Why Canada does not have a carbon tax

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Canada does not have a carbon tax.

You might feel differently when you fill up your gas tank or pay your heating bill. But the official position of the Government of Canada is that there is not a federal carbon tax – there is a regulatory system of carbon pricing, the proceeds of which it distributes.

“It’s actually not really a tax,” federal Environment Minister Jonathan Wilkinson said in an interview. “A tax is about raising revenue for the purpose of government spending. This is not that.”

Similarly, Ottawa said last week when releasing its updated plan for meeting 2030 greenhouse gas emissions targets that it is contemplating a “border carbon adjustment” mechanism, which would increase the costs of imported goods from jurisdictions without carbon pricing. But the government didn’t describe that measure as a tariff.

“I think it is explicitly a choice of words,” Mr. Wilkinson said. He noted that the European Union, which uses the term border carbon adjustment, is furthest advanced in figuring out how to create such a levy that doesn’t violate international trade rules. “That’s why it’s called a border carbon adjustment, not a tariff,” he said.

It might seem like the Liberals are engaging in little more than politically driven word play. But there are domestic and international legal imperatives driving that language.

The question of whether the levy placed on greenhouse emissions is a tax, or a regulatory measure, has featured prominently in the legal challenges launched by Ontario, Alberta and Saskatchewan to the federal Greenhouse Gas Pollution Pricing Act (note the absence of the word tax in that title). The Saskatchewan government argued, as part of its challenge, that Ottawa had imposed a tax on carbon, and in doing so did not properly delegate to the federal cabinet the taxing authority of Parliament.

The Saskatchewan Court of Appeal rejected that argument in its 3-2 decision upholding the constitutionality of the federal act. The minority dissent, however, found that the government had introduced a tax on carbon, and that as a result, the act was not constitutional.

Why the difference? The majority found that the primary purpose of the government’s greenhouse gas legislation is to curtail emissions and that it is a “complete and detailed code of regulation.” The dissenting judges said the fuel levy’s “main thrust or dominant characteristic is that of taxation.”

In that sense, the Liberals’ insistence on calling their plan “carbon pricing” is not just semantics. It’s a legal strategy, one that is still playing out in the Supreme Court, which has yet to issue its decision on the provincial legal challenges after holding hearings in September.

For economist Trevor Tombe, however, the fine points of that legal debate do not square with the simple reality that Ottawa has moved to incorporate the costs of carbon emissions into energy use. In his view, carbon pricing is a broader strategy that includes carbon taxation as well as measures such as cap-and-trade programs for industries. “It’s a carbon tax and it is a carbon price,” said Dr. Tombe, an associate professor of economics at the University of Calgary.

He noted that the word “tax” in climate-change policy has proven politically unpalatable to successive Alberta administrations The previous NDP government used the term “carbon levy” and the current United Conservative Party government has shied away from calling the costs it imposes on heavy industry a tax.

“Using the T-word can be tough,” he said.

Tax historian Shirley Tillotson said there is a long tradition of governments and their opponents sparring over what is and is not a tax. In the late 1800s, the Liberal opponents of the Conservative government’s protective tariff (which imposed levies on imported goods to give a cost advantage to domestic manufacturers) criticized the measure an unfair tax grab. The Conservative response, which might seem familiar to the current federal cabinet: It’s not a tax at all. “Both of those are political moves,” said Dr. Tillotson, professor emeritus at Dalhousie University.

For carbon costs imposed at the border, Canada’s treaty commitments under the General Agreement on Tariffs and Trade will pose significant problems, said Aaron Cosbey, senior associate at the International Institute for Sustainable Development. He said border carbon adjustments are not truly tariffs. Similar to the debate playing out in Canadian courts, there’s a distinction to be made between a tariff, designed to raise revenue, and a border carbon adjustment whose aim is to curtail emissions.

Whatever it’s called, any move to impose a fee on imported goods would be deemed illegal under GATT, which prohibits such discrimination, Mr. Cosbey said. Even though Canadian industry is subject to a domestic fee, that wouldn’t shield Canada from a challenge under GATT, since domestic production, by definition, would not have to pay the import fees.

But Mr. Cosbey said there are exceptions to that rule, including for environmental purposes. So, that might very well clear a path for Ottawa to impose border carbon adjustments – with the caveat that it would need to be careful in how it spent the proceeds. Putting that money into general revenue would weaken Canada’s position, while earmarking it for environmental purposes would bolster Ottawa’s case, since it would underscore the green rationale for the measure.

Ottawa has yet to decide whether it will proceed with a border carbon adjustment, much less determine how the resulting funds would be apportioned. But Mr. Wilkinson said it would be “logical” to return that money to Canadians, as is the case with the current carbon pricing policy, where 90 per cent of revenue raised is sent in rebates paid to households through the income tax system.

On that front, Dr. Tombe has his own semantic quibble, over the government’s use of the word “rebate” to describe those payments. He said that term may lead people to believe the government is simply refunding them the tax they paid. And it obscures the reality that the payment remains constant in a given year, whatever happens with an individual’s carbon footprint, and that many households receive payments that exceed their carbon costs.

But he said it’s not obvious to him what a better word might be for the government’s revenue recycling mechanism for its carbon pricing and/or tax. “I’m not sure anyone has a good name for it.”

Tax and Spend examines the intricacies and oddities of taxation and government spending.