, however, Carney said that it had become “too divisive” and was “not working,” echoing language from his leadership campaign.

The cancellation comes as the federal fuel charge was set to rise 3.3 cents per liter, from 14.3 cents to 17.6 cents. During his party leadership campaign, Carney proposed that the fuel charge be replaced with “a system of incentives to reward Canadians for making greener choices, such as purchasing an energy efficient appliance, electric vehicle, or improved home insulation.” Sound familiar?

So where does this leave carbon tax proponents? If one can’t survive in Canada, where can it?

Catherine Wolfram, an economist at MIT and former Biden Treasury official, is, like many economists, a supporter of carbon pricing. She told me that “too many people are dancing on the grave of carbon taxing writ large,” noting that the industrial side of Canada’s carbon tax is still active. And so If someone came to her for advice on a carbon tax, she would tell them to “start with something very far upstream. Start with industry. Don’t touch retail gasoline until more substitutes are available to consumers.”

She also pointed out that the industrial side of the tax was still alive in Canada, and Carney’s decarbonize your life-style proposal could address individual carbon emissions. But wouldn’t this just be the Inflation Reduction Act all over again, I asked her?

No, she said, because Canada still, for now at least, has a tax on industrial emitters.

“If we could get the U.S. to where Canada is now, I would be delighted,” she said.