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Here’s how much carbon pricing will likely cost households

Economist Trevor Tombe on what putting a price on carbon emissions will mean for people across Canada, and what provinces can do to lessen the impact


 
THE CANADIAN PRESS/Michelle Siu

THE CANADIAN PRESS/Michelle Siu

Canada’s federal government will soon require provinces to put a price on greenhouse gas emissions. The minimum price will start at $10 per tonne in 2018, and rise to $50 per tonne by 2022. The government has provided little information about the projected costs for the average Canadian household, so others have filled the gap. The Canadian Taxpayers Federation (CTF), for example, claims the average household will be on the hook for more than $2,500 per year. Many, including the interim federal Conservative Party leader Rona Ambrose, cite this estimate. Others point to lower costs. Saskatchewan Premier Brad Wall, for example, claims the average household will see costs of $1,250 per year.

What are Canadians to make of such dramatically different numbers? With many details of the federal policy still to be determined, it’s hard to be precise. But, if we consider a simple and broad $50 per tonne price on carbon, it’s possible to come up with some fairly good ballpark numbers.

Let’s start with why the $2,500 estimate is too large. In their analysis, the CTF applies $50 per tonne to Canada’s total projected emissions and divides this by the expected number of households in Canada in 2022. The trouble with this approach is that not all emissions can or will be subject to the carbon tax. Emissions from cow farts or leaky valves, for example, are not priced and alone account for over 10 per cent of Canada’s greenhouse gas emissions. When other emissions not subject to the tax are added up, only about 70 to 75 per cent  of emissions are will be priced, though each province is different.
taxable_share

This alone shrinks the CTF numbers to closer to $1,800, but even this is too high. Not all of the burden falls on consumers, and some are passed along to foreign buyers of Canadian exports. Finally, it is critically important to consider how governments can use the revenue from carbon pricing to limit negative effects on household real incomes.

Let’s start with something easy, and visible: direct costs on households.

Direct Costs to Households

A carbon tax will increase the price of gasoline, fuel for home heating, and (in some provinces) electricity. The effect of this is fairly easy to quantify using data on gasoline spending, gasoline prices, electricity emissions intensity, and average household energy use. The average household uses about 2,000 litres of gasoline. A $50 per tonne tax adds 11.2 cents per litre to that, for a total cost of $224. To heat the average home, Canadians use just over 90 gigajoules of natural gas. The carbon tax adds about $230 per year to those costs.

As each province is different, I repeat this exercise for the typical household in each province, with the above data, and find:

household_costs

Overall, the cost of a $50 per tonne carbon tax is about $600 per year for the average Canadian household. To be sure, these figures are for the average household. The specific costs vary across households, as it depends on their consumption habits and many other factors.

Differences across provinces are also fairly large. B.C. and Quebec are notable for their low levels of fossil fuel use, while Alberta, Saskatchewan, Nova Scotia, and New Brunswick not only have higher home heating and vehicle gasoline use, but also have emissions-intensive electricity systems. It takes about 10 tonnes of greenhouse gases per year in Alberta to power a home using 1,000 kWh of electricity per month, while it takes just over 0.15 tonnes in B.C. Pricing carbon will therefore potentially affect electricity prices much more in some provinces than others.

But this need not be the case. Following the recommendations of University of Alberta economist Andrew Leach, the Alberta government opted to provide subsidies (output-based aid or OBA) to large GHG emitters in proportion to the production. These subsidies buffer the effect of carbon pricing on a firm’s average cost, and therefore mean electricity prices are not going to rise much (if at all) for Albertans. Other governments may adopt similar measures, which can eliminate the green bar in the above graph leaving overall costs of between $400 to $600 per household, depending on the province. (Side note: the OBAs don’t undermine the incentive effect of carbon taxes, as the subsidies aren’t a function of emissions. Firms still save money for each tonne of emissions abated when they adopt a new technology or technique.)

