In an election year, the carbon tax policy is one of the hot issues, to say the least. The unpopular tax is all but dead now with parties of all stripes lining up to “axe it”. In the middle of the conversation about ending the tax, who would dare ask why? Or what is next?
So let’s take a look. What is the carbon tax and what, exactly, were we supposed to get out of it anyway from a climate change policy point of view?
Carbon tax and fossil fuels: Efforts to mitigate CO2 emissions, globally speaking, are broadly categorized as the use of Command and Control (CAC) and Economic Instruments (EI) policy approaches. While command and control schemes involve direct regulations on specific targets that emitters must reach. These can include penalties for non-compliance or market-based instruments that allow for more flexibility in abatement. Economic instruments involve price changes or payments to influence behavioral changes, allowing the polluter (or consumer) to choose a more cost-effective approach to reducing greenhouse gas (GHG) emissions. Examples of Economic Instruments include emission charges or carbon taxes, marketable or tradeable emissions permits, user charges, green bonds, subsidies for renewable energy sources, and deposit refund schemes. These strategies are more cost-effective because they ensure equity in internalizing the external costs of emissions. For instance, the higher the polluter is on the emissions chain (or, the more carbon-intensive product is consumed), the higher their cost. Emitters on the lower end pay less for fewer emissions. Economic instruments also serve as revenue-generating opportunities for the government, providing resources for investments in other sectors of the economy. Beyond targeting emissions reduction, economic instruments can also be applied to other environmental problems such as water and waste management and biodiversity conservation.
Carbon taxes are the more commonly used Economic Instrument for abating emissions. Carbon Tax is a policy tool that assigns a direct cost to carbon-intensive activities. It incentivizes industries and consumers to adopt cleaner alternatives across supply and consumption chains. It functions on the principle that those who emit CO2 and other pollutants should bear the financial cost of their environmental impact. The adoption of carbon taxation has grown globally, with early implementations in countries such as Sweden and Finland. These nations introduced carbon taxes as part of broader climate policies to balance economic growth with environmental sustainability. The carbon tax approach can contribute to the economy by recycling the tax revenues to other public programs, reducing other taxes, or applying the resulting revenues to budget deficits.
In the current climate of tariff threats and renewed pressures for west-to-east pipelines in Canada, no one is going to get very far talking about the economic or even climate benefits of consumer carbon tax. This type of program, though, can give us a glimpse of possible options for future policy alternatives.
Canada: Promises to “Axe the Tax”
Nearly 20 years ago, Canada’s carbon tax history began in Alberta (!), where carbon levies of around $15 per tonne of CO2e were placed on industrial emitters of GHG. British Columbia launched its Carbon Tax Act in 2008 to cover all aspects of the economy. Quebec and Ontario also launched carbon tax systems around the same period, long before a federal carbon tax system was introduced in 2016 by the Liberals. In 2019, the price was set at $20 per tonne of CO2e, rising $10 per year to $50 per tonne of CO2e in 2022. While provinces with no carbon tax systems were required to comply with the federal system, provinces can decide which tax systems best suit their context if they adhere to the national minimum standards or ‘benchmark.’ These minimum standards were adjusted in 2023 with an increase in price to $65 per tonne of GHG emission (in CO2e) and increases by $15 per year to $170 per tonne CO2e in 2030.
For transparency, provinces must regularly publish reports of their systems indicating the pricing outcomes and impacts on GHG emissions, people, and the economy. This is a good thing because it improves the information available to policy-makers.
Canada’s carbon tax operates on two levels: for consumers and large industries. The consumer tax applies to fuel and heating, aiming to reduce individual emissions by encouraging greener choices. The higher the GHG emissions of a product, the higher the tax rates. For instance, the carbon tax on diesel is higher than what is paid for gasoline because 1 liter of diesel emits 13% more CO2 than gasoline. The industrial carbon tax (British Columbia and Quebec), targets emissions-heavy industries. Interestingly, while the consumer tax faces significant public backlash, the industrial tax has been relatively well-received in British Columbia and Quebec. Public dissatisfaction stems from perceptions of financial burden despite rebates intended to offset costs. The research on this point shows that households receive more money back in rebates than they pay in carbon taxes. This message is lost in the political framing and the clumsy tax-based rebates process.The 2025 elections are shaping up to be the death of Canada’s consumer-based carbon tax.
No One Would Dare Make a Case for Carbon Tax
Consumer carbon tax is doomed in Canada. The evidence that shows the benefits for people, businesses, the environment, and the economy will be certainly overtaken by the slogans and positioning in the election.
