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Are Canadians Feeling Taxed by the Carbon Tax?

Read more in the April 5 edition of Invert Insights.

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The Canadian national tax on pollution rose by $15 per tonne on April 1, and it ruffled a few feathers amongst residents, most notably the leader of the federal official opposition, Pierre Poilievre. The increase, taking the federal price of carbon to $80/tonne, is expected to add about 3 cents to a liter of gasoline or a cubic meter of natural gas.

The Canadian Carbon Pricing Mechanism – intended to make it more expensive to burn fossil fuels and to encourage people and companies to use less – is estimated to contribute to as much as one-third of Canada’s emissions reductions in 2030. The legislation was first introduced on April 1, 2019, and since then, every jurisdiction in Canada has had a price on carbon pollution. 

What exactly is the Canadian carbon tax?

The Canadian federal carbon program consists of 2 components – a fuel charge tax aimed at curbing individual emissions and a regulatory trading system that taxes the highest emitting sectors like oil & gas, auto manufacturing, and building material production.

The Fuel Charge represents a fee per tonne of carbon dioxide (CO2) emitted from burning fossil fuels. While the distributor – most commonly gas stations and home heating companies – pays the levy initially, the cost is then passed down the supply chain to consumers through increased prices.

The Output-Based Pricing System (OBPS) component applies to large industrial facilities in high-emitting sectors. These organizations are exempt from paying the carbon price on fuel for their operations and instead are given emission limits which, if exceeded, require the purchase of carbon credits to abate emissions or pay a penalty. The OBPS applies automatically to companies that produce more than 50,000 tonnes of carbon dioxide, or an equivalent measure of other greenhouse gasses like methane and nitrous oxide. 

How does the federal carbon program differ from the provincial counterpart plans?

While the federal government releases their own policy, each province or territory has the option to design its own pricing system tailored to local needs. The federal government also sets minimum national stringency standards (the federal benchmark) that all pricing systems must meet to ensure they are comparable and effective in reducing greenhouse gas emissions.

If a province or territory decides not to price pollution or proposes a system that does not meet this federal benchmark, the federal system is put in place to ensure consistency and fairness. For example, Canadians living in the 8 provinces that have a mechanism in place for taxing industries but not a consumer mechanism receive approximately 90% of fuel charge proceeds back from the government via the Canada Carbon Rebate program. The Canadian government recently shared that 8 out of 10 households receive more money back than they spend on the fuel charge, and has even become a source of income for low and middle-income households. As of April 2024, residents of small and rural communities receive an extra 20% supplement beyond the base rebate amount in recognition of the increased energy needs of rural residents and their reduced access to cleaner transportation options. The remaining proceeds from the fuel charge tax are returned to businesses, farmers, and Indigenous groups in the same province or territory where it was collected.

Here’s a snapshot of carbon pollution pricing plans across Canada:

Canadian Carbon Tax programs across each province.

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