Without other policies, carbon tax must rise substantially to meet climate goals, PBO says

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If the federal government doesn’t enact other measures to combat climate change, it will have to significantly increase its carbon tax to meet emissions-reduction goals, according to the federal budget watchdog.

Ahead of Ottawa’s long-anticipated release of its plan to meet and exceed Canada’s 2030 emissions targets, the Parliamentary Budget Officer’s report set a baseline for the potential costs to consumers, industries and the economy.

In the Thursday report, Parliamentary Budget Officer Yves Giroux put three scenarios on the table that show the tradeoffs between protecting trade-exposed industries from having to compete against international rivals that have no carbon taxes, and the higher costs that other sectors and consumers could face.

The federal government has two streams for carbon pricing — one for consumers and small businesses and the other for industrial emitters that are energy-intensive and trade-exposed. Both streams will hit a carbon price of $50 per tonne by 2022, but Ottawa hasn’t yet said whether they will go up after that.

The report found if Ottawa were to do away with the separate carbon price on industrial emitters and shift to a broad-based carbon tax across the economy, it would have to rise to $117 in 2030, up from $50 in 2022. If the federal government continues with its two separate systems for industrial emitters and consumers, then the price would hit either $131 or $289, the report found. The lower cost would apply if the two different pricing systems stay in place and continue to increase. The higher-cost option would kick in if industrial emitters are protected from any price increases post-2022, therefore shifting the burden to consumers and other sectors.

Under the $131-scenario, where the carbon tax would continue to increase on both streams, the biggest reductions in emissions would come from the waste, transportation and heavy industry sectors, according to the report.

The report from Mr. Giroux and his staff estimates that solely relying on carbon pricing to close the gap in Canada’s emissions targets would eat into Canada’s real GDP in 2030 by between 0.47 per cent and 0.62 per cent, depending on which of the three pricing scenarios is used. The lowest economic hit comes from the mix of policies that would lead to a $131 carbon tax in 2030, the report said.

The findings include an important message for government on how to meet Canada’s climate goals without putting an undue burden on households and small businesses, said Kent Fellows, an economist at the University of Calgary’s School of Public Policy.

Mr. Giroux said during a livestreamed news conference on Thursday that his office did not calculate the economic costs of not addressing climate change because it did not have the resources to do so.

According to international modelling, the short-term hit to the economy from paying to avoid the worst effects of climate change would be far outweighed by the costs of climate change in the long-term, Dr. Fellows said.

“It is significant, it’s something that you’ll notice, but sacrificing that now to offset the longer term cost ... I think is probably well worth that investment," he said.

The Parliamentary Budget Office report is based on a model in which all provinces and territories would use the federal consumer and industrial carbon tax systems. In practice, most provinces have versions that Ottawa has deemed equivalent with the federal programs. Where they aren’t equivalent, Ottawa imposed its own.

The report accounts for the emissions reductions from policies that were implemented or promised by September, 2019, and so does not include promises from the Liberal government’s election platform or Throne Speech. Mr. Giroux’s office noted that the policies and measures announced up to September, 2019, “are not sufficient” to meet the goal of limiting emissions to 511 megatonnes in 2030, and a gap of 77 megatonnes remains.

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In the September Throne Speech, the government said it would immediately release its plan to exceed the 2030 emissions targets, but it has not yet set a date.

Economists say that for a carbon tax to be effective, it needs to continue to increase in stringency so that businesses and individuals will reduce their emissions. But the Liberals have avoided saying whether that will be part of their plan. The Supreme Court could make the decision for Ottawa when it releases its judgment on the federal program’s constitutionality, expected in the coming months.

Federal Environment Minister Jonathan Wilkinson was not available to speak with reporters on Thursday, but said in a statement that Mr. Giroux’s report shows “a price on pollution is an effective and affordable way to tackle climate change.” Even if the Liberals increase the carbon tax, they have said it will be done in concert with other policies.

So far, they have promised to increase spending on energy retrofits and zero-emissions vehicles, but have not yet said how much those policies are expected to reduce emissions.

Since 2015, the government has said it will spend about $60-billion to reduce emissions, adapt to climate change, and invest in clean technology.

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