Is carbon pricing a burden on Canadian households?


The federal Liberals’ main counterattack in the political jousting over carbon pricing has been that their carbon levy isn’t a cost burden for most households, with annual rebates larger than the added costs for fossil fuel use.

And that average benefit will increase in 2021 in the four provinces where the federal government has put in place its own carbon pricing regime, according to figures released by Ottawa this month as rebate amounts for next year were announced.

The Liberals’ assertion that most households are net beneficiaries of carbon pricing is broadly true. But that calculation does not include some significant costs and does not include higher-income households that do face net costs.

And it’s not clear at the moment how consumer energy consumption habits will change as the carbon tax increases. At the moment, higher-income households have a relatively higher carbon tax bill because their energy consumption is higher than average. If consumers do not sufficiently reduce their use of fossil fuels relative to average consumption, they could join the ranks of households facing net costs.

The rebate to an Ontario adult in 2020 would cover the added costs from carbon pricing on 3,379 litres of gasoline, for instance. But by 2030, the rebate would pay for the added carbon cost on just 2,686 litres, reflecting that the payments will rise more slowly than the tax rate. That means that an Ontario adult would need to drive less, use a more fuel-efficient vehicle or pay more in carbon costs.

“If all those around you start to change behaviour, and you do not, absolutely you could find yourself in a situation where you are a net payer,” said Trevor Tombe, an associate professor of economics at the University of Calgary, adding that is extremely difficult to predict how the distribution of expenses and benefits among households will change as carbon costs rise.

At the moment, however, the assertion that federal carbon pricing is not a burden on the large majority of households bears up under scrutiny. The numbers released this month show that the amounts paid in carbon tax in the next fiscal year, which begins on April 1, will rise in Ontario, Manitoba, Saskatchewan and Alberta, where federal carbon pricing has been put in place. But rebates will rise more, increasing the average benefit in all four provinces, as the chart below shows.

But what is true on average isn’t true for all. In an interview, federal Environment Minister Jonathan Wilkinson says he expects that four-fifths of households will continue to receive rebates that are at least as much as their carbon tax bill. That would leave 20 per cent of households with carbon costs greater than their rebates. (However, when the Liberals unveiled their plan for increasing the carbon tax through to 2030, their plan only said a majority of households would receive a net benefit, without specifying a percentage.)

Currently, the 80-per-cent proportion mostly holds in the four provinces with federal carbon pricing, although that depends in part on excluding the impact of the GST/HST, which is levied on top of the added carbon cost of fossil fuels – a tax on a tax. Earlier this year, the Parliamentary Budget Officer said that when the GST/HST costs are included, costs rise and net benefits fall. In Ontario, that meant the highest-earning 40 per cent of households faced net costs from carbon pricing, although the actual amounts are relatively small. In the current fiscal year, the highest-earning 20 per cent of households in the province would pay a net cost of $134, the PBO estimated.

More significant is the exclusion of carbon pricing administered by the provinces. In Alberta, that means the costs from carbon pricing for industry aren’t included in either the federal government’s or the PBO’s calculations. Dr. Tombe says his calculations show that about two-thirds of Albertan households now receive rebates larger than their carbon costs, once the effect of businesses passing on the expense of industrial carbon pricing is included.

And the assertion that 80 per cent of households benefit from federal carbon pricing also ignores the costs of other parts of the government’s climate change strategy, including the Clean Fuel Standard, designed to gradually lower the carbon content of liquid fossil fuels. The investments needed to comply with those regulations will add costs, however, which will be passed on to consumers, the federal Environment Department said in a regulatory impact analysis statement this month.

The added costs aren’t large, with the most likely average annual cost for households rising to $136 in 2030. But the department points out that those costs would not be distributed equally, depending on the amount of liquid fuels consumed. In addition, remote communities are exempted from the regulation.

Even those costs may be overstated, said Mark Jaccard, a professor at Simon Fraser University’s school of resource and environmental management. Clean-fuel regulations and carbon pricing will both be affecting the use of fossil fuels through this decade, he says, making it difficult to sort out which has been decisive in influencing consumer behaviour.

So, if someone decides to switch away from a gasoline-powered car or an oil-burning furnace, did they do so because of the added implicit cost from the regulation or their rising carbon pricing bill? In that sense, the government’s figures may overestimate the amount of emissions that clean-fuel regulations will spur, and in turn, overestimate the resulting costs for households. It would be a mistake to simply assume that the figures provided by the government will simply add to the cost burden for households, Prof. Jaccard said. “You just can’t add them up.”

He added that it’s also important to consider the full life-cycle of energy expenditures, both the operating costs and the initial capital costs of purchases such as vehicles or heating systems.

The Environment Department says its regulatory analysis takes into account the interaction with carbon pricing and that there will be added costs for households. Significantly, the analysis does not take into account the increases in carbon pricing after 2022 that were announced this month. A government official, speaking on background, said that accounting for higher carbon pricing would likely increase the cost to households of the clean-fuel regulations, but that detailed modelling will be needed, as part of an updated regulatory analysis next year.

The official also pointed out that the analysis does not include the effect of government initiatives such as funding for low-carbon technologies and grants and loans for home retrofits, which would reduce the cost burden of the clean-fuel regulation. It also does not take into account how innovation could lower the cost of regulatory compliance.

The federal NDP has called on the government to increase its grants for low-income households by diverting federal support for the fossil fuel industry, arguing that poorer Canadians should be shielded from the effect of higher carbon costs.

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Note: This blog is a re-post of the original posted on The Globe and Mail website.