Canada Moves Ahead on Carbon Taxes, Leaving the U.S. Behind

The victory of climate change-denying Republican candidate Donald Trump was one of two big setbacks for U.S. climate policy earlier this month. The other was the resounding defeat of Washington State's Initiative 732, which sought to prove that using fees on carbon emissions to cut existing taxes could provide bipartisan appeal for what economists consider to be the most efficient mechanism to cut greenhouse gas emissions: carbon taxes.

Washington State rejected the idea of a carbon tax by 59 percent to 41. In sharp contrast, just across the world’s longest border, carbon taxes are attracting politically diverse support. Four-fifths of Canadians will live in provinces with such taxes in 2017, and in 2018 all Canadians could be paying a carbon tax.

Both Washington State’s defeated initiative and Canada’s growing comfort with carbon pricing have their origins in North America’s first carbon tax, which British Columbia’s provincial government launched in 2008. The British Columbia tax started at C$10 (U.S.$7.40) per metric ton of carbon dioxide on fossil fuels consumed in the province, and it ratcheted up to C$30 per metric ton by 2012. The tax is revenue-neutral, with proceeds used to cut corporate and personal income taxes.

Most academic studies find that British Columbia’s tax is reducing carbon emissions by 5 to 15 percent without hurting economic growth, and that a special tax break to offset its impact on low-income families has succeeded. “The tax appears to be highly progressive,” says Nicholas Rivers, an expert in energy and economic modeling at the University of Ottawa.

Likewise, the Washington tax was to start next year at $15 per metric ton (adding, for example, about 15 cents to every gallon of gasoline), then rise to $25 in 2018 and grow annually thereafter by a further 3.5 percent plus inflation until it reached $100 per ton. Revenues were to cut existing taxes and provide tax benefits for low-income families.

The initiative garnered strong grassroots support as well as endorsements from Democratic and Republican legislators, including former Republican Senator Slade Gorton and Joe Fitzgibbon, who chairs the state legislature’s environment committee. But the Washington initiative was opposed by both fossil fuel interests as well as advocacy groups that favored spending carbon revenues on development projects to ensure a “just" transition to a low-carbon economy.

In Canada, meanwhile, politicians from all major parties are pushing carbon taxes nationwide. Last month Prime Minister Justin Trudeau announced that his Liberal Party government will institute a national carbon tax plan in 2018. And last week a contender for leader of the official opposition in Parliament, Canada's Conservative Party, unveiled a more ambitious carbon tax.

Provincial leaders have done much of the heavy lifting already. Canada’s two largest western provinces will have carbon taxes operating as of January 1, when Alberta follows British Columbia’s lead with a C$20 per metric ton carbon levy that's set to rise to C$30 in 2018. And as of March, Canada’s eastern heavyweights Ontario and Quebec will auction carbon credits under a cap-and-trade market that California kicked off in 2012.

Trudeau’s national carbon tax plan encourages the remaining provinces to operate their own programs, and mandates that all attain a minimum carbon price that ratchets up from C$10 in 2018 to C$50 in 2022.

Conservative parliamentarian Michael Chong wants to push carbon taxes to C$130 per metric ton in 2030, providing the policy certainty that he says businesses need to plan investments. And whereas some provinces such as Quebec and Ontario are using carbon revenues to fund programs, Chong’s plan mirrors the revenue neutrality of British Columbia’s carbon tax. “Every last cent will be used to introduce one of the largest income tax cuts in Canadian history,” vows Chong.

Whereas some Conservative Party politicians see carbon taxes as out-of-step, given U.S. President-elect Donald Trump’s vows to scrap U.S. climate change policies, Chong says income tax cuts funded by carbon taxes look even more strategic after Trump’s victory. "It’s clear that Trump’s plan is to significantly cut … income taxes. In order to maintain our competitiveness, we need to match those cuts,” says Chong.

Chong argues that his ambitious $130 per ton carbon tax can, on its own, achieve Canada’s promise under the Paris Agreement to cut emissions 30 percent by 2030 from its 2005 level. He proposes therefore to cut existing regulations on carbon, such as vehicle efficiency standards and carbon dioxide standards that mandate carbon capture for new coal-fired power plants.

However, polls reveal high levels of public opposition to the carbon taxes. That unpopularity, for one, could threaten Alberta Premier Rachel Notley. Oil sands producers such as Shell, Cenovus Energy, and Suncor Energy back her levy, which provides rebates that soften its impact on fossil fuel exports. But low oil prices have decimated the province’s economy. Two-thirds of Albertans oppose the tax, according to polling last month.

Mark Jaccard, an energy economist at Simon Fraser University who helped craft the British Columbia tax, sees a “50/50 chance” that Notley's modest carbon tax will get her unelected. It could also go the other way, says Jaccard, if a political attack on climate policy by Donald Trump inspires further climate action by major U.S. states. That could include more states, including Washington and Oregon, joining forces with California, Quebec, and Ontario in their growing carbon market.