Navigating the Noise: Carbon Taxes in Atlantic Canada

On April 1, 2023, Canada’s carbon tax increased from $50 to $65 per tonne. And following months of protest by Atlantic Canada’s political leaders, the federal tax came into effect there on July 1.

“It’s a bad thing. It will punish Nova Scotians unnecessarily,” said NS Premier Tim Houston. They will have “a known disproportionate impact on Atlantic Canada,” wrote PEI Premier Dennis King on behalf of all Atlantic Premiers. New Brunswick released advertisements opposing the federal policy and, along with Nova Scotia, created anti-carbon-tax webpages. Even the Council of Atlantic Premiers is getting in on the action.

There’s been so much noise that we’ve heard it all the way in Alberta (and our own government has joined the fight).

Are these concerns valid? Far from unnecessarily burdening Atlantic Canadians, carbon pricing is both a cost-effective approach to lowering emissions and flexible enough to address concerns unique to the region.

Carbon Taxes, Simplified

The basic principle behind carbon pricing is simple. When you tax something, you tend to get less of it. Families and businesses, after all, respond to incentives. By making greenhouse gases more expensive to emit, there is a financial reward on offer to anyone who can avoid doing so. There are countless millions of individual decisions that we all collectively make, and small adjustments at the margin can add up quickly. 

The evidence that they work is strong, with research across a wide variety of settings consistently showing that carbon pricing lowers emissions. “Virtually all the available literature finds that consumers reduce fuel consumption in response to increases in fuel prices,” wrote University of Ottawa Professor Nicholas Rivers in an affidavit submitted to the Ontario Court of Appeal during the recent reference case concerning the constitutionality of the federal system.

Concerned about the effect of carbon pricing on affordability? There are numerous policy options for using revenues to offset costs without undermining the carbon pricing system. These range from rebates (income-tested or lump sum) to lower income or sales taxes.

Canada’s System of Carbon Pricing

In practice, Canada started pricing carbon nationally in 2018. The federal government sets a minimum standard, both in terms of the types of emissions subject to the price and the price itself. Provinces and territories can opt into the federal system or design their own pricing systems, so long as they meet the federal minimum standard. This system combines flexibility and consistency, so that (in theory) where you live doesn’t affect the emissions-reduction incentive you face.

In August 2021, Environment and Climate Change Canada published an updated minimum standard. Two of the major changes were disallowing exemptions by type of fuel, fuel use, and type of activity, and disallowing provinces’ directly offsetting the price increase (for example, by reducing gasoline taxes). 

In the fall of 2022, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador submitted pricing policies that failed to meet the minimum federal standard. This meant the federal system would be imposed (with corresponding Climate Action Incentive payments, a set amount paid automatically when people file their taxes), rather than the provinces retaining control of the revenues.

Perhaps the most controversial change for Atlantic Canada was that home heating oil is now covered, while it was previously exempt. (Interestingly, New Brunswick opted into the federal system in February 2023 despite first proposing its own system that covered home heating oil.)

Contrary to some of the commentary, there are options to substitute for heating oil. Over the past decade, nearly 100,000 fewer homes in Atlantic Canada use heating oil. Today, it accounts for only about one-third of the energy used to heat homes and barely one-fifth of all homes. Electric heat is making up the difference; it’s now the dominant source of heating in the region. And there are numerous federal and provincial programs to subsidize heat pumps, for example.

Of course, there are financial costs for families. There is no such thing as a free lunch, and all policies come with costs. But with carbon taxes, such costs can be significantly lowered by using the revenues wisely. Under the federal system, 90 percent of the proceeds are returned directly to households. This year, for example, a family of four in Nova Scotia will receive nearly $250 every three months.

Provinces Have Flexibility

Atlantic provinces can, if they choose, explore alternatives to address their unique concerns.

Consider households that use heating oil. With just over 200,000 homes affected, provinces could recycle the roughly $100 million raised from this fuel to fund lump-sum rebates that could appear on bills. That could provide as much as $40 per month to affected homes. Alberta has done this recently for electricity bills, for example, as a measure to help offset pressures from high inflation over the past year. For many families (perhaps even more), such a rebate would almost entirely offset the additional costs from the carbon tax on heating oil.

Would such a rebate undermine the goals of carbon pricing? To some extent, yes. It would dampen the incentive to switch from fuel oil sources to others, like electric heating options. Governments could instead extend slightly smaller credits to all homes, regardless of fuel type. This would not run afoul of carbon pricing since it would be a lump-sum amount unrelated to household fuel use. And by appearing on heating bills, such rebates might be slightly more salient than quarterly direct deposits are. 

One thing is clear: by abandoning provincial carbon pricing, Atlantic provinces have eliminated their flexibility in using revenues differently.

Instead of inflaming tensions with Ottawa—and rejecting one of the most cost-effective tools we have to lower emissions and fight climate change—Atlantic Premiers should retake control of carbon pricing systems and adapt the use of revenues to reflect their specific concerns and priorities. 

To reject carbon pricing entirely means turning to more costly and less flexible policies in the future. That’s in no one’s best interest.

Trevor Tombe is a professor of economics at the University of Calgary, and research fellow at the School of Public Policy.

Jennifer Winter is an associate professor in the Department of Economics and School of Public Policy, University of Calgary. She is currently a visiting scholar at Environment and Climate Change Canada, but did not write this in that capacity.