Indirect costs to households

Higher transportation and heating costs also affect businesses. With higher costs, prices of even non-energy products are likely to increase. These create “indirect costs” to households, and they are difficult to quantify. Much depends on how firms pass cost increases through to consumers—and evidence on this as it relates to carbon taxes is incomplete. From detailed analysis by University of Ottawa economist Nic Rivers (in this research paper) the effect of a $50 per tonne carbon tax on the price of various goods is roughly illustrated below:

indirect_costs

So it is true that goods and services will become more expensive, but this effect is fairly small—only a few per cent for most non-energy items.

To add up these costs isn’t trivial. On the low end, one can point to Alberta government estimates and project indirect costs of around $100 to $200 per year for a typical household. For a higher estimate, consider two data points. First, the OECD reports that 415 megatonnes of emissions are produced in Canada and purchases by households and business in Canada (that is, not exported). Second, Statistics Canada reports about 410 million tonnes of GHGs are produced in Canada and consumed by households as final consumption or by business as a capital investment. Quite consistent. So, with these two sources in mind, if 70 per cent of emissions are priced (which is roughly the case), then total costs per household is just below $1,100 per year. With direct costs averaging close to $600, from before, that suggests indirect costs are about $500 per year.

More precise estimates would require careful data work and modelling that is sure to come. But we can be fairly confident that indirect costs for the average household are smaller than direct costs. And for further context, $1,100 per year is less than 1.5 per cent of average household spending.

In any case, it seems clear Premier Wall’s estimate of the cost is very close to the mark while the CTF number is at least twice what the average household will experience. Neither estimate, though, accounts for the options governments have to mitigate these costs.

Rebates or offsetting tax cuts

Carbon taxes don’t just increase costs, they also allow governments—if they so choose—to increase household disposable incomes by providing direct transfers or by cutting other taxes.

There’s plenty of carbon revenue available.

rebates_available

Different governments will choose different ways of using revenue from carbon taxes. The B.C. government is committed to ensuring the tax is revenue neutral. By lowering other taxes, the province ensures pricing carbon is not the tax-grab that many suppose it is. In the neighbouring province of Alberta, we see other choices. There, the government will return most of the carbon revenue as subsidies to large industrial emitters and rebates to low-income households, but will spend the rest (see page 6 of the 2016 Budget.)

Interested readers should explore this comprehensive report by Canada’s EcoFiscal Commission on the pros and cons of various options available.

In the following table, I compare the revenue each province might expect from a broad $50 per tonne carbon tax with various potential uses of funds. One option gives rebates to everyone roughly in line with average direct costs. Another provides smaller rebates in line with B.C.’s, and only to adults in the bottom half of the income distribution (I scale up B.C.’s credit to $200 to reflect the higher carbon price of $50). A third option provides rebates to large industrial emitters. As in Alberta, I presume roughly three-quarters of carbon taxes raised from large emitters are returned via OBAs. Finally, I look at the cost of lowering personal and corporate income taxes by 10 per cent. (That is, lowering income tax revenues by 10 per cent; determining the precise rate changes to do this is complex.)

rev_use

Some provinces will generate so much revenue that there are many recycling options available. In Saskatchewan, for example, the government will bring in nearly $2.5 billion—more than enough to provide rebates to large emitters and low-income households, and still have enough left over to cut personal and corporate income taxes by 40 per cent! Of course, as emissions decline gradually over time, the revenue side of this equation will shrink and governments would then need to roll back some of these measures. But that is many years down the road.

This does make clear that for those concerned that a carbon tax is just a tax grab, there are many recycling options available that do not enlarge the size of government. In particular, provincial governments should strongly consider rebates and lower personal and corporate income taxes.

There is certainly large scope for disagreement about how best to use carbon revenue. For the strongest case in favour of “revenue neutral” carbon taxes, see this report by University of Calgary economist Ken McKenzie. But governments may also opt to spend the money. For perhaps the strongest case in favour of this approach, see this piece by Vox author David Roberts.

