A tactical retreat
Mark Carney axes Canada's consumer carbon tax
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“credibility and trust cannot be maintained without political support. This in turn requires public understanding, which is built through transparency and accountability, and it requires consent which is grounded in solidarity.”
-Mark Carney, Values: An Economists Guide To Everything That Matters
Over the weekend Mark Carney, the newly elected Prime Minister of Canada, signed an executive order reducing the consumer carbon tax rate to zero, effective immediately.
The consumer carbon tax was C$80 per tonne (€51) and set to rise to C$95 per tonne in April, increasing each year thereafter until 2030 when it was scheduled to hit C$170 per tonne. The tax was levied on fuel distributors, based on the carbon content in a given fuel, who would then typically pass on the cost to households and motorists through higher fuel prices.
Federal law required that 90% of the proceeds from the carbon tax be returned to households in the province or territory where they were collected; about 80% received more from the quarterly rebate than they paid out in tax. Carney also announced that the last rebate would be paid in April, just ahead of when the general election is expected to be held.
Impact on Canada’s emission pathway
The consumer carbon tax, also known as the fuel charge, was estimated to contribute 14% of incremental emission reductions between 2025 and 2030, according to analysis published by the Canadian Climate Institute (CCI). In producing this estimate they sought to account for the interactions between the fuel charge, the large-emitter trading system (LETS), the oil and gas emissions cap, and other climate policies.
Overall, CCI’s analysis indicated that Canada was on track to meet up to 90% of the emission reduction necessary to hit 400 Mt CO2 or less by 2030. If it did hit the target set out in the Emissions Reduction Plan (ERP) it would represent a 40% reduction compared with 2005 levels. However, that was before Canada axed the consumer carbon tax.
CCI’s analysis indicates that its loss is not a big one in terms of Canada’s ability to hit its emission targets. However, it does now place more of the burden on the other policies, and indeed may increase pressure on the government to introduce other measures to replace the consumer carbon tax.
For example, the LETS was expected to contribute almost half the incremental impact on emissions (almost 3.5 times as much as the fuel charge), in part by virtue of the much larger share of Canadian emissions covered. In response, Carney proposed to “improve and tighten” LETS, while also extending it until 2035, to “help foster Canada’s clean industrial competitive advantage.” 1
CCI’s analysis estimated that the oil and gas emissions cap would deliver approximately one-third (34%) of the emission reduction required between 2025 and 2030. However, the proposal was never finalised under Prime Minister Trudeau’s leadership and it is unclear whether the emissions cap will be resurrected or not. Instead Carney has indicated that he would explore strengthening existing standards, such as those imposed on the energy industry in order to slash methane emissions (see Canada's oil and gas cap-and-trade scheme does not go far enough).
Another option not considered by CCI in their analysis is the introduction of a carbon border levy. As I outlined in a recent article, when Carney announced that he would axe the consumer carbon tax, he also pledged to “develop a carbon border-adjustment mechanism," making the case that it “promotes jobs here at home, it prevents carbon leakage abroad.” Canada could easily beat Europe and become the first country to introduce a carbon border levy (see Striking first: Why Canada could beat Europe to a carbon border levy).
Addressing ‘carbonflation’ concerns
Up until last weekend the consumer carbon tax was adding almost 18 cents per litre of gasoline, 15 cents per cubic metre of natural gas, and 21 cents per litre of heating oil consumed. Of the three fuels, consumers are probably most sensitive to changes in gasoline prices. Afterall, it’s perhaps the only price that is advertised on large, eye-catching LED displays everywhere you drive, immediately visible to drivers even if you have no immediate need to fill up.
Analysis by the International Institute for Sustainable Development (IISD) shows the carbon tax only had a negligible impact on gasoline price inflation. The tax was responsible for a 3 cents per litre increase in the year to June 2022, while changes in the underlying price of crude oil and gasoline accounted for 70.5 cents per litre. This tallies with analysis from the Bank of Canada who estimate that the carbon tax contributed only 0.15 percentage points to energy price inflation. The bank estimates the overall impact on inflation in goods and services to be minimal - less than 0.3%.23
The perception that the carbon tax had a big impact on inflation was weaponised by the opposition Conservative Party during the recent energy crisis - despite evidence indicating the impact was negligible. However, the perception that the carbon tax was impoverishing Canadians was enough for it to become politically toxic. You can already see the impact of inflation concerns across other jurisdictions with carbon pricing.
