Axe the carbon tax, OK, but keep paying the rebates
Following on this fall’s kerfuffle over Ottawa’s exemption of heating oil under the carbon tax, Opposition leader Pierre Poilievre has renewed his promise to “axe the tax.” In response, the government is reminding voters that 90 per cent of what it earns from the tax is disbursed as lumpsum rebates of equal value to each household, rich or poor. And it claims these rebates make the average resident better off in the eight provinces where the federal tax applies. (B.C. and Quebec have their own carbon pricing systems.)
But is it true that axing the tax necessarily means axing the rebates?
I have always argued that the carbon tax is better policy than the existing pancake approach, which stacks one inefficient, soak-thepoor carbon mandate, regulation and subsidy on top of another until even the relevant ministers forget how many anti-carbon initiatives we have. On the other hand, if our largest trading partner, the U.S., isn’t going to price carbon, maybe axing the tax makes sense. But if we do that, do the rebates have to go, too?
Analysis does typically assume rebates go hand-inhand with the carbon tax. And if you look only at the tax and the rebates, Ottawa is probably right: the rebates in large part offset the tax. But Poilievre takes a broader view. He cites a 2022 Parliamentary Budget Office study that also looked at the effects of the carbon tax on household incomes as a result of economic restructuring. It gives different results. For example, it estimates that for the average Ontario household the fiscal “cost” — carbon taxes and related GST effects net of rebates — is actually a net gain of $113 by 2030-31. But add in the likely economic effects on employment and investment income and that gain turns into a net loss of $1,145 in 2030-31.
But the link between the carbon tax and carbon tax rebates is now broken. The Trudeau government broke it in October when, to curry political support in Atlantic Canada, it announced a three-year exemption for heating oil. Since 30 per cent of Atlantic households use heating oil, the exemption dings carbon tax proceeds, which are used to cover rebates in the Atlantic. But nary a word was heard about rebates falling. Quite the contrary, the PM announced Ottawa would be doubling the top-up rural rebate from 10 to 20 per cent.
The heating oil exemption opened the door for others to push similar exemptions and many other groups have tried to squeeze through it. But none has mentioned doing away with the rebates. A carbon tax exemption for heating farm buildings was put on hold before Christmas when the Senate sent a private member’s bill back to the Commons. But even if that bill eventually passes, rebates to households would be untouched.
Because 92 per cent of Canadian households outside the Atlantic region use natural gas and electricity to heat their homes many other provinces have argued that the home oil heating exemption is unfair. As of this week, Saskatchewan is exempting all heating from carbon taxation. The federal government could by rights respond by reducing rebates to Saskatchewan households. But with rebates to Atlantic Canadians seemingly unaffected by the heating oil exemption, any such response would be — and would certainly be seen in the West as — regionally unfair.
The Trudeau government is not the first to leave rebates alone to avoid upsetting voters. When the GST was originally introduced on Jan. 1, 1991, Ottawa provided a low-income tax credit to offset the impact of a general tax on consumption. Yet, when the Harper government reduced the GST rate from seven to five per cent, it did not lower the credit accordingly. Instead, the credit has been boosted over the years due to restructuring and inflation adjustments.
The consumer portion of the federal carbon tax is expected to yield $23.4 billion by 2030-31, so axing it will involve a substantial loss in revenue. You would think the rebates would need to be scaled back at least somewhat.
One thought is that they should be continued as an offset to other carbon policies that raise energy costs for households (including in B.C. and Quebec). Though the Conservatives may well axe the carbon tax, they would likely leave in place carbon levies on high-emitter companies that the provinces currently apply. They may also keep the clean fuel regulations since companies have already started investing in low-carbon fuels using ethanol, waste and other products. These regulations on their own are estimated to raise the price of gas and diesel by 17 cents a litre, so continuing with twofifths of the rebate could be deemed an offset to that hit. That would cost the federal treasury almost $10 billion in 2030-31.
That is still a lot of money. If rebates were targeted to modest-income and rural Canadians instead of all of us, the policy could be much less expensive. Even better: why not integrate the rebate with the GST tax credit to offset both sales, excise and other climate levies, enabling a pool of credits to be income-tested that would reduce marginal effective tax rates on workers with modest incomes?
The key point is that axing the carbon tax does not necessarily mean axing rebates. Instead, it could lead to a restructuring of rebates to Canada’s advantage.
THE TRUDEAU GOVERNMENT IS NOT THE FIRST TO LEAVE REBATES ALONE TO AVOID UPSETTING VOTERS.