Canada’s bold experiment with carbon pricing is over, pulled by new Prime Minister Mark Carney to remove a controversial wedge issue before the coming federal election. Politics crept up on carbon pricing in light of higher inflation rates in 2022 and 2023. With higher costs of living top of mind, it became convenient for politicians to point their fingers at the carbon tax (as opposed to the massive windfall profits going to the oil and gas industry).
While removing the “divisive” consumer carbon tax has been framed as an affordability measure, it’s important to point out that the Canada Carbon Rebate–an income transfer to households funded from carbon tax revenues–is also being discarded. Since the vast majority of households were getting back more in rebates than they were paying in carbon tax, they will be worse off and inequality will rise.
Carbon pricing is based on the idea that carbon (aka greenhouse gas or GHG) emissions are an “externality”—a cost that is imposed on third parties to the market transaction. By taxing emissions, market prices would reflect those costs and markets would work more efficiently. Carbon pricing was thus the finest hour for neoclassical economists, with the vast majority in academia in support. At its peak, several new think tanks were born specifically to promote carbon pricing, a development unlike any other area of public policy.
While Prime Minister Carney was a strong advocate of climate action, including carbon pricing, over the past decade, what comes next to replace carbon pricing is far from clear. Technically, carbon pricing is still in place for large industrial emitters through what’s known as the federal output-based pricing system (OBPS), although it, too, is under attack from the Conservative opposition. Carney’s leadership platform mostly reiterates federal climate spending programs already underway (more on this below).
Born in B.C.
The federal decision to end consumer carbon pricing has echoes of the October 2024 British Columbia election, in which Premier David Eby promised to end B.C.’s consumer carbon tax amidst a surge in polling numbers for the B.C. Conservative party. That was then an idle promise due to the federal carbon price floor, but now that has been removed by the prime minister, B.C. has officially turned from carbon tax cheerleader to opponent.
Federal carbon pricing was notably shaped by B.C., which first implemented a broad-based carbon tax in 2008 as part of a Climate Action Plan that included putting GHG emission targets in legislation and new programs to reduce emissions in homes and businesses. B.C. environmental groups made a carbon tax a litmus test of the government’s credibility on the climate file. Later, awards from environmental non-government organizations (ENGOs) would be lavished on then B.C. Premier Gordon Campbell and the governing B.C. Liberals for their climate plan and early steps on carbon pricing.
The speed at which the B.C. carbon tax was implemented was impressive. Announced in the February 2008 budget, the carbon tax went into effect in July that year. Starting small, at $10 per tonne of CO2 (a mere 2.3 cents per litre at the pump), the tax increased annually and by mid-2012 hit $30 per tonne (7.2 cents per litre), after which the B.C. government put a lid on further increases.
The B.C. carbon tax was designed to be a revenue-neutral tax shift, balanced by reductions in personal and corporate income tax rates, plus a Climate Action Tax Credit (CATC) aimed at low-income households. This design insulated the carbon tax from claims it was a tax grab, while protecting low-income households from the full force of a regressive tax.
Nonetheless, from the outset, the B.C. carbon tax was controversial and made for wedge politics. Inspired by B.C., then-federal-Liberal Leader Stephan Dion failed to get traction on a proposed revenue-neutral carbon tax, losing in 2008 to the Conservatives, whose leader Stephen Harper proclaimed the plan to be a “tax on everything” that would “screw everybody.” Back in B.C., the NDP launched an Axe the Tax campaign in the 2009 provincial election, but the governing Liberals won, though perhaps in spite of the carbon tax.
After the Paris Agreement
In the aftermath of the 2015 Paris Agreement on climate change, discussions towards a pan-Canadian plan for reducing emissions put carbon pricing front and centre. The federal government chose a carbon pricing backstop to provide provinces with flexibility to implement their own systems while ensuring a minimum carbon price across the country.
Starting in 2019 at $20 per tonne, the federal carbon pricing backstop grew to $80 per tonne (about 18 cents per litre at the pump), as of April 2024. It was due to rise to $95 on April 1, 2025 and had a destination of $130 per tonne by 2030. The federal carbon pricing regime also followed revenue neutrality. In provinces where the federal carbon pricing backstop applied, all revenues collected in that province were returned to households through a quarterly income transfer known as the Canada Carbon Rebate.
The federal carbon pricing backstop survived a major legal challenge from Alberta, Saskatchewan and Ontario, which disputed the federal government’s constitutional authority to regulate greenhouse gases. In March 2021, the Supreme Court of Canada upheld federal authority to regulate emissions through tools like the carbon pricing backstop.
What comes next?
The federal decision to end consumer carbon pricing is the end of an era but it is not the end of climate policy. Carbon pricing was always just one tool in the toolkit and needed to be complemented by regulations, subsidies and public investments. Even with the carbon tax in place, Canada was not on a trajectory to meet its 2030 emissions target, largely due to allowing continued growth of oil and gas production for export.
The federal government also intends to kill the Canada Carbon Rebate, which was designed so that most households would get more back, on average, in the rebate than they paid in carbon tax. Losing both the tax and the rebate will increase inequality and make life less affordable for low- to medium-income households. Keeping the carbon rebate would help advance an affordability agenda.
As stated in his leadership campaign, PM Carney promises improvements to industrial carbon pricing (the output-based pricing system, OBPS) but political considerations will weigh heavily on any plans for a more stringent system. The OBPS has already been gutted by design, exempting large portions of industrial emissions in the name of “competitiveness” while allowing generous provisions for carbon credits and offsets.
We’re left in Canada without a clear road map to meeting our stated emission reduction targets and commitments under the Paris Agreement. PM Carney also speaks of border carbon adjustments to put tariffs on imported goods reflecting carbon intensity, but this makes little sense, having done away with the consumer carbon tax. The remainder of the platform is a repeat of existing federal climate policies.
Politics may have killed carbon pricing, at least for now, and populist stirrings on this front seem a soft form of climate change denial. Faced with urgent and existential threats from south of the border, the federal government appears to be putting climate action on the backburner.
That would be a mistake. Over the broad sweep of time, policy trends come and go, and Donald Trump won’t be in power forever (we hope). For Canada, it’s imperative that we continue to push towards building a truly sustainable economy and making bold public investments that put Canada on the right track. Our 2023 Spending What it Takes report cites key areas for major federal investments across Canada to put us on a pathway to decarbonization.
Pivoting to stronger public investment and green industrial policy, while tightening up regulations on big polluters, should be top of mind towards our commitments to the Paris agreement. As Hadrian Mertins-Kirkwood shows, east-west green infrastructure for high-speed rail and electricity connections/grids can weave the country together. Climate action now strengthens our economy and will make us more competitive in the long-run.