When the tax is killed, the existential reality of climate change and the need for Canada to sharply reduce its emissions will remain. There are a couple of advantages of the tax program worth paying attention to:
Environmental effectiveness: Carbon taxes reduce CO2 emissions. Among early implementers (Finland, Sweden, Denmark, and Norway) is that emissions reduced from between 7% to as high as 31%. An implication that environmental effectiveness from carbon taxes is not peculiar to Nordic countries. In British Columbia, emissions were reduced by an average of 10% due to carbon tax. The tax system in the province was also reported to reduce gasoline consumption by 8% and fossil fuel demand by 19%.
Economic benefits: In British Columbia, carbon taxes yielded several micro- and macroeconomic benefits. Through tax breaks or credits, the revenue generated from the taxes is returned to businesses and individuals. This revenue-recycling or ‘neutrality’ model adopted by British Columbia was a unique element that proved to stir economic growth through distortions in the existing tax system. For example, rural homeowners have benefited from up to CAD$200 since 2011. Small businesses also benefited from a 12% to 11% tax cut. There was an income tax reduction of 5% for low-income households, among other benefits to residents. While political framing plays a role in the acceptance of carbon taxes. Where the political framing is positive, these tax rebate measures effectively reduce emissions. In British Columbia, half of the success of carbon tax is primarily hinged on a favorable political climate, stakeholder engagement, public awareness, and clear plans for revenue recycling. The revenues generated from carbon taxation lead to innovative investments in low-carbon production technologies.
Not Necessarily Carbon Pricing
One of the most significant challenges of the carbon tax is public perception. The tax has by now been framed as a financial burden on everyday Canadians despite the reality being a bit more nuanced than that. It is certainly easy to see that the rebate system, designed to offset the financial impact on households, was poorly communicated, leaving many unsure of its benefits and therefore ripe for the steep decline in public support.
One could always hope that the election may still bring a different, balanced, and more dispassionate tone to the discussions. There’s room to talk about program adjustments and alternatives while sensibly steering industry and consumer behavior away from fossil fuels. There are helpful policy approaches within Command and Control and Economic Instruments that can be applied to nudge GHG performance in the right direction. Perhaps some of these might include types of carbon pricing schemes or reasonable alternatives.
References
Brightspot Climate (2022). History Lesson – Carbon Pricing in Canada. https://brightspot.co/library/history-lesson-carbon-pricing-in-canada/
CBC (2024). The carbon tax has plagued the Liberals politically. Research says that’s not surprising. https://www.cbc.ca/news/politics/carbon-tax-political-popularity-research-1.7221908.
Elgie, S., & McClay, J. (2013). BC’s carbon tax shift is working well after four years (attention Ottawa). Canadian Public Policy, 39(S2), S1–S10. https://www.researchgate.net/publication/265938410_ BC’s_Carbon_Tax_Shift_Is_Working_Well_after_Four_Years_Attention _Ottawa.
EnergyNow.ca (2016). A Brief History of the Canadian Carbon Tax. https://energynow.ca/2016/12/brief-history-canadian-carbon-tax/
David Suzuki Foundation (n.d.). Canada’s carbon pricing (a.k.a. “carbon tax”) explained. https://davidsuzuki.org/what-you-can-do/carbon-pricingexplained/#:~:text=Canada’s %20carbon%20levy%20started%20in,will%20reach%20%24170%20per%20tonne.
Getting the Prices Right: Economy-wide Policies to Promote Structural Change:British Columbia. https://api.knack.com/v1/applications/5b23f04fd240aa37e01fa362/download/asset/6564 d9f1bb4d7c0028c6d7a2/britishcolumbiataxingcarbonfordevelopmentworldbank2023.pdf.
Government of Canada (n.d.). The federal carbon pollution pricing benchmark. https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/carbon-pollution-pricing-federal-benchmark-information.html.
Government of Canada (n.d.). Update to the Pan-Canadian Approach to Carbon Pollution Pricing 2023-2030. https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/carbon-pollution-pricing-federal-benchmark-information/federal-benchmark-2023-2030.html#toc1.
IMF (1998). Carbon Taxes: Their Macroeconomic Effects and Prospects for Global Adoption – A Survey of the Literature. IMF Working Paper. https://www.imf.org/external/pubs/ft/wp/wp9873.pdf
International Council on Clean Transportation (2019). Fact Sheet: Europe. https://theicct.org/wp-content/uploads/2022/01/Gas-_v-_Diesel_-CO2_emissions_-EN_-Fact-_Sheet-2019_05_07_0.pdf.
