Carbon tax change has Canadians asking about the program. Here’s how it’s supposed to work

Prime Minister Justin Trudeau’s decision to exempt home heating oil from the carbon tax has thrust the controversial policy back into the spotlight — and renewed calls from Conservatives for it to be scrapped altogether.

But it has also raised questions about how exactly the tax is meant to work and the role it’s meant to play in the country’s emissions targets.

CBC News has received plenty of questions in recent days about the inner workings of the tax. Here are some of them, answered.

What is a carbon tax?

A carbon tax, also known as a price on carbon, is a price levied on emissions from fossil fuel sources, be it from coal, oil, natural gas or gasoline.

Burning fossil fuels is by far the largest contributor to the greenhouse gas emissions that are causing climate change, leading to more wildfires and extreme weather like floods and storms.

Though climate change is forecast to cost the Canadian economy billions, emitting greenhouse gases did not come with a price. The carbon tax is designed to change that for the emission sources it covers.

The levy varies based on how much carbon dioxide a fuel releases when burned. Coal, for example, releases more carbon pollution than natural gas to produce the same amount of energy, so the tax is higher on coal than natural gas.

The carbon tax doesn’t apply to hydroelectricity and other energy sources that don’t release any carbon pollution.

The federal carbon tax applies to burning fossil fuels, like coal, oil, natural gas — and gasoline for vehicles. (Rick Bowmer/The Associated Press)Ok, but what’s the point?

The federal tax was introduced by the Liberal government in 2019 and is designed as a financial incentive for people and businesses to change their behaviour to burn less fossil fuels and transition to greener forms of energy, thus helping Canada lower its emissions.

Those who use less fuel pay less tax, but still get the same rebate as someone who burns a lot of fuel — leaving them financially ahead by comparison.

Does the tax apply in all provinces?

Canada’s carbon tax is a patchwork, because some provinces were resistant to the idea, and others already had their own policies in place. There are also two systems for pricing carbon in Canada: the fuel charge, which is a consumer carbon tax on the gasoline and fossil fuels used to heat your house, and another system applied to industrial emitters. (You can find a full breakdown by the government here.)

Residents in Newfoundland and Labrador, New Brunswick, Nova Scotia and Prince Edward Island are, as of this year, all subject to the tax (and rebate), joining those in Ontario, Manitoba, Saskatchewan, Alberta, Yukon and Nunavut. British Columbia, Quebec and the Northwest Territories follow their own carbon-pricing mechanisms that meet federal standards.

WATCH | Premiers push back after carbon tax exemption:Calls for carbon tax exemptions as PM doubles down on no moreFeatured VideoCalls come from more premiers and from the Conservatives to make more exemptions to the federal carbon tax as the prime minister says there will be no more.How does it work, in practice?

The carbon tax is a standard price per tonne of CO2-equivalent emissions generated. This year, that’s $65 per tonne, but it’s set to increase over time, to encourage Canadians to transition away from fossil fuels.

The amount you’re taxed depends on the fuel source you use — the more emissions it produces, the more you’ll pay. The carbon tax on home heating oil, for instance, works out to $0.1738 per litre, regardless of the cost of oil. On an order of heating oil this month, Hughes calculated that would work out to roughly nine per cent of the total bill.

Is it revenue neutral?

On the whole, Canada calls its program “revenue neutral” because all proceeds are returned to the province where they were collected.

Ninety per cent of the government revenues are returned to households through a rebate program. The other 10 per cent is directed to programs to help businesses, schools, municipalities and other grant recipients reduce their fossil fuel consumption.

But it’s not designed to be revenue neutral for the individual. Whether you come out with more cash — or less — depends on how you heat your home and how much you drive your car.

A homeowner with a big house, heated with fossil fuels, who drives a gas-powered vehicle will pay more money than they get back, said Prof. Kathryn Harrison, a political scientist at the University of British Columbia in Vancouver who researches carbon taxes. That dynamic creates an incentive for people to lower their carbon footprint, she said.

Larry Hughes, a professor in the department of electrical and computer engineering at Dalhousie University in Halifax, did his own calculations to determine whether Nova Scotians would benefit from the carbon tax. According to his analysis, households using electricity for heating and hot water would gain more than $200 from the rebates, while homes using oil (before the exemption was introduced) could lose more than $400.

Does it actually reduce emissions?

Empirical research shows a carbon tax leads to a reduction in emissions, with some cases showing greater success than others. In British Columbia, where a carbon tax was put in place in 2008, research from 2015 found that the tax has reduced emissions in the province by between five and 15 per cent since being implemented without adversely affecting economic growth.

Harris said it’s too soon to have empirical data at the federal level. She added that it was easier to assess the impact in British Columbia, because the province could be compared to others that had not adopted the policy.

Do a lot other countries have carbon taxes?

Nearly 40 countries have some kind of a price on carbon, through a carbon tax or a cap-and-trade program. Economists have long viewed a carbon tax as a simple and effective way to reduce emissions, with varying degrees of success in practice.

Overall, the results have been a “mixed bag,” said Harris, because policies are often undermined by concessions to some of the worst emitters. The political pressure to exempt either sectors or fuels can be “quite contrary to the environment goals,” she said.

WATCH | At Issue panel discusses: Did Trudeau cave to carbon tax pressure?Ottawa creates carve-out for the carbon tax on home heating oilFeatured VideoOct. 26, 2023 – Ottawa is exempting home heating oil from the carbon tax for three years. We speak to Liberal MP Kody Blois and New Brunswick Premier Blaine Higgs for more reaction. Plus, we get the latest on the Israel-Hamas war from our reporter on the ground.What is the impact of the heating oil exemption?

In terms of numbers, only three per cent of Canadian households use heating oil, primarily in Atlantic Canada, so the impact on emissions isn’t significant. Trudeau has insisted he won’t put in place further exemptions for natural gas and other fuel sources, despite pressure from premiers and Conservative Leader Pierre Poilievre.

Atlantic Canada has been among the leaders in transitioning from fossil fuels to heat pumps as a way to heat their homes, though experts say the cost of purchase and installation can be a barrier, with many systems well over $10,000. 

Still, the cost of heating oil has skyrocketed, nearly doubling in two years, providing strong motivation to switch even with the carbon tax exemption, Harris said. 

“There’s already very strong financial incentives to switch from heating oil to heat pumps,” said Harris.

Along with the exemption, Trudeau announced the federal government would double the rural supplement in the tax rebate program and put in place additional incentives to help Atlantic Canadians switch from oil to electric heat pumps.