Carbon Tax Changes In Canada Put Entire Program At Risk

Canadian Prime Minister Justin Trudeau recently announced changes to the federal carbon policy to reduce the cost for rural Canadians. Specifically, the change exempts home heating oil from the carbon tax for the next three years. This primarily impacts households in the Atlantic provinces, an important voting region. The government will also increase the rebate received by rural Canadians. This announcement has resulted in the two extreme sides of the carbon tax debate finally both agreeing: agreeing that it’s a bad decision. Advocates of the tax, and environmentalists, feel betrayed, and the opposition says it justifies their worst fears about how it is applied. To understand why, the history of the carbon tax is important.

The Canadian carbon tax program has been in place at a federal level since 2019. Alberta legislated greenhouse gas reductions before that, since 2007, even though it’s never thought of that way. The federal program is applied based on the carbon content of fuels and is applied across every jurisdiction. Provinces or territories are then allowed to design their own programs within the broader scheme if they meet minimum thresholds. The goal is to create a financial incentive for people to pollute less, and putting a price on carbon hopefully drives innovation at the same time. The program is revenue-neutral, meaning most of the proceeds are returned to families through Climate Action Incentive Payments, which are added to annual tax returns.

The major complaints about the program have been that any tax that is then returned gives the government control over more dollars to pick political wins. The second complaint is that it has never been as revenue-neutral as it sounds and, in a cost-of-living crisis, an additional tax is the last thing families need. This recently announced exemption creates the perfect case study on both complaints and that’s kicked off the flurry of commentary.

Relief for households was broadly telegraphed as the reason for the heating oil change. The political thinking was likely “if we are saving people money, we should make sure they know and get credit.” Suddenly everyone heard this though and started saying “I thought you said there wasn’t a cost to this program?” Making jurisdiction-dependent decisions within the program also makes it look less like an equal tax for the greater good and more like another political tool that can be applied for votes. These debates have now consumed the news cycle.

It remains to be seen what the government does, or if the current focus disappears, but the talking points will be used for a while. It’s also a blow to everyone who believed in the carbon tax as if it really is the most important thing then why do politicians suddenly get to pick and choose where it is applied? Environmentalists are hopeful that this doesn’t muddy a lot of the good work, but it seems like a pretty big risk has been taken.

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