Understanding The Carbon Tax & Benefits
There is a lot of disinformation around the Canadian Carbon Tax, and I’m hoping this review gives you a better, more accurate, and truthful understanding.

There is a lot of disinformation and misinformation floating around the Canadian "carbon tax", otherwise known as “price on carbon”, and I’m hoping this review gives you a better, more accurate, and truthful understanding. I know the word tax alone is enough to make people anxious that more money might be flowing out of their wallet, especially during a time when inflation is at record highs, resulting in skyrocketing food, and other basic living costs. Understanding the price on carbon would also be easier if some politicians weren’t trying to confuse Canadians for their own political gain as they ignore the financial and environmental benefits of the resulting Climate Action Incentive that comes from the tax.

What Is The Carbon Tax?

The federal carbon pricing is a policy designed to reduce greenhouse gas emissions by levying a price on emissions from fossil fuel sources such as coal, gas, oil, and natural gas. The greenhouse gas effect happens when fossil fuel gasses trap the sun’s energy in the atmosphere instead of it being reflected into space. As a result, those gasses heat up the earth to greater temperatures than it should be. The tax was introduced as a financial incentive for people and businesses to change their behaviour to burn fewer fossil fuels. So, the tax is designed to encourage the burning of fewer fossil fuels while moving to greener forms of energy and as a result, reducing the greenhouse gas effects.

 

How Much Does Carbon Pricing Cost?

The tax was set at a standard price per tonne of CO2-equivalent emissions generated. In 2023, the price was $65 per tonne, but that price was set to increase over time.  The amount taxed depends on the fuel source that is used, so the more emissions it produces, the more would be paid. The increasing cost approach is intended to encourage Canadians to transition away from fossil fuels, giving them incentives to do that sooner than later.  Those who use less fuel pay less tax, but still get the same rebate, as someone who burns a lot of fuel. It can sound confusing when you consider than on one hand you’re paying a tax, but then you’re getting money sent back to you.

 

Understanding How Carbon Pricing Is Applied

Understanding how the carbon pricing program generates income may make it easier to understand where the money comes from for the Canadian Government to send out rebates. There are two parts to the federal pricing system. One is a regulatory charge on fossil fuels like gasoline and natural gas, known as the “fuel charge”. The other is a performance-based system for industries (businesses) known as the “output-based system”. The output-based system provides a financial incentive for large industrial emitters to reduce their greenhouse gas emissions. It charges the  tax on a portion of their emissions, and those that emit less than their limit can earn surplus credits. Money from these two revenue streams is what is used to redistribute a rebate to Canadian citizens.

 

How Does Carbon Pricing Impact The Average Canadian?

Canadian carbon pricing impacts the average Canadian in many ways. It increases the price of gasoline, fuel for home heating, and in some provinces, electricity. The average Canadian household uses about 2,000 litres of gasoline, and a $50 per tonne tax adds 11.2 cents per litre to that, for a total cost of $2,241. To heat the average home, Canadians use just over 90 gigajoules of natural gas, and the tax adds about $230 per year to those costs. While that is money going out, the other side of the program sees money coming back into your wallet through the Climate Action Incentive (CAI) and that income might be more than what you’re paying in the first place.

 

Does Carbon Pricing Impact Inflation?

According to the Bank of Canada, the impact of the carbon pricing on inflation is very small, measuring only 0.15 percentage points. This means the tax causes one-twentieth of price increases when the average year-over-year inflation is around three percent. So, while there is an impact, in the larger cause and effect, it certainly isn’t the mountain some politicians are pitching. In fact, it may not even be a molehill.

 

Do You Actually Get More Money Back?

An image of a Canadian Carbon Tax RebateThe Canadian Government returns the proceeds from the tax to households through the Climate Action Incentive payments. The extra money that makes it possible for the average Canadian to receive more in rebates than they pay in the tax comes from the industrial sector. Large industrial emitters who are subject to the tax, contribute significantly to the overall pot of money that is collected.

