Carbon tax: how does it work and who can benefit from it?
June 30, 2021 Insights
2020 was one of the three warmest years on record in the history of our planet, according to the World Meterological Association (WMA).1 Human activity related to the burning of fossil fuels continues to send carbon dioxide (CO2), methane (CH4), and nitrous oxide (N20) into our atmosphere—and as a result, the Earth continues to heat up. This is global warming at its essence, and its potential consequences could be devastating not only for humans, but for all species on this planet: from rising sea levels, to loss of global food security, to animal and plant extinction.2
In April 2021, at the launch of the WMA’s report on the State of the Global Climate, United Nations Secretary-General António Guterres deemed 2021 the
make it or break it year for climate change. He went on to say that by 2030, we must globally reduce greenhouse gas emissions by 45% from 2010 levels.3
More than 190 nations have agreed to take action to reduce their greenhouse gas emissions in order to reach a 2030 emission reduction target, as per the 2015 Paris Agreement (Canada has the additional goal of reaching Net-Zero status by 2050). For some nations, associating a monetary cost with carbon pollution is a key strategy in reducing emissions and encouraging a more widespread adoption of sustainable practices. Some countries have introduced this pricing in the form of a carbon tax.
What is carbon tax?
Carbon tax is a type of carbon pricing (other types include cap-and-trade models and carbon offsets).
Essentially, carbon tax is a pricing surcharge on goods, services, processes and activities that contribute to greenhouse gas pollution, most notably through the burning of fossil fuels such as coal, diesel, and gasoline. Carbon tax can be imposed at federal and/or provincial levels and impacts corporations and individuals in different ways.
The ultimate objective of a carbon tax is to put a tangible price on the environmental and economic cost that comes with greenhouse gas emissions.
Sweden: an example of carbon tax early adoption
Unlike Canada, which only began to adopt the concept of a carbon tax in the late 2000s, Sweden has been discouraging greenhouse gas emissions via carbon pricing since 1991. Its carbon tax is currently priced at $140 per tonne—far above that of Canada—and, according to the Swedish Ministry of Environment, has enabled the country to cut emissions by 20%. The tax has also been credited with accelerating the innovation of more sustainable heating technology, which has significantly reduced the oil usage for heat across the country. Sweden’s economy has grown by more than 100% since the carbon tax was introduced in 1991.4
Carbon tax’s introduction in Canada
Carbon tax was first introduced in Canada in 2007 with Alberta’s carbon levy, which effectively made the province of Alberta the first jurisdiction in North America to legislate greenhouse gas reductions from large industrial emitters.5
A year later, British Columbia began to apply a revenue-neutral carbon tax to purchases of fuel, which covers approximately 70% of its total provincial emissions.6 This was the first application of a revenue-neutral carbon tax–a structure in which all revenue generated from the tax is returned to provincial residents through various personal and business tax measures–in North America.
British Columbia’s carbon tax structure has garnered positive attention from the World Bank and United Nations, who have upheld the structure as a model for others to follow.7 According to the Canadian government’s 2020 climate plan, “Independent research and analysis has found that [British Columbia’s] carbon tax has cut emissions by 5 to 15% from what they would have otherwise been, encouraging the purchase of more fuel-efficient cars, and decreasing consumption of natural gas use, all while supporting increased employment.”8
Fast-forward to 2018: Canada’s federal government introduced the Greenhouse Gas Pollution Pricing Act (GGPPA), a national carbon-pricing regime, which took effect in most provinces in 2019. The GGPPA put a surcharge on fuel and applied a pollution price for industry. In March 2021, Canada’s Supreme Court upheld the federal government’s right to continue to impose the GGPPA on provinces whose individual climate plans don’t meet federal standards.9
How does carbon tax apply to individual consumers?
The federal government’s carbon tax system, like that developed in British Columbia in 2008, is revenue-neutral, meaning all proceeds within a specific province are returned to that province’s residents.
In the case of everyday consumers, the federal government’s current minimum carbon price is $40 per tonne. This pricing has doubled since carbon tax was first introduced in 2019—and it will be rising again to $50 next year. Further, in the federal government’s strengthened climate plan, it proposes “to increase the carbon price by $15 per year, starting in 2030, rising to $170 per tonne of carbon pollution in 2030.”10
The federal carbon pricing currently applies in Alberta, Saskatchewan, Manitoba, and Ontario, as these provinces’ own carbon tax legislation does not meet the federal standard. It is enacted by way of directly adding to the cost of gasoline and home heating. As an incentive to offset the cost of the fuel charge, residents in these provinces can apply for a Climate Action Incentive (CAI) tax credit (one per household), the value of which differs by province, location within the province, and household size.