Either way, this debate is separate from the issue of carbon pricing itself. Opposing carbon pricing because one disagrees with how the money is used misses the critical fact that regulations and other command-and-control approaches have far higher economic costs than carbon pricing, and no revenue is available to offset those costs. If we’re interested in addressing our greenhouse gas emissions in the least-cost way, then carbon pricing is the way to go.

 

Trevor Tombe is an Assistant Professor of Economics at the University of Calgary, and a Research Fellow at the School of Public Policy

 

Here’s how much carbon pricing will likely cost households

  1. “Following the recommendations of University of Alberta economist Andrew Leach, the Alberta government opted to provide subsidies (output-based aid or OBA) to large GHG emitters in proportion to the production.”

    Huh, the whole point of a carbon tax is to change behaviour by increasing the cost of producing carbon; so providing subsidies to large GHG emitters defeats the purpose.

    • Well, anything to avoid facing reality……and getting votes.

    • I’d have to agree with you Jim. Subsidies in general have not been effective. The Liberal government in Ontario has subsidized renewable energies and in turn have increased the cost of electricity by a whopping 375% during their term. This increase has happened even though household consumption of electricity has dropped.

      • A subsidy is when you take something that belongs to someone, and give it to someone who it doesn’t rightfully belong to. When you create a situation where the only really profitable businesses are the ones getting subsidies (because the profitable ones are getting de-subsidized in order to subsidize the unprofitable ones into profitability) then it only makes sense for every business to get into a line of business that gets subsidized. But what do you do when everyone is eligible for a subsidy, and no one is making any money in order to be de-subsidized?
        See where this goes? On a related note, if we burnt down the legislature, would we have to pay a tax on the resultant carbon emissions?

    • The idea is to reward production but penalize emissions, so cleaner utilities will get the same rebate while paying less of the tax, dirtier utilities will pay more tax. It’s not that hard if you want to understand it, but don’t worry, Brad Wall claims he doesn’t understand it either so you’re in good company.

      It’s like if I tell you I’ll pay you $100 for going to work, but I’m also going to charge you $1 for every 100 km you drive: since you get the $100 no matter what, you still have an incentive to take the bus and pay less tax. Get it?

  2. The whole thing is just asinine. It’s just a huge tax grab by government no matter how you cut it.
    If you want to stop companies from using carbon based energy, there is a quick way to force them to change. Add a huge tax to their profits if they don’t stop or reduce their carbon out put. Make it illegal to pass the cost on to the consumer.
    Tax away 100% of their executive’s bonuses if they don’t cut the carbon.
    Carbon use will plunge like a rock when faced with that.
    Now take the tax money raised and give grants to low income earners and pensioners to increase the insulation in their homes and to change their
    heating systems to ones that do not leave a big carbon imprint.
    Change the building codes across Canada to insure new homes and all new businesses are super insulated, energy efficient and reply on solar, thermal, or wind power for their energy source.
    It won’t take long to eliminate carbon based energy needs after that,

    • I think there are some smoke and mirrors in the author’s calcs. Today, the published CO2 emissions are
      732 Mega tonnes/year. Even if I subtract 10% for cow “farts” (and why should the beef ranchers not have to pay for their animals’ contributions?) and other non-qualifying emissions of 15%, that leaves 550 Mega tonnes. At $50/tonne that will collect $28 billion/year in new taxes.. That’s about $800 for every man woman and child. Forget about the export argument, this tax will raise the cost of the finished goods we import from those same companies. So if the cost, as he states, is $1250/average household that would imply that the average household has only 1.5 people and there are 22 million households. Not the last time I looked!!

      • I’m back briefly. What everybody is missing is that our reductions are puny in comparison with those produced still by just USA and China in their huge coal consumption to make electricity, (despite their promises) and in the short run harmful to our economy. Until I see either of them getting on board in a big way consistent with their huge output we are just farting into a windstorm. Incidentally, the world figures mention the huge amount put out by ruminants. What about the methane put out by some billions of people? No more beer, beans and cabbage.

