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What is Canada’s National Carbon Tax and how does it affect us?

Here’s what you need to know about Canada’s carbon tax, the Greenhouse Gas Pollution Pricing Act, why we have it and how it affects you.

Fl615 Blog Canada Carbon Tax

Climate change is well on its way towards climate disaster, and Canadians experiencing the extreme highs in temperatures coupled with the rampant wildfires tearing apart towns and forests across Canada this summer have had a glimpse of the bleak future if urgent action isn’t taken. 

In an effort to curb climate change and not a second too soon, Canada’s Supreme Court upheld the Trudeau government’s 2019 implementation of the Greenhouse Gas Pollution Pricing Act on March 25th of this year to help the country reach its sustainability goals

This act implements a carbon tax that puts a price on carbon in an effort to reduce emissions by at least 30% below 2005 levels by 2030, and it’s one of many ways we’re aiming to undo the environmental damage done by human hands. Here’s what you need to know about Canada’s carbon tax.

What is a carbon tax?

A carbon tax is a tax imposed on the amount of carbon emitted into the atmosphere as a result of human activity. The carbon emitted is usually in the form of carbon dioxide (CO2) from burning fossil fuels. 

The goal of a carbon tax is to create incentives for individuals and businesses to reduce their amount of carbon emissions in order to help curb climate change. Carbon tax may also be referred to as carbon pricing, price on carbon, greenhouse gas tax (GHG tax) or fuel charge, although each of these has slightly varying definitions. 

The term “carbon pricing” or “price of carbon” can be misunderstood, because rather than the traditional way of understanding price, where the price is related to the amount of something consumed, carbon pricing indicates the amount of carbon emitted. Carbon pricing is applied to the amount of carbon in the form of CO2 emitted into the atmosphere from burning fossil fuels. It is used in both carbon taxes and the cap-and-trade system.

A greenhouse gas tax, or GHG tax, is generally speaking what most carbon taxes actually refer to. Carbon dioxide is one of many gases that contribute to the greenhouse effect which warms the atmosphere, so taxation on such gases are all-inclusive of the various types of gases. If it wasn’t, then a tax that purely targets carbon dioxide would mean people and industry may shift towards using another harmful type of emission-producing fuel rather than renewable energies.

Fuel charge refers to the part of carbon tax that affects individuals, whereby the fuel consumed for operating motor vehicles or heating homes have an additional tax separate from HST. To learn about how you can save on fuel tax with the innovations and technologies behind low emission vehicles, you can enrol in the Introduction to Low Emission Road Transport course

Why do countries tax carbon emissions? 

Carbon taxes take into account activities such as fueling cars and homes and the operation of factories that burn greenhouse gases. The reason why carbon emissions need to be reduced is that carbon dioxide emitted into the atmosphere directly contributes to climate change. 

The science that backs the carbon tax

When fossil fuels such as coal, petroleum and natural gas are combusted in order to generate power for various machinery and uses, carbon dioxide is emitted into the atmosphere. This contributes to the greenhouse effect of the Earth’s atmosphere, where heat gets trapped inside the atmosphere, being absorbed by its immense amount of ocean surfaces and heating up the average temperature of the planet. 

Through many scientific models of climate, it is unanimously understood that a shift in average temperature will have devastating effects on the livability of the planet, including its oceans and land.

The Earth’s climate has had several drastic shifts before, and carbon in the atmosphere does not even comprise a majority of the greenhouse gases. So why do we care about carbon emissions? 

The reason for this is because the rapid accumulation of carbon in the atmosphere is due to human activity on an industrial scale. The amount of carbon in the atmosphere has significantly increased since the beginning of the industrial revolution in the late 18th century. 

This rapid accumulation of carbon has contributed to the average temperature on Earth increasing by more than 1° Celsius since 1880. This shift in temperature is leading to devastating effects, as explained in Tipping Points: Climate Change and Society from the University of Exeter.

Carbon taxes help tackle the scale of the issue

It is undeniable that human activity is what has contributed to global warming. There are individual things we can do to live more sustainably, such as opting for a plant-based diet or avoiding fast fashion, but because of the scale on which any solution must come about, it is up to governments to implement policies that will reduce the carbon in the atmosphere. This is where carbon taxes come in. 

Carbon taxes are used as an incentive to reduce these emissions in a direct way. In order to pay less in carbon taxes, individuals and businesses will reduce their use of excessive carbon emitters while renewable energy producers will be given a competitive edge.

For a uniquely innovative way in which another country has combated the climate crisis, see the course Tackling the Climate Crisis: Innovation from Cuba

Carbon tax pros and cons

Although popular amongst many economists and governments, carbon tax is not without its critics. There are many pros as well as cons to using a carbon tax as a way to reduce the carbon in the atmosphere. Here, we offer insight into some of the advantages as well as disadvantages of using a carbon tax to combat climate change. 