For example, fear of a political backlash to high gasoline prices in California is one reason why the state keeps delaying reforms to its Cap-and-Trade scheme. The state already has one of the highest gasoline prices in America and Governor Newsom knows that it will do his chances of leading the Democrats no good if his policies are perceived as being behind high gasoline prices (see The future of California's cap-and-trade program beyond 2030 is now in doubt: Clean hydrogen production tax credit rules complicate the legislative process).
Ultimate transparency required
Back in July 2024 I argued that the Canadian government should at least reform the consumer carbon tax, if not dump it. In the article I outlined four reasons why the implementation of the tax was far from optimal: a) poor communication by the government meant few knew about, far less understood the scheme, b) revenue recycling failed to address barriers to switching, c) the perception of political machination, real or otherwise, and d) that revenue recycling meant the economy failed to benefit from the multiplier effect (see Why Canada should reform its carbon tax).
As in Canada, slapping a carbon tax on very visible, consumer facing, politically sensitive products is fraught with difficulty. Europe’s leaders will be acutely aware of the political risks, even more so after recent developments in Canada. It is vital that European governments are completely transparent on how the funds are allocated, or they are likely to face the wrath of their voters. This is especially pertinent given that Europe’s second emissions trading scheme - covering buildings, road transport, as well as those manufacturing industries not included in ETS1 - is set to begin in less than two years.
The ETS2 price should, in theory at least, jump to the level at which emission abatement is incentivised. As I’ve discussed in previous posts, that could be very high - >€200 per tonne - given the position that buildings and transportation have on the marginal abatement cost (MAC) curve. According to Veyt that might add at least €0.50 per litre of diesel by 2031. However, given the inherent deficit of allowances built into the system, the ETS2 price could spike much earlier than this, and to much higher levels, perhaps as high as €340 per tonne with knock-on implications for European diesel and other fuel prices (see ETS2 carbon price could rapidly breach €100: Europe's second carbon market is expected to be very sensitive to emission allowance scarcity).4
Each Member State is expected to channel revenue from the sale of ETS2 allowances to measures to cut emissions from buildings (e.g. insulation) and transport (e.g. public transport), while also allocating funds to support lower income households. Furthermore, the EU are also launching the Social Climate Fund (SCF) to direct income payments, support the renovation of social housing, help with integrating renewable energy, and enable communities to roll out low carbon transport (e.g. EV infrastructure and public transport).
The experience from ETS1 is not encouraging. A report by WWF found that EU Member States raised €88.5 billion from the sale of EUAs during the period 2013-22. However, €25 billion of this income was not spent on climate action, while another €12 billion was spent on projects that could have resulted in increased emissions. More importantly from the perspective of transparency, they claim their analysis was made more difficult due to the “considerable gaps and inconsistencies in Member States’ reporting,” while information on how ETS revenues were spent was often “riddled with inconsistencies and mistakes - if it’s available at all.”5
Mark Carney’s decision to can the consumer carbon tax was a savvy tactical political move, eliminating the key battleground issue upon which opposition leader, Pierre Poilievre was waging the election battle: ‘Axe the tax! Some supporters of carbon pricing will no doubt argue that Carney’s move goes against everything the former head of the Taskforce for Scaling Voluntary Carbon Markets use to stand for. I disagree, and as the quote at the beginning of this article makes clear, Carney has always been clear that markets require the tacit approval of society at large for them to be effective - the consumer carbon tax is no different. By beating a tactical retreat, Carney can now seek to reengineer Canada’s carbon markets, bigger and better than ever before.
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https://440megatonnes.ca/insight/industrial-carbon-pricing-systems-driver-emissions-reductions/
https://www.iisd.org/system/files/2024-07/fossil-fuels-drive-inflation-canada.pdf
https://www.cbc.ca/news/canada/calgary/carbon-tax-inflation-tiff-macklem-calgary-1.6960189
https://veyt.com/press-releases/starting-in-2027-europes-second-big-emission-trading-scheme-will-increase-fossil-fuel-prices/
https://www.wwf.eu/?8399416/Where-did-all-the-money-go-How-Member-States-spent-their-ETS-revenues