        • Per capita, our emissions are about the same as the US and much, much higher than China’s. Asking the Chinese to cut first is like saying “I’ll drive a smaller SUV if you agree to never heat your home or drive anything more than a pedal bike”. China and the US are both party to the Paris agreement, they are acting (the US has political issues but the executive has taken action through regulation). Europe did more than this a long time ago. It’s past time we stopped pointing fingers and started taking action.

          • Using ‘per capita’ figures is meaningless – an attempt by the more fanatic environmentalists to make one feel guilty, I guess. Everybody is free to make their own decisions but the only meaningful figure is the political entity that can influence the people at large. It is countries that pollute and can legislate, not environmental kooks.

            Do you drive a car? Fly in an airliner? Use electricity created by fossil fuels? I light and heat my house hydro electricity made right here, never fly, drive a Toyota Corolla that gets 41 statute miles to the imperial gallon and less than 3000 mile a year. This carbon tax campaign is for the birds as are your comments about per capita here and China. Go to China if you want to be pure.

    • Most CO2 comes from consuming fossil fuel products by driving cars, heating homes, and transporting goods by road and rail. So the government has to somehow change your behavior!! I was in Italy recently and you see virtually no large cars. Why?-because the tax/per litre of fuels is the equivalent of $1.5/litre. Here we think it’s awful that our gasoline taxes are 38 cents/litre because they are only 10 cents/litre in the US.
      Now, if they put in this carbon tax and the provincial governments give it back to the consumer in various forms, no one’s behavior will change and we’ll just have added government bureaucracy collecting the tax and giving it back. A bunch of added cost with NO benefit whatsoever.

      • No: you tax people based on CO2 emissions, you rebate to them based on other things (need, income tax cuts, business tax cuts, electrical subsidies, etc.). Since the rebates do not depend on emissions, the incentive to change behaviour – reduce emissions – is the same as if the rebates didn’t exist.

        I really think that people are just too cynical to be willing to understand this concept. Yes, the provincial governments could use this as a tax grab, but it’s up to voters whether or not they will. At the end of the day, governments will tax and spend whatever voters want/allow, how the tax is collected does not change this.

  3. Its a TAX. The charts and graphs point to an academic exercise to prove a theory. The author fails to address the moral and ethical filed reasonings behind this TAX. There is nothing a modern government has put into place that is revenue neutral. The administrations costs always inflate over time to start with one criticism. The fact you are taking from one segment of society to subsidize another is near criminal, as well counter-productive. Citing the theoretical numbers above shows that the theory is flawed. We are to be subjected to the whims of politicians with no practical truth to their facts and figures. Canada will not make the transition, because the populace finding that they are the economic pariah of the world and that nobody is following us nor buying our over priced goods, will succumb to reality. The fact is this author is manipulating numbers to prove a theory.

    • I don’t think there’s any convincing you but I’ll bite. By your definition, all government revenue is “near criminal”, so it doesn’t really make a difference if the money is collected through a carbon tax or not. E.g. income tax is taken disproportionately from the wealthy simply so that the poor can pay less.

      It’s been a bit of a rollercoaster, but government spending as a percentage of GDP last year was about the same as it was in 1971, which seems to somewhat undercut your gut feel about expenditures always growing, although in dollar terms of course you’re right.

      The basic mathematical fact is that the tax collects exactly enough revenue to offset all of the effects on citizens and exports. To make the tax work, there have to be some losers (relatively heavy emitters), and rebates/subsidies will never be perfect. Of course, to be on board with this at all you have to accept that putting a price on carbon emissions is worthwhile… I’m guessing you probably don’t.