Pros of carbon taxes:

  • Carbon taxes are a direct step in saving the planet. It is generally agreed upon by economists that carbon taxes are an effective and efficient way to lower carbon emissions because it allows the market to determine the most efficient way to reduce emissions and gives renewable energy sources a more competitive edge. 
  • Carbon taxes support innovation that helps the environment. These taxes bolster renewable energy industries by giving facilities and individuals who use energy incentives to opt for renewable sources, offering them a bigger market share of buyers.
  • Putting a price on carbon is something that can be implemented fairly quickly without overhauling an entire system. Taxes are something that individuals and industry are used to, and is something that is perennially accounted for. Adding a carbon tax is not a strenuous reinvention of the system, which means it can be applied quickly and efficiently.
  • Carbon taxes encourage both industry and individuals to reduce their carbon footprint in order to save money in addition to saving the planet. 
  • The efficacy of carbon taxes is backed by evidence. Most countries that have implemented carbon taxes before Canada have done so successfully with a reduction in their carbon output. The one exception is Australia, which repealed its carbon tax after two years in 2014 by their then centre-right government. 

Cons of carbon taxes:

  • Implemented on their own, carbon taxes can be harmful to lower-income families. These households tend to use a higher percentage of their income on high-emission activities, such as heating homes and transportation, than those with higher income. This makes carbon tax a regressive tax. 
  • Money might not be a big enough incentive for those who have money. It has been proposed that those with more money can afford to pay more and thus may not effectively reduce their burning of fossil fuels. One would hope that the effects of burning these fuels on the environment would be enough to deter certain practices, but there is no guarantee that understanding of the climate crisis is universal. 
  • Carbon taxes have been criticised as a scheme that continues to operate under a for-profit system. This system is seen by many as the underlying cause of climate change, whereby the system itself must be fixed. Carbon taxes do not alter the system but rather operate within it, which leaves some sceptical of the long-term change that it may affect.

An example of the tax being harmful to low income families is if an individuals annual income is 35,000 dollars, and they spend 3000 dollars commuting to and from work plus an additional 4000 dollars on their home, 20% or a fifth of their income would be used on an activity that contributes to carbon emissions.

Contrast this with someone whose income is in the 6-figures range, and there is a stark difference in disposable income after the fact. But governments are well aware of this. To counter the regressive property of carbon taxes, these taxes are usually implemented along with other measures to ensure that those with lower income are not hit the hardest.

These measures may be either a redistribution of the revenue from carbon taxes or with carbon tax rebates. For the Canadian carbon tax, the federal government offers a rebate to individuals in order to offset increases in bills. If you’re in Ontario, Alberta, Calgary or Manitoba, you may be eligible for a carbon tax rebate from the federal government. 

Striving towards Canada’s climate goals

Regardless of its criticisms, the ability to implement this tax without systemic overhaul and reorganisation means carbon taxes continue to be an attractive measure to realise Canada’s time-limited climate goals. The hope is to eventually leave behind non-renewable energy production completely. In the meantime, as clean energy solutions are innovated and help us achieve clean growth and clean cities, carbon tax in Canada will aid us in striving towards our climate objectives.

This is one of several ways taxes serve to better the societies we live in. Find out more about the different ways taxes serve public policy objectives with our open step with Professor Tony Allen of SOAS University of London.

A brief history of Canada’s carbon tax

Carbon taxes have existed in Canada since 2007 when the province of Quebec first implemented a carbon tax on the energy sector. But while other provinces had followed suit, there remain stragglers when it comes to enforcing policy to reduce carbon emissions

As is the case with governments that have a turnover rate of every few years, policies are constantly rebuked and reinstated. For example, while a cap and trade system was implemented by Ontario Kathleen Wynne in 2016, this was overturned by Conservative premier Doug Ford who was voted in after 2019. 

To eradicate this type of flip-flopping of policy over something as crucial as the fight against climate change, and to guarantee that every province will continue to do their part, the Canadian parliament passed the Greenhouse Gas Pollution Pricing Act (GHGPPA) in 2018, colloquially known as the carbon tax. This was then implemented by the Trudeau government in 2019.

Controversies on Canada’s carbon tax 

But it wasn’t simply smooth sailing from there. The governments of Ontario, Alberta and Saskatchewan, along with a few other political bodies, disputed the tax. They filed separate lawsuits that challenged the federal government’s authority on carbon pricing. 

Their arguments were all variations on the claim that this amount of jurisdiction from federal to provincial government was unconstitutional, and that a carbon tax should be enforced at the discretion of the province because natural resources are a provincial issue.

On March 25th, 2021, the Canadian Supreme Court determined in a 6-3 ruling that the Greenhouse Gas Pollution Pricing Act was constitutional. This was based on the Peace, Order, and Good Government of Canada clause (POGG), and it overruled the provinces opposing the act. 

