Opinion: How to tactically retreat on the carbon tax

Grant Bishop is the Calgary-based founder of KnightFork, which builds data-driven tools for carbon pricing and the energy transition.

The federal government rightly followed through on raising the carbon price on April 1. However, with polling showing unravelling public support for the policy, the remaining days for a consumer-facing federal carbon levy – the so-called “carbon tax” – look numbered.

The demise of the carbon levy will be a loss for sound policy, and the growing opposition is deeply disheartening for those who hoped robust economic reasoning could secure durable public support. However, it’s increasingly apparent that Canada needs a “second-best” Plan B for tactical retreat from the carbon tax – at least for the present.

Such a Plan B requires several considerations. First, decarbonizing our economy will involve real costs and trade-offs. Any alternative policy that achieves comparable reductions in greenhouse-gas emissions will incur greater economic costs. A boggling mishmash of sector-specific regulations presents a paralyzing maze for companies to navigate. Subsidizing equivalent emission reductions will involve large fiscal outlays – just as Canada’s government finances look increasingly shaky.

Second, communicating how any Plan B is good policy will face an uphill battle – precisely because of the principled arguments for carbon pricing.

Yes: On this, you can shout into the wind about Pierre Poilievre’s cynical opportunism. Mr. Poilievre himself undoubtably understands the economic efficiency of the policy that he is politically vanquishing. But any Conservative government will need a credible climate plan, and Mr. Poilievre as prime minister may find himself in a trap of his own making.

However, it’s the Liberals who must wear the failure of this good policy. Their communications on climate policy have been sanctimoniously preachy but egregiously lacked on consistent, competent implementation. For all its self-congratulatory virtue signalling, this government failed to deliver when getting details right was pivotal for Canada’s economy. Finally, with its nakedly vote-seeking carve-out of heating oil from carbon pricing, this government hypocritically scored an own goal against its policy.

So what should replace an axed carbon tax?

First, industry needs credible commitments from governments that large-emitter carbon pricing is here to stay and that carbon prices will rise according to schedule. These regimes – the most important of which is Alberta’s TIER system – must provide confidence that decarbonization projects will yield payback. However, reflecting uncertainty facing the market, TIER credit prices have traded at a 20-per-cent discount – during 2023, around $53 a tonne versus the headline $65 a tonne federal target carbon price.

Project proponents need certainty that a policy reversal won’t scuttle business cases for billion-dollar investments. Guarantees through carbon credit offtake agreements, such as recently announced by the Canada Growth Fund, can help anchor expectations. But such guarantees only work as intended if governments follow through on commitments for higher carbon prices.

Second, what shouldn’t replace a carbon tax is more sector-specific micromanagement from Ottawa. Alongside unresolved constitutional questions, the push to regulate specific sectors – especially the proposed Clean Electricity Standard and cap on oil and gas emissions – confuse credit markets under industrial carbon pricing regimes like TIER. Such picking-winners regulations undermine principled arguments for a uniform carbon price, and these are ironically aimed at the very sectors where carbon pricing demonstrably works to reduce emissions.

The slow-moving disaster of Ottawa’s Clean Fuel Regulations – which Environment Canada runs off a Google Drive and has yet to publish any statistics for credit creation or trading – are Exhibit A for skepticism about Ottawa’s competence to administer such regulations.

The second-best option is then subsidies. Such subsidies would be calibrated to equalize the costs for households and businesses to buy zero-emission vehicles and home heating equipment such as heat pumps.

Make no mistake: These will be very, very expensive and less economically efficient than a carbon tax. Governments will subsidize choices that many households or businesses would already make. Facing imperfect information, governments will also almost certainly oversubsidize certain technologies. Any subsidy regime will attract lobbyists galore and will take courage to ramp down.

But the reciprocal argument for near-term subsidies – compared to opaque sector-specific regulations – is these incur a transparent fiscal burden. Subsidies also address households today lacking any advantage for early adoption of electric vehicles or heat pumps. Fiscalizing some decarbonization costs might be justified by Canadians being both future taxpayers and future owners of these durable goods.

Again though, what I’ve sketched here is a tactical retreat rather than the policy victory that carbon pricing should have been. If the carbon tax is axed (for now), we will have much to learn from its autopsy – and hopefully some hard introspection about its failure today can inform its eventual resurrection.