On April 22, 2022, the world marked the 52nd Earth Day at a time when global crises such as the conflict in Ukraine and COVID-19 continue to dominate public discussion.
Nonetheless, concern over Issues such as climate change persists. An Ipsos global poll in 31 countries found climate change is not the top concern for the public currently, but more than half worry about it regularly.
Nearly two-thirds of Canadians — 63 per cent — say that if Canada’s government does not act now to combat climate change, it will be failing Canadians. And only three in 10 Canadians (30 per cent) agree the government has a clear plan in place for how government, businesses, and individuals are going to work together to tackle climate change.
Perhaps for that reason, the federal government under Prime Minister Justin Trudeau remains focused on climate action. Three years ago, in April 2019, the federal government imposed a national minimum price on carbon pollution (colloquially known as a carbon tax) initially set at $20 per tonne, which effectively put a price on carbon across Canada.
This meant consumers in provinces without a carbon pricing model of their own were faced with an increase on the cost of things like gasoline and home energy. Other provinces with an equivalent regime, such as British Columbia or Quebec, were exempt, reflecting the provinces’ flexibility to implement a system that made sense for their own markets.
On April 1, 2022, the carbon tax increased to $50 per tonne (it will eventually rise to $130 per tonne by 2030). At the same time, the cost of oil was reaching levels not seen in close to a decade.
Ipsos polling suggests Canadians are divided on their support for a carbon tax and according to an August 2021 Ipsos poll for Global News, three quarters (74 per cent) of Canadians agreed that they would be more supportive of a carbon tax if they knew the money collected was going directly to initiatives to combat climate change.
In fact, about 90 per cent of the money collected by the carbon tax is directly returned to Canadians who paid it. In March 2022, the government announced that the rebate will come in the form of a periodic cheque or direct deposit from the federal government.
The idea behind a carbon tax is simple. Fossil fuels like oil and natural gas exact a cost on the environment that is not captured in their market price. By forcing people to “pay more,” the carbon tax “internalizes the externality,” or reveals the hidden or true cost of burning fossil fuels. That is, it gets people to pay the actual cost of burning fossil fuels.
Those who use less still get the rebate. They effectively get a double benefit, saving money by spending less because they reduce their use of fossil fuels, while at the same time receiving the rebate based on the average carbon price paid in their province. This benefit relies on them changing their behaviour and spending less on fossil fuels.
Instead, in recent months, the market has significantly increased the price of fossil fuels, making the price of gasoline much higher than it otherwise would have been from planned carbon price increases alone. In fact, if you look at the average cost of gasoline in 2019, when the carbon tax was first enacted, it would have taken numerous increases in the price per tonne to get us to the price we are at today simply through carbon tax increases.
This raises some questions. If the objective of the carbon price is to make it more expensive to use fossil fuels so people shift to cleaner forms of energy, why are governments across Canada responding to the call for consumer relief at the pump? Haven’t market forces more than achieved what were the government’s original carbon price objectives?
For example, British Columbia implemented a province-wide carbon tax in 2008 and increased it on April 1. The province announced this increase would go ahead despite rising oil prices, arguing that any relief on carbon pricing would simply be pocketed by oil and natural gas producers. At the same time, however, B.C. announced a one-time $110 payment to drivers for gasoline relief. Other governments across Canada have signalled they are contemplating similar forms of relief.
You would think governments concerned about climate change would welcome the high price of gasoline. After all, the purpose of the carbon tax is to increase the costs of using gasoline and other fossil fuels to discourage people from using them. It seems counter-intuitive to offer relief for the costs of fossil fuels at the same time as calling for even more carbon pricing. That is, until you consider where that money is going.
It may surprise some to learn that there is no requirement for governments to spend the carbon tax on environmental initiatives, though many say they allocate at least some portion to the environment. In the federal government’s case, while they rebate 90 per cent of the proceeds from the carbon tax back to consumers, the remaining 10 per cent is used to support farmers, small businesses, Indigenous groups, schools, universities and municipalities, but not necessarily on the environment.
From a purely economic standpoint, the recent price increase has done the same job as the carbon tax, only much faster. It has increased the cost of using a product that the government desires us to use less of. Shouldn’t governments that believe fossil fuels need to be more expensive be cheering the recent increase in gasoline prices, rather than searching for ways to give consumers relief? Instead, they are continuing to collect the tax and then sending a lot of that money back to offset the impact of the tax.
Perhaps one reason why governments may be offering relief at the same time as they increase the carbon tax is that governments don’t want the price increase to happen too quickly, to create too much shock. We need some relief now, because we want prices to rise gradually — the very reason why the carbon tax goes up slowly each year, rather than being set at a high amount to begin with.
If that’s the case, the best way to provide that relief is to reduce the speed the carbon tax rises — or even decrease it — when gasoline gets more expensive, and increase the speed it rises when gasoline gets cheaper. Governments are doing neither.
Finally, the recent increase in prices at the pump doesn’t appear to be changing consumer behaviour all that much right now. Despite advances in the availability and pricing of electric vehicles, many people — for a variety of reasons, such as the high cost of an electric vehicle, and limited availability of charging stations, especially in remote areas — have no other option but to continue driving gasoline-powered vehicles. Fossil fuels remain an inelastic good, in that there is no true substitute for them at the moment, despite the advances in electric vehicles.
It is the same reason why successive, cumulative increases in tobacco and alcohol tax yield increasingly diminishing returns. Whether out of necessity or addiction (and some have said we are “addicted to oil”), we will continue using oil and gas until we have real alternatives. The recent increase in the price of gasoline is just a preview, if you will, of what will happen when the carbon tax is $170 a tonne in 2030. Some behaviour may change with higher prices, but absent affordable and reliable alternatives, not enough to make a real difference.
The market has achieved in a virtual instant what the carbon tax was designed to achieve over several years: namely, make fossil fuels more expensive. Governments could fund the development of real alternatives for oil and gas by allocating virtually all revenue from the carbon tax to them, but instead they prefer to collect the cash, take credit for environmental action, and send cheques back to their constituents. If we are addicted to fossil fuels, governments are addicted to the cure for our addiction, and the revenue and credit that comes with it.
Gregory Jack is vice president, public affairs (Canada), Ipsos Public Affairs