Carbon Tax Exemptions for Heating Oil: Who Are They Really Designed For?

Image By: The Boston Globe

Amidst a recent environmental audit signalling that Canada will fall short of its 2030 emission targets, Justin Trudeau and the Liberal party have been facing increasing political pressure to further expand carbon tax exemptions beyond heating oil. Several provincial premiers, and the Conservative government, have demanded that the Liberal government expand current carbon tax exemptions to propane and natural gas. However, PM Trudeau has made his stance abundantly clear, and announced that there is no inclination to consider expanding carbon tax exemptions beyond heating oil.

Since 2019, every jurisdiction in Canada has had the ability to decide whether they adhere to their very own tailored carbon pricing system. If the province does not design their own pricing system, by default, they adhere to the federal pricing system. The objective of the carbon tax is to integrate the environmental and social cost of regular market transactions incurred by third parties as a result of regular market transactions. The idea is then that emitters would reduce their total greenhouse gas emissions because they are faced with a higher marginal cost of abatement - the increased cost of production for every ton of carbon dioxide reduced. In turn, there are incentives for different industries to adopt cleaner technologies to avoid paying higher production costs in the long-term.  Technologies that are the most costly to reduce emissions include: gas plants, coal plants, and agricultural conversion. Conversely, other technologies have positive monetary yields, such as small hydro and switching lighting from incandescent to LED. For example, switching from incandescent lighting to LED lighting would actually allow consumers to save $120 in reduced energy costs for every ton of carbon dioxide reduced (Goodstein & Polansky, 2014).

The pricing system of carbon pollution has, arguably, been effective in encouraging industries to become more environmentally conscientious and reduce overall greenhouse gas emissions. However, Trudeau’s announcement to maintain carbon tax exemptions on heating has raised questions about whether Canada can adequately prepare itself for adhering to its 2030 emission targets, but more importantly, has shed light on Canada’s longer-term energy plan. 

The current carbon pricing system allows households who do choose to make upgrades to their home to experience the benefits, as these households do not need to pay a carbon tax. In other words, certain actions that reduce greenhouse gas emissions allow Canadians to avoid paying the price on pollution. However, it is important to recognize that not all groups in Canada are affected by the carbon pricing system the same way. On November 2nd, Energy Minister Johnathan Wilkinson defended Justin Trudeau’s carbon tax exemption for heating oil. However, Wilkinson recognized that heating oil is not just an expensive energy option;it has been getting increasingly more expensive over time. For example, the price of heating oil increased by 75% in 2022. In particular, it is true that those who use heating oil tend to live in more rural areas and tend to be households who are currently sitting under the national median income. As a result, maintaining carbon tax exemptions on heating oil is meant to provide targeted relief to farmers, fishers, users of aviation fuel in the territories and residents of rural communities. In the long term, Wilkinson stated that the Canadian government is seeking to displace the utilization of heating oil through issuing heat pumps in every province and territory. Thus, in the short-term, the maintenance of carbon tax exemptions will provide relief to those living in rural areas, disproportionately using heating oil as an energy option. It then becomes clear that the objective of the federal government is to pause the price on pollution, rather than an elimination, and is meant to provide rural Canadians with time to implement longer-term heating pumps. In other words, the government of Canada is providing certain exemptions that allow the price of carbon to seemingly be “eliminated.” However, Minister Wilkinson has argued that carbon pricing will only be removed in this case for a few years while the transition to free-heat pump use is enacted. 

To that effect, the carbon pricing system is both a progressive and proportional policy. Progressive and proportional are two concepts that are routinely used in public economics which describe how the structure of a policy is meant to benefit or hurt a certain groups based on financial standing. Furthermore, certain higher tax rates on luxury goods are meant to benefit lower-income earners at the detriment of higher-income earners. As the current carbon tax exemptions disproportionately target Canadians under the national median income, they can be categorized as progressive because they are meant to benefit those with less income. However, these recent carbon tax exemptions also have aspects to them that are proportional. As the federal government is trying to rectify unequal access to alternative energy options, the implementation of free-heating pumps to those in rural communities is designed so that all Canadians, regardless of economic background or location, have equal access to energy options that don’t oblige a price to be paid on pollution.