Lessons from Canada’s carbon tax saga | USAEMALL.com

Over the past few years, former central banker Mark Carney has been one of the world’s most prominent advocates of climate action. Yet one of the first things he did after taking over as Canadian prime minister was to ditch the country’s landmark tax on consumer carbon emissions.

What does the levy’s demise tell us about the challenge of getting modern economies on to a low-carbon path? Read on for my postmortem . . . 

Carbon pricing

Why Canada’s consumer carbon tax failed

It was billed as the “largest public statement of economists in history”. More than 3,600 economists — including four former Federal Reserve chairs and 28 Nobel laureates — threw their weight behind a 2019 appeal for the US to introduce a national carbon tax, with all the revenue paid out to citizens.

This was, the economic luminaries said, “the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary”. Crucially, the full rebate of the proceeds to families — most of whom would enjoy a net financial benefit — would ensure the scheme’s “political viability”.

The US economists’ proposal might have sounded revolutionary, but it was fundamentally almost identical to a scheme that had been legislated the previous year in Canada, and which came into force in April 2019. Justin Trudeau’s government was the world’s first to introduce a national carbon tax on fossil fuel consumption with the proceeds returned in full to the nation, through quarterly rebates.

Last month’s Canadian carbon rebate, however, was the last. New Prime Minister Mark Carney scrapped consumer-facing carbon taxes during a hard-fought campaign ahead of his victory in last week’s general election.

This is a sobering development for the many global economists who have long viewed a revenue-neutral “carbon fee and dividend” system as a uniquely elegant and politically feasible approach to climate action — shifting the economic incentives for consumers, and then letting market forces do the work.

So what lessons can be learned from the Canadian carbon tax saga? Have those economists been barking up the wrong tree? Or could this yet prove a potent means of tackling global emissions?

One glaring problem was the government’s failure to draw people’s attention to the rebates they were getting. For most households, these outweighed the carbon taxes they paid, because a wealthier minority of Canadians account for a disproportionate share of fuel consumption (and therefore of the carbon tax burden).

At first, the rebates simply appeared as discounts in individuals’ annual tax statements. Later, they arrived as payments to their bank accounts — but often without labels clearly indicating what they were, until the government passed a law last June forcing banks to change their systems to enable this. Even then, awareness of the rebates was limited by the fact that they were paid out to only one adult in each household.

As Canadian economist Aaron Cosbey put it recently: “The lesson is, if you’re going to rebate a carbon tax to folks, send them a paper cheque in the mail, with big red words at the top that say, ‘This is your carbon tax rebate. Thanks very much.’”

In contrast, the cost side of the tax scheme appeared in the most conspicuous of places: the towering price displays at every roadside petrol station. “People were very aware of the cost and much less aware of the dividends,” says Kathryn Harrison, a professor of political science at the University of British Columbia.

The tax was introduced in 2019 at a level of C$20 (US$14.48) per tonne of carbon dioxide, and increased by C$10 or C$15 each year. Last year it reached C$80 per tonne. Even then, it added only about 10 per cent to the cost of road fuel. The rebates increased too, reaching a national average of C$1,160 last year for a family of four.

But as consumer inflation rose in recent years, opposition politicians succeeded in channelling frustration towards the carbon tax. Pierre Poilievre put his “Axe the Tax” campaign at the centre of his public messaging after he became Conservative party leader in 2022.

Poilievre’s warnings of the tax’s damaging impact on Canadian households “just resonated really hard, even though the data said otherwise”, says Dave Sawyer, principal economist at the Canadian Climate Institute.

This meant that even Carney — who had made climate action his main focus since leaving the Bank of England in 2020 — saw no option but to drop the tax. “It’s become too divisive,” he explained in January during his run for the Liberal party leadership.

Carney has stressed that he plans to replace the consumer carbon tax with new “incentives for greener choices”. Canada is set to stick to its policy on banning the sale of new fossil-fuel powered cars from 2035. And the country’s industrial carbon pricing scheme, which applies to a wide range of heavy-emitting sectors, is set to stay. The industrial scheme was already likely to drive emission reductions three times greater than the consumer tax, according to the Canadian Climate Institute.

At a global level, carbon pricing — whether through taxes or emissions trading systems — is slowly spreading. A World Bank report last year found that 24 per cent of global emissions were covered by such schemes, up from 7 per cent a year before. The EU’s introduction of a carbon border tariff (a move that Carney’s Canada is also set to pursue) is likely to add to the momentum, as countries try to avoid the levy by introducing their own carbon prices.

Most of these schemes are focused on industrial rather than consumer emissions, and almost none are pursuing the route of returning revenues to taxpayers. (Switzerland comes closest, using most of the proceeds to subsidise health insurance premiums.)

But recent research is casting doubt on whether those Nobel-winning economists were right to assume that making carbon taxes revenue-neutral would make them more politically viable.

A valuable new study led by OECD researchers surveyed 40,000 people in 20 countries on their opinions of various climate policies. In both rich and developing nations, respondents were much keener on the idea of carbon taxes if the proceeds were used to fund environmental infrastructure, rather than for cash transfers.

“Most people around the world are motivated to tackle climate change, and they’re OK with paying something to do so — but they want that money to go into a tangible outcome,” says Nicholas Rivers, a professor of public and international affairs at the University of Ottawa. “And that’s not what happened here. People could never attach this extra gas money they were paying to some green outcome.”

It turns out that humans can be hard to predict — even for the best economists.

Smart reads

Line of fire Some cities are now so vulnerable to climate change-related disasters that scientists refer to them as “sitting ducks”.

Keeping the faith The rules of good governance don’t seem to apply to Tesla, at least in its shareholders’ eyes, writes Lex.

Desert disruption A climate scientist advising Saudi Arabia has warned that its futuristic Neom mega-project could alter weather patterns.