The government began delivering CAI payments to Canadians on a quarterly basis starting in July 2022. This approach returns fuel charge proceeds to households, with 8 out of 10 households getting more money back than they pay. This has been typically achieved through the proper filing of income taxes.

For provinces that do not meet the federal stringency requirements in 2023-24 like Alberta, Manitoba, Newfoundland, Labrador, Nova Scotia, Ontario, Prince Edward Island, and Saskatchewan, 90 per cent of direct proceeds from the federal fuel charge will be returned to residents of those provinces through CAI payments. The other 10 per cent will be used to support small businesses and Indigenous groups.

A Real-Life Example Comparing Carbon Tax vs. Rebate

The amount you receive in rebates depends on three criteria:

  • The size of your household.
  • The province you live in.
  • Whether you live in a rural area or a census metropolitan area.

Let's use the following carbon tax scenario:

  • You live in Ontario and are a rural resident (not in a metropolitan area).
  • You are married and have 2 children.
  • Your household income is $35,000.
  • You consume an average of 240 litres of fuel for your car and 8 gigajoules of natural gas monthly.

Image of a portion of a Canadian $100 billHere is the outcome of  your carbon tax pricing comparison:

  • The Total carbon tax on your monthly fuel purchases would be $61.
  • The estimated cost increase in other things you buy would be $11.
  • You would receive a rebate of $89.
  • You would make $17 a month or $204 annually. 

To give you a further comparison, a family with most of the same conditions except living in a metropolitan area with an average annual household income of $200,000 would be one of those 2 in 10 households where the rebate would result in an averaging annual cost of approximately $108.

What if You're Not Getting A Rebate?

There may be several reasons if you are one of the 2 in 10 households that does not receive a rebate. In those cases, you'll need to assess what the reasons might be and perhaps make adjustments. One way to combat any extra carbon costs is to reduce commuting and businesses now have plenty of financial incentive to do that, as well as proof that remote work cuts costs and increases productivity as “The Cost and Chaos of Returning To Normal”, is avoided. In scenarios where employers are not making those changes, Canadians are also choosing alternate careers with employers who offer better work-life balance opportunities. 

Is Carbon Pricing Working?

There is early evidence that the carbon  pricing has helped change consumption behaviours. It has been found to reduce consumption of gasoline and residential natural gas as well as overall emissions in British Columbia. It also prompted greater uptake of fuel-efficient vehicles, all without loss of jobs or harm to low-income households.

The Carbon pricing "tax" might be less politically contentious if there was a better understanding among consumers that it is not a cost but a windfall, with most Canadians (80 per cent) receiving more in rebates than they pay out. The Government of Canada has changed the payment method for the CAI from a refundable credit claimed annually on personal income tax returns to quarterly tax-free payments made through the benefit system starting in July 2022. Mailed out cheques give Canadians real-time rebates that they can see and process instead of a listing on tax returns that can get lost in the many lines on that form.

 

Getting Back More Than You Pay

While the carbon pricing does increase the cost of certain goods and services, most Canadians receive more in rebates than they pay through the Climate Action Incentive payments. This effectively makes the tax a financial incentive for people and businesses to change their behaviour to burn fewer fossil fuels and transition to greener forms of energy. It may not be a perfect solution, but carbon pricing helps move Canada towards a more environmentally friendly future while putting money back in 80% of Canadians pockets. 

 

This is an opinion article by Guido Piraino of  The Monthly Social Podcast. It may also be heard on The Path Radio Mix Online. You can read other opinion articles on the blog page. You may also enjoy video content of The Monthly Social Podcast on YouTube or The Path Radio Mix on YouTube.  For sports content, please consider The Coach's Call YouTube Podcast.

 

Reference:

  1. Average Canadian Energy Consumption Tables
  2. Carbon Tax Cost & Rebate Calculator
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