Canada can thrive and achieve climate success with or without a carbon tax

Policymaking has been compared to sausage-making, in that neither are pleasant to watch. And the federal carbon tax, called pollution pricing, may be one of the least-appetizing policy sausages of recent times. With beginnings rooted firmly in sound economic theory, the Canadian carbon price has ruptured like an overcooked sausage. All it needed was a poke from the prime minister because it appeared ready to burst at any moment.

The Maritime heating oil exemption from the carbon tax may have seemed like a minor adjustment, but it was the poke that set things in motion for what may be the inevitable unravelling of consumer carbon pricing at the federal level in Canada. Although not an ideal outcome, maybe it isn’t the worst thing to happen, either. Policy, after all, is meant to evolve and adapt.

The question now is: How do the Liberals respond to the mounting opposition across the country? Is a major revamp of retail pollution pricing, their signature climate policy, a possibility?

Unpacking that idea leads to three important conclusions:

1. Canada’s comprehensive and diverse array of industrial carbon pricing systems (output-based pricing) must be maintained and enhanced. The recent federal announcement on contracts for differences is an excellent example of a critical policy enhancement, as will border carbon adjustments be when introduced.

2. The federal government must focus on implementing the impressive package of economic, policy and regulatory tools that first and foremost position Canada for future economic growth while managing carbon emissions in a meaningful way. These include direct investments in net-zero manufacturing, clean technology investment tax credits, electric vehicle availability legislation, incentives for heat pumps, support for renewable and nuclear power, support for skills training and sustainable jobs, climate-resilient agriculture programs, enhanced methane regulations, an oil sector emissions cap, and more.

3. With points one and two in hand, the retail carbon tax may not be needed because the effort to preserve it may outweigh the benefits. A focus on delivering the other important policies will likely do more of the heavy lifting in terms of achieving our emission targets, and there is still much heavy lifting to do.

While it may be hard to imagine the Liberals voluntarily rolling over on the retail carbon tax, it might be politically smart to “read the room” and offer up some clever “policy adaptation” given how vastly different the world is today from when it was first introduced.

The political challenge is that most politicians don’t want to be seen changing their minds or backtracking — the dreaded flip-flop. And to be clear, adaptive policy is not waffling or flip-flopping, but modifying and improving a set of policies to increase uptake, compliance and efficacy.

This deep-seated fear of waffling leads politicians and civil servants to seek policies that are “perfect” before they are launched — a classic example of “the perfect being the enemy of the good.” Nasty political divisiveness leaves no room for adaptation or improvement — a sad reflection on our political space.

There are major downsides to removing a critical pillar of Canada’s climate-fighting agenda and the arguments against eliminating the tax have traction. Not least of which is that it will undermine one of the most oft-heard mantras of business: “We need policy certainty.” Major policy flip-flops do nobody any good. By eliminating carbon pricing, the most theoretically efficient and business-friendly climate tool is removed from the climate policy toolbox.

This may not present a problem for the Liberals in that they have an extensive toolbox from which to work and are using virtually all the tools at their disposal. The Conservatives, however, will have a tough time coming up with alternatives to carbon pricing after having rejected regulations, standards, incentives, subsidies and most other means of addressing emission reductions. The irony is that the most “conservative” of all of these policy tools is a market-based pricing mechanism.

A more germane question may be, “Is there any upside to ‘axing the tax?’” I can’t think of one other than the crass retail politics of lowering taxes (despite the fact most Canadians save more with the tax rebate). For climate policy experts, the carbon tax was always meant to be part of the solution, not the dominant climate policy.

The problem was that the carbon tax sucked all the oxygen out of the room to the point where politicians convinced themselves, with the vigorous support of economists, the carbon tax was all that was needed to fight climate change. What the tax proponents failed to communicate was the level of tax required to be effective (i.e., over $100/tonne) and the cost to consumers of a carbon price at that level. This is where economic theory does not work in political practice.

As a consequence, Canada was slow to adopt other regulatory pieces needed to fill in where the carbon tax could not — like an oil emissions cap, enhanced methane regulations, electric vehicle mandates, etc. These important policies are all nearing fruition, but they have taken too long and as a result, Canada will have a tough time meeting our 2030 climate targets.

Before the carbon tax, there was considerable debate around the relative contribution of a tax in achieving emission reductions. I recall speaking at an event with one of Canada’s leading climate economists, Mark Jaccard, in Ottawa in 2013, debating that issue. We landed on a figure of between 15 and 20 per cent of overall greenhouse gas emission reductions that could be attributable to a carbon tax going forward. That meant 80 to 85 per cent of emission reductions would need to come from more traditional environmental standards, regulations and incentives.

We agreed carbon pricing was an important tool in the policy toolbox but inherently limited by the political challenge of requiring the price to rise to over $100 per tonne of carbon before achieving meaningful emission reductions. For this reason, Canada would need to develop a full suite of actions to accompany the tax. In fact, it was the integration of the carbon tax along with other policies that helped create low-carbon alternatives that made for the most effective climate policy. This is still an argument to maintain a carbon tax because it pushes consumers and businesses in the right direction to take advantage of the incentives and comply with the standards. Policies need to be developed as co-operative packages, not standalone heroes.

The carbon tax succeeded at breaking through the climate policy stagnation in Canada, but it failed by being “too successful” and leading some to believe it was the “silver bullet” solution to climate change.

