How a carbon tax will affect Canadians is difficult to predict

Every jurisdiction in Canada could have some kind of carbon pricing scheme implemented soon. But how that will affect average Canadians, particularly in the pocketbook, can be difficult to forecast.

Provinces and territories have been given the option to come up with their own carbon pricing plan

Provinces and territories have been given the option to come up with their own carbon tax or cap-and-trade system. If they fail to do so, the federal government will impose its own plan. (Mark Ralston/AFP/Getty Images)

If Saskatchewan and Ontario are unsuccessful in convincing the courts that the federal government has no right to impose a carbon tax on provinces, then every jurisdiction in Canada could have some kind of carbon pricing scheme implemented in the near future.

Last year, the government announced it was giving the provinces and territories until the beginning of September to "outline how they are implementing carbon pricing systems that meet the federal standard."

Those standards, or benchmarks, demand that a carbon price of $10 a tonne must be implemented this year. That price will increase to $20 on Jan. 1, 2019 and to $50 a tonne in 2022.​

Four provinces had already implemented a carbon price system — B.C. and Alberta (carbon taxes) and Quebec and Ontario (cap and trade).

But newly elected Ontario Premier Doug Ford recently said he would be ending the  province's cap-and-trade program, leaving only three provinces with their own carbon pricing programs. 

Ontario Premier Doug Ford, left, and Saskatchewan Premier Scott Moe have agreed to fight the federal government plan to impose a carbon tax. (Andrew Vaughan/Canadian Press)

Provinces and territories have been given the option to come up with their own carbon tax or cap-and-trade system. If they fail to do so, the federal government will impose its own plan.

But how that will affect average Canadians, particularly in the wallet, can be difficult to forecast.

Canadians will be impacted by direct and indirect costs — from the taxes on emissions from energy used in households and the the pass-through of costs from businesses to households, wrote Jennifer Winter, director of energy and environmental policy at the School of Public Policy at the University of Calgary, in a May 2017 blog. 

Tax expert Mitch LaBuick said, "It's not going to be a black-or-white thing. On a very very high level will the carbon tax take the money out of the pockets of people? And the short answer is, yes it will do that."

"You have to remember that the spirit of a carbon tax is to alter behaviours so that they're not consuming or burning carbon fuels. So if you want to keep the money in your pocket, don't consume these things."

But, as LaBuick points out, basic economics dictate that as costs go up, prices will go up because businesses need to maintain their margins.

"How much of that margin will businesses be able to keep and how much price increase can be passed on to the consumer?" he said.

A small impact?

In 2016, Canada's Ecofiscal Commission released a report to calculate the impact carbon pricing would have on Canadian households. Using  $30 per tonne carbon price as a base, and through economic models, the authors of the report found the carbon costs associated would represent "a very small share of total income or expenditure."

According to their estimates, the costs would  always be less than 2.1 per cent of household income or expenditures, and for most provinces less than one per cent.

The average annual carbon cost varied from $207 for households in the first income quintile to $543 in the middle quintile and $1,141 for households in the highest quintile. 

Other cost forecasts

At the University of Calgary, Winter forecasted that at $20 a tonne, annual costs would range from $241 in B.C to $448 in Nova Scotia.

But in a followup posting in 2018, Winter clarified that a lot of assumptions were built into the calculations. For example, she said her calculations assumed households used the same amount of energy, regardless of whether there was a carbon tax.

"This is clearly an over-simplification," she wrote.

Despite some of the limitations, she said the figures still provide an "approximate upper bound for carbon tax costs to households."

Carbon content in production and transport

So how much should Canadians expect the prices of goods to go up? That depends on how much carbon is used to produce a consumer good or is consumed in the supply chain.

Carbon pricing will cause fuels such as gasoline to go up in price. (Graham Hughes/The Canadian Press)

"We burn fossil fuels to transport pretty much anything. We burn fossil fuels to eat and to produce energy all over the economy," said  Christopher Ragan, an associate professor of economics at McGill University and chair of Canada's Ecofiscal Commission.

"So lots of things will have prices that go up but they will go up by different amounts based on their carbon content."

For example, gasoline, heating fuel and diesel have different carbon content and will go up by different amounts. 

"Stuff that has to transport longer distances is probably going to rise more than stuff that short distances, stuff  that's produced with fossil fuel energy rather than non-fossil-fuel energy," he said.

Where you live is important

The impact of carbon pricing on Canadian households depends on whether a household uses electricity, natural gas or heating oil for home heating and on the emissions intensity of electricity in each province, the Ecofiscal Commission report noted.

In Alberta, Saskatchewan, and Nova Scotia for example, where most electricity is produced with coal-fired plants, there would be higher carbon costs 

Such significant price increases would not occur in British Columbia, Manitoba and Quebec, however, because electricity in these provinces is generated with far lower greenhouse-gas emissions, mostly from large-scale hydro facilities, the report found.

With files from The Canadian Press