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The Tax and Spend newsletter will return Sept. 12.

For the most part, Ottawa’s battle with the provinces over carbon pricing has been fought in Ontario and the Prairies.

But the fight looks to be shifting to the east, starting with Nova Scotia.

The Atlantic provinces secured sweetheart deals that either gave them outright exemptions from the provisions of carbon pricing – Newfoundland and Labrador was allowed to exempt home heating fuels, for instance – or put in place systems so flimsy that it amounted to carbon pricing in name only.

That was the case in Nova Scotia, with what the province describes as an internal cap-and-trade system for heavy emitters. In theory, cap-and-trade systems can serve the same function as the fuel charge that is at the heart of the federal approach. Nova Scotia’s fell well short of that mark, however, says Nicholas Rivers, an associate professor at the University of Ottawa.

The province’s system only regulated intensity (the amount of carbon pollution per unit of output) rather than overall emissions. Unsurprisingly, the resulting carbon price in the province was a fraction of the federal benchmark price, averaging $1.80 a tonne in 2020 versus the federal benchmark price that year of $30 a tonne.

So much for a national carbon price.

Even that minimal burden seems too much for Nova Scotia. The province will let the internal cap-and-trade system expire at the end of this year. In its place, the Progressive Conservative government is pitching a regulations-focused approach – but no carbon pricing.

Ottawa has yet to provide its response, but it is hard to see any answer other than – No way, no how, here’s your federal fuel charge. The Environment and Climate Change department has already indicated that it will be tightening up application of carbon pricing in the region to bring it more into line with how the system operates in Ontario and the Prairie provinces.

The wishful thinking and misstatements in Nova Scotia’s submission don’t seem likely to sway Ottawa from that course.

To begin with, the submission gets at least one basic fact about federal carbon pricing wrong. The province claims that its residents cannot afford to wait months to be reimbursed for cash paid out in fuel charges. That is flatly wrong: Ottawa’s payments land in bank accounts ahead of time. One can debate whether the payments are big enough, or do enough to nudge behaviour, but the timing is indisputable.

Then there is the questionable claim that Nova Scotian households will pay an average of $2,000 a year in carbon costs (both out of pocket and those passed on by businesses) in 2025, rising to $3,000 in 2030, under the federal backstop. That is, supposedly, because of the uniquely rural character of the province, ignoring the fact that it trails Prince Edward Island and New Brunswick on that measure. (Both provinces have fuel charges, although they have defrayed them to differing degrees with offsetting cuts to their excise taxes.)

Set aside the fact that Nova Scotia’s estimates are considerably higher than for provinces currently subject to the federal backstop. The province’s submission to Ottawa skirts around the fact that those are gross costs – before accounting for the redistribution of funds to households. The submission to the federal government professes confusion as to how much of those costs are offset by rebates: “It is our understanding that only a portion of the direct costs associated with a carbon tax are reimbursed, while indirect costs are not.”

Wrong. The structure of the federal fuel charge is that 90 per cent of proceeds are rebated through to households, with the remaining 10 per cent spent on emissions-reduction projects. That rebate means that around four in five households receive more than they pay in fuel charges – both directly, and indirectly.

(It’s true that the Parliamentary Budget Officer recently released a report showing that carbon pricing is a net cost for the majority of households. But that analysis included the costs of economic dislocation, which were not included in Nova Scotia’s estimates.)

Does the Nova Scotia government really have that poor a grasp of federal environmental policy? That’s one possibility. The other is that the document is aimed at bolstering misconceptions among Nova Scotians, and directing any carbon-charged anger toward Ottawa.

Taxing questions

Responding to last week’s Tax and Spend newsletter on increasing productivity, one online reader questioned how – or rather whether – capital investment increases prosperity. Don’t such investments displace workers and drive down wages?

The long-term answer is: definitely not. The short-term answer is more nuanced: sometimes, for some people.

Fundamentally, though, the reader is looking at the situation backward. Investments in capital equipment are needed to make each worker more productive, and in doing so, increase income. (Although presumably businesses also capture some of the benefit; otherwise, there would be no incentive to invest.)

Take agriculture. Without modern machinery, it is true that many more people would need to work as farmers to generate the same amount of output. But the fruits, and vegetables, of their labour wouldn’t necessarily be worth any more. So, the same amount of income divided among more people leads to, you guessed it, lower wages.

Now, add in modern tractors, GPS-enabled ploughing and chemical fertilizers. Output per person soars. In the long term that means greater efficiencies, and benefits that flow to consumers (in the form of lower prices) and producers (in the form of higher incomes).

But for some workers caught in the transition, that could indeed mean lost employment. That concern, however, is less pressing than it has been in the past. With unemployment rates at historical lows, the threat of unemployment rising because of automation is blunted, to say the least.

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Pay check: University of Waterloo economics professor Mikal Skuterud has created a must-see chart that maps out the (very fast) growth of the Consumer Price Index against the (not nearly as fast) growth in the mean nominal hourly wage. Not good news, unless your name is Tiff Macklem.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.

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