A taxing history

Industrial carbon pricing is well-supported by industry and pricing schemes in the provinces introduced before the federal carbon tax will likely remain. It is the consumer carbon tax that is most at risk, having enraged populist conservative politicians.

It is no coincidence the first carbon pricing system in Canada was introduced by Alberta’s Ed Stelmach, a Conservative premier, in 2007. It covers industrial emissions from large polluters and is well-regarded and still in force.

North America’s first broad-based carbon tax was introduced the following year by then-B.C. premier Gordon Campbell, a fiscal conservative. It was lauded for its “purity” in adhering to fundamental fiscal principles of lowering tax on income (a “good”) while raising the tax on carbon pollution (a “bad”).

In 2013, Quebec joined California’s cap-and-trade market, a form of carbon pricing. Ontario joined the same program in 2017 for a short-lived stint that was shut down the following year by Doug Ford after he became the premier. The diversity of carbon pricing systems across provinces and sectors makes Canada a fascinating laboratory for understanding climate pricing policy development, adoption and acceptance.

In the decade between 2008 and 2018, something happened to the carbon tax narrative and the positive attributes of carbon pricing as a business-friendly “market mechanism” were replaced by the simple negative narrative of “cut taxes” to the point where populists such as Pierre Poilievre use “axe the tax” as one of their primary rallying calls to engage and enrage their voting base.

Financially literate conservatives are fans of using market instruments to achieve environmental outcomes, and carbon pricing fits the bill perfectly. Economic theory tells us that charging a fee for something we don’t want (carbon dioxide pollution), motivates us to avoid the behaviours that produce carbon dioxide (using gasoline in your car or natural gas to heat your house or in industry, using coal to make steel and cement or carbon-intensive oil refining).

The higher the tax, the greater the financial incentive to seek low-carbon alternatives or invest in carbon-mitigating technologies. The crux is getting the price to the point where it shifts behaviour effectively without angering the public. We now know what that threshold is.

The backlash

Justin Trudeau’s sausage poke was all that was needed for an explosion of carbon tax opposition, resulting in calls for tax exemptions from beyond the usual suspects, including premiers of all political stripes.

Maybe the consumer carbon tax has run its course and resistance isn’t such a bad thing? One of the reasons policymaking is so fraught is that no government wants to back down on something they have held so dearly.

For all its intellectual rigour, economic logic and thoughtful design, maybe the smartest thing for the Liberal government to do is to get ahead of the curve, deflate Poilievre’s tax-axing bluster and drop the guillotine themselves. Or at least adapt.

Best practice in law-making and policy design is “adaptive.” That means designing policy as best you can with the information and input at hand and then adjusting or adapting policies to the “real world” response over time. Modifications are often required to improve any sort of policy in response to uptake experience or social, technological and political circumstances. Nobody could have predicted COVID, autocrat invasions, skyrocketing oil prices and record levels of inflation causing extreme pressure on housing and food prices, the basics of life. And whenever immediate needs are threatened, policies and laws to protect long-term environmental protection tend to go by the wayside. These are the “real world” circumstances that make policy adaptation essential.

In 2013, the Ecofiscal Commission was launched as an independent, time-limited think tank with the goal of making fiscal policy (taxes and fees) a priority in Canada for addressing environmental problems. It was hugely successful and many would argue it laid the foundation for the federal carbon tax.

The commission brought together the country’s top economists, together with a high-powered advisory group that included former politicians and business leaders, including Preston Manning and Jean Charest, who advocated for fiscal measures over regulation, seen to be more efficient and better aligned with “conservative” values.

An underlying premise of the commission, and carbon pricing proponents generally, was the support it could garner from business-friendly liberals and small “c” conservatives across the country. Pricing was seen as a bridge-building climate policy. So much for that idea.

Fast-forward 10 years and the world is a very different place. We no longer have conservative political leaders in Canada, at least not outside of Nova Scotia. They have been replaced by populists. And rather than having a value-centred compass to guide policy and leadership, populists focus on their voters, which recalls the quote: “The best argument against democracy is a five-minute conversation with the average voter.”

The Liberal government was courageous, diligent and well-intentioned in the design and delivery of the federal “pollution pricing” system. One might even describe it as Brian Mulroney-style vision and leadership. It put Canada on the map as one of the few countries in the world (outside of Scandinavia) with serious climate legislation based on pollution pricing. There were improvements that could have been made at the outset to enhance public support, apparently rejected by bureaucrats against the advice of pricing policy experts. However, perfection is elusive and shouldn’t stop public policy from advancing.

The federal carbon price was not only smart legislation that held its own in a Supreme Court challenge from populist provinces, it was the first serious climate policy implemented by any federal government in Canada.

This is the real success of the carbon tax. It broke through the federal climate narrative barrier of “Should we develop serious policy to address climate change?” to “What are the most effective policies to address climate change?” It was a monumental shift for Canada after decades of dithering by all parties. Perhaps the federal carbon tax has fulfilled its primary task. It was ground-breaking at the time and never considered to be the “be-all, end-all of climate policy,” except possibly by economists.

With Canadians on board for serious climate action, businesses supporting the new economy and a robust suite of policies and incentives to help us navigate the next decade, Canada is well-positioned for economic growth and climate change success with or without a consumer carbon tax.

Bruce Lourie is president of the Ivey Foundation and co-author with Rick Smith of Slow Death by Rubber Duck: How the Toxic Chemistry of Everyday Life Affects Our Health. He also sits on the board of Canada's National Observer.