This win for the battle against climate change saw that provinces that didn’t previously meet the federal standard abide by the carbon tax imposed by Trudeau’s government. With Canada’s carbon tax confirmed as constitutional by the Supreme Court in March 2021, there is hope that Canada will be able to reach its goal of reducing carbon emissions by 30% below the levels in 2005 by 2030 as per its commitment to the Paris Agreement.

How does Canada’s carbon tax work? 

Industry has a different pricing structure than individuals. The two-part system imposes a pollution price on fuel, known as the fuel charge, and a pollution price for industry, known as the Output-Based Pricing System (OBPS). 

Canada’s Fuel Charge

The carbon tax on fuel set a minimum price of 20 dollars per tonne of CO2 in 2019, rising my 10 dollars every year to 50 dollars in 2022, where it will increase by 15 dollars every year until it reaches 170 dollars in 2030. As of April 2021, the carbon tax per tonne of CO2 is 40 dollars.

Each province and territory can set their own taxes that either meet or exceed this minimum. Exemptions include provinces that instead have a cap-and-trade system which achieves a similar result. 

Currently, the four provinces that have not set their own carbon taxes or cap-and-trade system are Ontario, Alberta, Saskatchewan and Manitoba, which means the federal government will impose the carbon tax system in its stead. 

Canada’s Output-Based Pricing System (OBPS)

Facilities that emit 50,000 tonnes of carbon or more per year will be required to pay for their emissions. The amount they’ll pay is dependent on industry standards and the amount of carbon emitted by facilities that output similar products. 

For example, a facility working within the aerospace industries would be charged a different amount per tonne of carbon than one that is used for agriculture, based on the average output of their peers. This is set in hopes of keeping Canadian industries competitive with their international colleagues.

How are different types of greenhouse gas emissions calculated?

Although it’s often referred to as a carbon tax, the Greenhouse Gas Pollution Pricing Act, as it’s officially called, applies to all greenhouse gases that contribute to global warming. But not all greenhouse gases are created equal. 

In order to determine how much each gas will cost when emitted, each gas is set against a standard framework that considers how much a substance increases the greenhouse effect that causes global warming. You can calculate greenhouse gas equivalencies using a calculator available on the Government of Canada website.

Canadian carbon tax rebate

The carbon rebate, or officially known as the Climate action incentive (CAI), ensures that the lower-income members of society are not the hardest hit by the carbon tax. It applies to residents of Ontario, Alberta, Saskatchewan and Manitoba, all of which are provinces that do not have their own carbon reduction policy. 

This rebate varies depending on the province you’re a resident of, because each province emits a different amount of carbon, and can be claimed per family. The following chart breaks down the amount you can claim back, depending on which province you’re a resident of and what your family situation is.

Province Basic Amount Spouse or common-law partner amount Qualified dependant amount Single parent’s qualified dependant amount
Alberta $490 $245 $123 $245
Saskatchewan $500 $250 $125 $250
Manitoba $360 $180 $90 $180
Ontario $300 $150 $75 $150


For those in small or rural communities, there is also an additional supplement that is not included in the above chart. You can find out more about the Climate action incentive here.

Cap-and-trade in Canada

The cap-and-trade policy, which currently applies to Quebec and Nova Scotia, implements a cap to the amount of emissions allowed each year. Companies can then purchase emissions credits quarterly within that amount. If they would like to exceed that amount, they can buy credits from the companies that have credit to spare because they emit less. Rather than raising the tax each year like with the carbon tax, here, the government would lower the cap each year. 

Canada’s sustainability goals

With Trudeau’s commitment to the Paris Agreement, an international treaty on climate change, Canada’s lofty goals of lowering carbon emissions by at least 30% below its 2005 emissions isn’t a task taken upon lightly. But with global warming well on its way and more natural disasters looming, urgent climate action is required. 

Canada’s carbon tax will increase each year until it reaches $170 per tonne in 2030, and this will continue to be applied to any province that does not have its own alternative that meets the standards set in order to reach the national goal. 

There is the risk of the carbon tax being repealed if another government with conflicting interests is voted in, as has occurred in Australia, but it is in the interest of Canadians and all inhabitants of the planet that measures continue to be taken in order to curb climate change. 

Final thoughts 

The carbon tax is an important step in the fight against climate change, but it shouldn’t and won’t exist in a vacuum. It will operate alongside tax rebates and continued innovation in clean energy so that we can transition into a biobased economy

Eventually, if Canada and the rest of the world continue to work towards reducing carbon emissions from burning fuel, the desired outcome is that the amount of carbon in the atmosphere will be cut down to pre-industrial levels. Along with building sustainable cities and innovating new technologies for the sake of saving the environment, there is hope that a long, sustainable future may be ahead of us.

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