Taxing Carbon or Taxing Canadians?
In January 2025, Prime Minister Justin Trudeau announced his resignation. While there is a myriad of reasons why he lost popularity and support, one of the most contentious issues was his increasingly unpopular carbon tax. Opponents of the policy, aiming to capitalize on public discontent, went so far as to call for a “Carbon Tax Election” to oust him sooner. Canada's climate actions have long been deeply political, polarizing the public and policymakers to the detriment of progress. With a federal election on the horizon, the future of Trudeau’s landmark legislation and Canada’s participation in the fight against climate has come into question.
The carbon tax, officially known as the Greenhouse Gas Pollution Pricing Act, was implemented in 2018 as a cornerstone of Canada’s commitment to the 2015 Paris Climate Agreement. The Climate Agreement was a worldwide conference to tackle climate change. Each country was tasked with creating plans to reduce the amount of carbon their country emits by 2030. It has been met with considerable pushback, with critics questioning its efficiency and economic cost.
The Greenhouse Gas Pollution Pricing Act created a federal minimum standard for emissions and carbon pricing consisting of two main parts.
· Fuel Charges: An additional tax on fossil fuels like natural gas, propane and gasoline. The federal minimum adds around 20 cents per liter of gasoline with plans to increase the rate until 2030. Certain provinces have more stringent standards exceeding the federal minimum.
· Output Based Pricing System: A plan to tax emissions for large industrial operations that exceed the limit. This is designed to provide a financial incentive for the industry to reduce its carbon footprint.
The revenue collected from these taxes is intended to be revenue-neutral. This means every cent is funnelled back into the provinces they were collected from. Ninety percent of it is dispersed quarterly as a rebate to any Canadian who files their taxes. The remaining ten percent is used to support small businesses, local governments, and universities who also pay the tax.
Supporters of the tax argue that it is an equitable way to fight climate change with a minimal cost for Canadians. By redistributing all revenue from the program, the policy aims to offset the cost of the tax. Yet, critics maintain that the increased fees on fuel disproportionately affect rural and suburban Canadians. The added transportation costs mean that goods and services across the economy get more expensive. These secondary effects compound to exacerbate inflation and reduce the standard of living for Canadians. These debates frame two very important questions: does this policy hurt Canadians economically? And does it contribute to Canada’s fight against climate change?
Economic Impacts
The economic impact has often been touted as the most important factor for Canadians. In recent polling, 40% of Canadians want to axe it with a majority in favour of lowering it. The Conservative Party has promised to “axe the tax” and lower prices for Canadians. According to a report by the Parliamentary Budget Office, the fiscal effects show that the average household will see a net gain. This means that the direct and indirect costs of increased gasoline prices will be, on average, counteracted by the rebate. Additionally, the effects are seen as progressive, with the poorest Canadians receiving the most in tax rebates. This means the “tax” is a net gain for the average Canadian. However, there is disagreement on further effects. Economists have found that carbon taxes have deflationary effects by analyzing British Columbia's more stringent carbon tax program. However, the Parliamentary Budget Office disagrees. They report an average net cost when they factor in the loss of employment and investment income associated with carbon pricing. Although the poorest 40% of Canadians still see net gains, painting a messy and ambiguous picture of the true economic cost of the carbon tax.
Carbon Impacts
An often-forgotten part of the carbon tax debate is how effective it is in delivering its promise to reduce carbon emissions. Studies on this subject present mixed findings. For instance, a 2022 study by Felix Pretis concluded that the policy’s impact on emissions remains ambiguous, with reductions falling short of the targets set under the Paris Agreement. The study points to prices being too low and the time frame being too short to have any significant impact on the environment. Considering how unpopular the carbon tax currently is, this could result in the tax prematurely ending before having any impact on the climate. On the other hand, research from Dervis Kirikkaleli argues that carbon pricing mechanisms have successfully curbed environmental degradation in some sectors and increased biodiversity and economic resilience. The study concludes that there are localized benefits but perhaps not enough to stop the approach of climate change.
Backers of the plan often frame the carbon tax as a vital tool for Canada’s fight against climate change. However, the effects reported range from not good enough to negligible. This raises another question: What is the alternative?
Without the carbon tax, Canada will need to come up with other strategies to meet the Paris Agreement targets. There are always new ideas and “silver bullets” that promise to solve all of Canada’s problems. These could include stricter regulations on industrial emissions, subsidies for renewable energy in solar and wind farms, or direct investment in carbon-reducing infrastructure like public transportation. Regardless, any option will either directly or indirectly raise costs for Canadians through regulations, taxes, or climate effects.
Through these discussions, it is important to not ignore the cost of inaction. As climate change accelerates the financial cost of extreme weather, health effects and infrastructural damage will dwarf the immediate expenses of the carbon tax. Canadians are already experiencing the effects of climate change from floods to wildfires that displace communities and destroy lives. It is easy to attack the system in place without confronting the cost of alternatives. The real question isn’t whether Canadians can afford a carbon tax—it’s whether we can afford what happens without it.