CALGARY — When the federal government put a three-year pause last fall on carbon taxes for home heating oils, it set off a chain reaction that suggested one of Prime Minister Justin Trudeau’s core environmental policies was on life support. 

Longtime opponents of the policy pounced—starting with those in the West. Alberta Premier Danielle Smith painted the decision as regional favouritism meant to shore up political support for the federal Liberals. Saskatchewan’s conservative-leaning government outright refused to collect the levy in defiance of Ottawa. Federal Conservative Pierre Poilievre has promised to “axe the tax” should he win the keys to the Prime Minister’s Office.

More ominous for the policy, though, may be cratering support for it on the political left, once home to its most reliable champions. Leading candidates to replace Rachel Notley as head of the Alberta NDP—a party that when in office introduced its own economy-wide carbon tax with support from oilsands CEOs—don’t support it. One front-runner recently declared the carbon tax “dead.” Manitoba’s New Democratic premier, Wab Kinew, is reviewing how the federal tax is applied in his province. 

Even though it’s aimed at consumers, the fate of this much-debated policy tool has ramifications for businesses large and small across the country. Here’s what the possible demise of the carbon tax means, and what comes next. 

A carbon tax on all

Canada’s broad-based carbon tax was introduced in 2018. It applies to consumer-facing fuels like gas and diesel, starting at $20 per tonne and rising to $170 by 2030. Between fiscal 2020 and 2023, the federal government raised about $22 billion in carbon taxes, much of which it returned to taxpayers in the form of rebates. 

The tax is distinct from industrial-scale carbon taxes that tend to focus on heavy emitters. Alberta was the first jurisdiction in Canada to introduce an industrial carbon tax in 2007, which it applies through a regulatory mechanism called an output-based pricing system (OBPS). 

The price of emission

Trevor Tombe, an economics professor at the University of Calgary, said an economy-wide carbon tax is the most efficient way to cut carbon emissions because it is decentralized. That is, it is applied more or less equally to people and businesses, who then independently find ways to reduce their exposure to the tax.  

Removing the consumer carbon tax, Tombe said, will force policymakers to lean on more costly policies that target specific sectors.

“Regulation that changes the way in which your business operates, for example, is going to come with costs, additional costs for the production process, and those costs will be passed through to consumers in the form of higher prices,” he said. 

Out of sight, out of mind

Those regulations have come in several forms, particularly for power generators and oil and gas producers. 

The federal government—perhaps in an acknowledgement that its central carbon tax policy was losing favour, Tombe said—has proposed stringent new clean electricity regulations, a cap on oil and gas emissions, clean fuel standards and EV mandates. 

Heather Exner-Pirot, a special advisor at the Business Council of Canada focused on energy, said the cost of climate policies are becoming more “hidden” in the absence of a broad carbon tax, and layers of regulations have created administrative burdens that are weighing down the private sector. 

Faced with those burdens, Exner-Pirot said many companies are opting to invest in other jurisdictions like the U.S., where climate policies are less stringent and subsidies more generous. As The Logic has previously reported, developers of carbon capture and storage for example are turning to the U.S. as Ottawa’s promises to roll out new tax credits have been delayed. 

“Their capital is fleeing Canada in droves,” she said. 

A little low, a little to the right

Growing hostility toward the carbon tax raises uncomfortable questions about where Canada’s emissions cuts will come from if it’s nixed—and how much of the burden industry will be asked to shoulder. 

By Ottawa’s calculations, carbon pricing was supposed to contribute as much as one-third of Canada’s expected carbon emissions reductions in 2030. (The estimate doesn’t specifically break down consumer versus industrial carbon taxes.) 

Dale Beugin, executive director of Canada’s Ecofiscal Commission, said the absence of a carbon tax would likely mean tighter controls aimed at shifting people to EVs, for example, or stricter building codes for higher energy efficiency.

Ottawa late last year published new regulations aimed at outlawing the sale of gas or diesel passenger cars by 2035, and will force automakers to sell a minimum percentage of zero-emissions vehicles per year until then. For oil and gas producers specifically, the feds are proposing a cap-and-trade system that aims to limit the sector’s total emissions allowances by 2030. (The government’s estimates hope to cut emissions between 35 and 38 per cent below 2019 levels.) In the absence of a broad-based tax, more onus could fall on these types of regulations, and a broad array of others, to bring Canada’s emissions profile into line. 

“It puts a bunch of pressure on vehicles and driving habits and buildings especially as the things where there aren’t a bunch of other policies already,” Beugin said. 

“It does leave a hole that needs to be filled.”