The remaining Canadian provinces and territories have either set their own taxes that meet or exceed the standard (adjusted as per the amount of carbon that province/territory emits), or use an alternative cap-and-trade carbon pricing system.
How does carbon tax apply to industry?
According to Forbes.com, “Companies’ investment in carbon reduction activity is being noticed, reported on, and touted so other companies can follow suit.”11 Industries are taxed differently than individuals for their carbon emissions. In provinces that do not have their own industry carbon tax system, industrial facilities that emit 50,000+ tonnes of CO2 annually are subject to the Output-Based Pricing System (OBPS).
This system sets a performance standard across each type of industry sector. This standard is set according to two criteria as laid out by the Government of Canada:
- “An assessment of the risks to competitiveness and “carbon leakage” (i.e. the risk of industries moving from one region to another to avoid paying a price on carbon pollution) for each sector.”
- “The level of industrial process emissions, which are much more challenging to reduce than emissions from burning fuel.”
Facilities that produce more emissions than their sector’s standard are taxed for the excess. Facilities whose emissions fall below the standard are rewarded with credits that can be sold or retained for later use.
The OBPS is currently active in Ontario, New Brunswick, Manitoba, Prince Edward Island, Yukon, Nunavut, and two sectors in Saskatchewan.12
Why is carbon tax important to Canada?
Canada is warming twice as fast as the rest of the world.1314 We are seeing the devastating effects of global warming from coast to coast: wildfires in the western provinces, floods in Ontario and Quebec, and eroding coastlines and melting permafrost in the north. Despite air travel all but grinding to a halt amid the first 1.5 years of the COVID-19 pandemic, CO2 concentrations in our atmosphere have relentlessly continued to climb.15
In order for Canada to achieve its 2050 Net-Zero goal, it will have to enact dramatic change across its oil and gas industry, which is its largest greenhouse gas contributor. Either the entire industry must transition to a focus on clean energy production, or technology must be rapidly accelerated to successfully capture and store carbon.16
Transportation is second to oil and gas when it comes to greenhouse gas emissions in Canada. This sector will also need to see enormous changes, by way of phasing out vehicles that require fossil fuel gasoline, and widespread use of public transit.17
Although not a magic solution, a carbon tax can significantly help effect change across both of these sectors—and beyond. It can provide a host of potential benefits and advantages for both Canada’s environment and economy. These include:
- Creating a financial incentive for individuals to choose more sustainable heat and electricity consumption methods, as well as methods of transportation
- Creating a financial incentive for industrial corporations to adopt processes that reduce their carbon emissions to below the federal performance standard
- Increasing consumer and industrial demand for green technologies and products
- Stimulating more investment in clean energy production, including solar and biogas
- Creating more employment overall within the clean energy industry
Ultimately, a carbon tax creates an “economic signal”—in the form of a tangible monetary surcharge—that there is a real price to pay for contributing to global warming. The strength of this signal will correlate to the strength of Canada’s investment in the growth of its clean energy sector. With a stronger economic signal comes more affordable and accessible clean technology and products—and, in turn, the phasing-out of technology and products that rely on burning fossil fuels. Carbon tax has the potential to help spur a positive cycle of sustainable production and consumption of goods and technologies to help Canada reach its Net-Zero 2050 objective.
President, Skyline Energy
Rob is responsible for the operational and financial performance of Skyline Clean Energy Fund’s clean energy asset portfolio, including overseeing acquisitions, dispositions, financial budgets, implementing and monitoring capital expenditure projects, and monitoring the assets’ functionality. With extensive experience in evaluating, building, maintaining, and selling renewable energy assets, his well-rounded knowledge of the solar energy industry is an invaluable asset to the Skyline Energy team.
Skyline Energy manages clean energy assets for Skyline Clean Energy Fund, a sustainable investment offered as a private alternative investment product by Skyline Wealth.
An Accredited Investor, as defined by National Instrument 45-106, can have several definitions. Below are the most commonly relied upon definitions by Skyline Wealth Management Inc. (“Skyline Wealth”) investors:
- an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that before taxes, but net of any related liabilities exceeding $1,000,000; (or)
- an individual who, either alone or with a spouse, has total net assets of at least $5,000,000; (or)
- an individual whose net income before taxes exceeded $200,000 in each of the 2 most recent calendar years or an individual whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year;
About Skyline Clean Energy Fund
Skyline Clean Energy Fund (“SCEF”) is a privately owned and managed portfolio of medium to large scale clean energy assets, focused on acquiring income-producing assets across Canada, under long-term government contracts.
SCEF is offered as an alternative investment product through Skyline Wealth Management Inc. (“Skyline Wealth”), the exclusive Exempt Market Dealer (EMD) for SCEF.
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