What is a carbon tax, and will it make a difference?

While opponents to a carbon tax call it a cash-grab, economists say it's the best way to cheaply reduce emissions.

Economists say carbon taxes are the most effective way to reduce greenhouse gas emissions

On Tuesday, the federal government announced it was levying a carbon tax on any province or territory that didn't have what it considers an adequate emissions plan. (Darryl Dyck/Canadian Press)

Many experts agree that a carbon tax is the cheapest way to reduce greenhouse gas emissions, but the jury is out on whether the Canadian government's new plan will achieve that in a major way.

On Tuesday, the federal government announced a carbon tax on the provinces and territories that did not sign on to the pan-Canadian framework on climate change.

"Starting next year, it will no longer be free to pollute anywhere in Canada," Prime Minister Justin Trudeau said. "And we're also going to help Canadians adjust to this new reality."

Saskatchewan, Manitoba, Ontario, New Brunswick, Yukon and Nunavut will have to pay a tax of $20 per tonne of emissions. The tax will increase by $10 a year until it reaches $50 per tonne by 2022, but most of it will be returned to residents in the form of rebates — which for many Canadians will be more than what it will cost them, the government said.

It's a plan not everyone agrees with, particularly Ontario Premier Doug Ford. Trudeau made the announcement at Humber College, in Ford's riding of Etobicoke.

But Nobel Prize-winning economist Paul Romer says carbon taxes are the solution to climate change.

University of Calgary associate professor of economics Trevor Tombe agrees.

"Economists for a long time have been pointing to carbon taxes, or carbon pricing, as the most efficient or most cost-effective way to reduce greenhouse gas emissions," Tombe said.

How it works

The idea of a carbon tax is straightforward — a price is levied on each tonne of emissions from fossil fuel sources, be it from coal, natural gas, gasoline, etc.

Opponents say a carbon tax is a cash-grab by the government that will cost taxpayers dearly. But supporters say the tax has to be high enough to dissuade people from making choices that cause emissions in the first place.

"What a carbon tax does is put an incentive in place for every individual and business to think about their own unique situation, to think about if they have low-cost ways of avoiding an emission and thereby saving on the tax," said Tombe.

"It's, in general, a way to lower emissions in the least-possible-cost manner. This would be contrasted to the government deciding on mandates — which type of appliance to adopt, which kind of light bulbs to use and so on."

Prime Minister Justin Trudeau speaks to the media and students at Humber College regarding his government's new federally imposed carbon tax in Toronto on Tuesday, October 23, 2018. (Nathan Denette/Canadian Press)

The federal government said 90 per cent of the carbon tax revenue collected will go back to households in the affected provinces and territories through Climate Action Incentive payments; the remaining 10 per cent will go to hospitals, schools and businesses in order to help develop greener solutions.

"The intent is to neutralize that concern people have about 'Is this going to cost me too much?' by giving all the money back to people," said Nic Rivers, professor and Canada research chair in climate and energy policy at the University of Ottawa. "That's the intent — but I think it remains to be seen how it's going to play out."

Carbon across Canada

B.C. already has a provincial carbon tax.

It started off at $10 per tonne in 2008 with a planned increase of $5 per tonne over four years. Beginning on April 1, 2018, the government increased it by another $5, raising it to $35 a tonne. It will continue on its $5-a-year-plan until it reaches $50 per tonne in 2020.

Some residents in the province receive a Climate Action Tax Credit.

So is it effective?

According to the B.C. government, since implementation GDP grew by 17 per cent and net emissions dropped by 4.7 per cent. There are estimates that B.C. could see a reduction of anywhere between five and 15 per cent under this plan.

A federal carbon tax has been a hot topic for debate for many provinces who that don't have one — but B.C. has for the last ten years. The National looks at the effect B.C.'s carbon tax has had on the province. 2:08

Still, that reduction falls well short of B.C.'s initial plan of 33 per cent below 2007 levels by 2020. But it's a step in the right direction, Tombe said.

"Small carbon tax, small effect. Larger carbon tax, larger effect," Tombe said. "But it's not the case that the initially modest carbon tax will have no effect."

Alberta became the second province to introduce a carbon tax on Jan. 1, 2017, when it began levying a $20-per-tonne charge on emissions from fossil fuels. That rose to $30 per tonne in 2018, and it's set to follow the federal increase to $50 by 2022. 

The Alberta NDP government expected it would bring in $5.4 billion over three years, some of which would go back to consumers through rebates; the rest was earmarked for various infrastructure projects.  

Other provinces have implemented other methods to reduce emissions, such as cap-and-trade. In this form, the government sets emission targets for businesses and organizations. Companies that know they will exceed the limit can buy credits from others who have leftover ones. It was the intention of Ontario to use such a system until Ford was elected and scrapped those plans.

2020 goals

While a carbon tax is widely lauded by economists as an effective — and cost-effective — way to reduce emissions, it remains to be seen what the results of Trudeau's plan will be.

"Certainly we shouldn't expect to see a big change [in emissions] suddenly. But it's not the case that a $20 per tonne will have no effect on emissions," Tombe said. "And as the carbon tax level increases, the effect on emissions — because there will be a stronger incentive to lower emissions — we'll see a bigger effect."

Rivers said the way to reduce emissions significantly is to raise the carbon tax even higher — more than the 2020 goal of $50 a tonne — or implement more effective ways of reducing fossil fuel emissions that would work in tandem with the carbon tax.

Even then, Rivers says, "It's too early to tell if whether that will get us there."

About the Author

Nicole Mortillaro

Senior Reporter, Science

Nicole has an avid interest in all things science. As an amateur astronomer, Nicole can be found looking up at the night sky appreciating the marvels of our universe. She is the editor of the Journal of the Royal Astronomical Society of Canada and the author of several books.