  4. The average Canadian pays 38.5 cents of tax per liter on gasoline. That is equal to a carbon tax of $171/tonne but apparently that is not enough for the Trudeau/Wynne/Notley gang. They need more, they have supporters who need some taxpayer funded help. Sadly most Canadians will complain and when the next election comes they will vote for the liberal/socialist hordes again, still believing the MSM narrative that socialists actually care about the masses.

    • That’s an interesting point. I remember Dion’s “Green Shift” proposal specifically excluded gasoline because of the taxes already on it. Provincial gov’s could certainly use the carbon tax revenues to eliminate some of the other gas taxes if they wanted.

  5. Prices will increase over time, but we should know why. Unfortunately politicians and deniers of global warming have created a situation where today it must be resolved. Canada plus many Nations in the world delayed any significant change. We are now paying for their mistakes. Not only will it be costlier, it may also create a situation where what was once, can never be returned to.

    • There is a fallacy to this whole thing. This is just another attempt by Trudeau to enhance his reputation on the world stage-about all he has focused on since becoming PM. Canada’s current CO2 emissions are 732 Mega tonnes/year. However, because of our abundance of forested and green areas (which need CO2 to exist), we absorb over 920 Mega tonnes of CO2 each year. So, Canada has a NEGATIVE contribution to CO2 of at least 188 Mega tonnes/year-a sizeable amount. So this is nothing more than a movement painted in green to collect more taxes from Canadians.

    • Ha, what a bunch of garbage you just spewed, chicken little…

  6. Does anyone really think the majority of the funds brought in by this tax will be returned to citizens? Isn’t it more likely this windfall will be used to increase program spending?

  7. This has been tried in the 70’s why would it work now?

  8. There’s some basically damaged thinking here – is this person really an economist? The point of carbon pricing is first to disincent activities which produce GHG so business as usual scenarios make no sense but then government schemes that attempt to offset the cost of carbon pricing are even more nuts as they completely miss the point. Under the business as usual scenario, one seems to be ignoring the fact that vehicle fuel economy is not only improving but is on a policy driven path to improvement (my first car got 16 MPG highway and my current one which is very similar gets 33), new housing stock is built to increasingly higher efficiency standards driven by building codes, appliance and HVAC eqipment efficiency is increasing driven by both national and international standards, etc, etc.
    The author at least realizes that energy use imposes a cost on all activity but somehow fails to recognize that the business as usual scenario ignores the fact that improving energy efficiency would be a direct benefit to the economy and increase the competitiveness of Canadian industry.
    One well known available source of GHG reduction is to fully utilize the bridging fuel natural gas to displace other fossil fuel which is an ongoing trend in power generation in the US and even parts of Canada; in this respect, government support for Energy East which seeks to reduce Canada’s NG transport capacity verges on vandalism; in any case, Ontario’s notion of improving the availability of NG is a step in the right direction and the idea of routinely including heat pumps in new builds.
    One really dumb assumption is that carbon pricing is necessarily a revenue stream for governments or worse an alternative to other revenue streams; this is a half-hearted implementation: carbon pricing is most effective and least costly when it produces credits that incent alternative energy use and conservation. The author at times wanders into magical thinking where fancy government funds transfers negates the impact of carbon pricing – the so called revenue neutral scenario. Why wouldn’t a credible economist calculate the carbon price offset resulting from an improvement in 1 mpg in average fuel economy relative to carbon pricing level in the cost of gasoline or 1% (absolute) improvement in average NG heating equipment relative to carbon pricing level.

  9. This whole thing is a case of pay me now or pay me later. The purpose behind a price on carbon is to get us to stop using so much. behaviour is influenced by cost. It is not to raise taxes. If climate change continues on the current trajectory, we will have massive bills to pay , For example, dykes to protect Richmond B.C. and other mainland low areas, and for the maritime provinces to be protected. Because the huge increase in arctic warming and melting of ice caps is going to raise water levels. And we will all pay. I would rather see us use less carbon and just maybe not have to have these massive future costs. forget your anti tax rants, anti government rants and face up to what nature is showing us. we need to change and this is one very small incentive.

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