Carbon Tax in Canada

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With devastating wildfires, droughts, and storms becoming increasingly common, the need to reduce greenhouse gas emissions has never been more urgent. The Canadian government has established national carbon taxes to reduce carbon dioxide pollution, and Canadian provincial governments each have their own rules or have adapted this federal system of rules to their own policies.

Some believe carbon taxes are the ideal way to reduce emissions of greenhouse gas emissions, while others claim the taxes may damage economies without having a meaningful impact on climate change. Canada’s government is clearly in the first group. It has created one of the most aggressive climate policies in the world.

Regardless of how effective you think this tax on carbon emissions is, it’s important for Canadians to understand since it could increase the total amount they pay annually in taxes. In this review, we examine everything you should know about the carbon tax in Canada, including how it works and who it affects.

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Is there a carbon tax in Canada?

There is a carbon tax in Canada, which amounts to a fee greenhouse-gas emitters and consumers must pay. In the summer of 2018, the Canadian government passed the Greenhouse Gas Pollution Pricing Act, which established a carbon tax system. The act dictated that provinces that did not already have a carbon tax arrangement must either design their own or adopt the federal rules.

All provinces in Canada have adopted some system that works for local needs, whether the federal rules or another arrangement. Yukon, Nunavut and Manitoba are the only provinces that have fully adopted the federal fuel charge in their provinces.

The carbon tax aligns with Canada’s promise to honor its obligations to the Paris Agreement, which requires the government to cut emissions by 30% below the levels recorded in 2005 by 2030.

How does the Canadian carbon tax work?

The carbon tax in Canada has two main parts. Some provinces have opted to follow both, some follow one, some follow one or both partially, and some follow neither because they have their own provincial systems that meet federal standards. The map of Canada is a patchwork when it comes to what provinces and territories are doing on carbon tax.

The first part of the carbon tax is federal and provincial carbon levies charged on the sale of petroleum products, as well as a regulatory charge on fuel called the federal fuel charge. The fuel charge only applies to Ontario, Manitoba, Yukon, Alberta, Saskatchewan, and Nunavut. In 2019, the first year the system was in effect, the fuel charge rate was set at $20 per ton of carbon dioxide emissions, and that increases by $10 each year up to its current $50 per ton in 2022.

The second part is a regulatory trading system for industry called the federal Output-Based Pricing System (OBPS), which applies in all territories except Northwest Territories, British Columbia, Quebec, and Nova Scotia…

Provinces that have not adopted this federal system but whose arrangements meet federal thresholds are Quebec, Nova Scotia, the Northwest Territories, and British Columbia. In Prince Edward Island, Alberta, Saskatchewan, and Ontario, policies meet federal standards for the emission sources they apply to, and federal rules apply to emission sources not covered by provincial rules in these places—a system called "federal backstop.”

Here is a quick run-down of the system active in each province and territory:

  • Newfoundland and Labrador: provincial carbon tax and OBPS

  • Nova Scotia: cap-and-trade

  • Prince Edward Island: provincial fuel charge, federal OBPS

  • New Brunswick: provincial fuel charge, provincial OBPS

  • Quebec: cap-and-trade

  • Ontario: federal fuel charge, provincial OBPS

  • Manitoba: federal backstop

  • Saskatchewan: federal fuel charge, provincial OBPS in some sectors, federal OBPS in other sectors

  • Alberta: federal fuel charge, provincial OBPS

  • British Columbia: provincial carbon tax

  • Yukon: federal backstop

  • Northwest Territories: territorial carbon tax

  • Nunavut: federal backstop

Who is affected?

Both families and industries are affected by the carbon tax. For regular consumers, the added tax may mean paying more at the gas station and for annual power bills. However, most provinces have a way to offset soaring prices through rebates, tax credits, and lower gas taxes.

One of these is the Climate Action Incentive (CAI) rebates offered by the federal government to residents of the provinces that adopted the federal fuel charge rules, which are Alberta, Saskatchewan, Manitoba, or Ontario. CAI rebates, often simply called carbon tax rebates, aim to offset the amount consumers pay due to the carbon tax. The size of the CAI rebates tax-filers receive depend on various factors, including the province and household size. The government has switched the CAI from a tax rebate to a direct quarterly payment called the Climate Action Incentive Payment (CAIP).

Additionally, a portion of the tax proceeds go to fund the federal Climate Action Incentive Fund, which helps schools and small and medium-sized businesses pay for projects that improve energy efficiency and reduce their energy use and carbon emissions. These schools and businesses, which can range from paper mills to bakeries, can apply for funding of up to 25% of the eligible costs of such projects. Other proceeds from the fuel charge are used to execute programs such as the Indigenous Community-Based Climate Monitoring Program run by Crown-Indigenous Relations and Northern Affairs Canada; the Capital Facilities and Maintenance Program (CFMP)/First Nations Infrastructure Fund (FNIF) run by Indigenous Services Canada; and the Clean Energy for Rural and Remote Communities (CERRC) Program and the Energy Manager Program run by Natural Resources Canada.

Industries can’t expect such relief, however. They will pay depending on the amount of emission produced per federal requirements. The tax obviously affects industrial profitability and economies that rely on fuel-powered industries.

Canada Carbon Tax FAQ

The carbon tax in Canada is a tax that emitters must pay on their greenhouse gas emissions. The tax was established in 2018 via the federal Greenhouse Gas Pollution Pricing Act. This Act laid out a carbon tax system in two parts: One is a federal and provincial carbon levy on petroleum products and a regulatory charge on fuel (the federal fuel charge). The other element of the carbon tax in Canada is the federal Output-Based Pricing System (OBPS), a regulatory trading system for industry.

The carbon tax is a way of following through on Canada's commitment to reduce greenhouse gas emissions by 30% below 2005 levels by the year 2030.

The Canadian carbon tax is based on a set price per ton of carbon dioxide emissions. Federal rules started in 2019 with a price of $20 per ton. This jumped up by $10 each year until reaching $50 per ton in 2022.

Carbon tax rebates will soon be called Climate Action Incentive Payments (CAIP). These will be tax-free payments that are automatically sent to eligible individuals four times a year. To be eligible, you must be a resident of Alberta, Saskatchewan, Manitoba, or Ontario on the first day of the month when you expect payment and the last day of the month before. During that same month you must be at least 19 years old; be or have been married/common law partnered; OR be or used to be a parent who lives with or used to live with your child.

You will also get a child credit for each eligible child you live with. To be eligible, the child must be under 19 and live with you; you must be primarily responsible for raising the child; and the child must be registered for the Canada child benefit.

Provinces may use the proceeds of the carbon tax as they think best, and in many cases this means helping families make ends meet and investing in more action to cut emissions further. Those governments that adopted the federal pricing system get proceeds from the tax back and can decide what to do with them.

A 2019 Brookings report estimates that taxing carbon at $25 per ton and raising that tax amount by 1% per every would reduce emissions by up to 38 percent compared to 2005 levels by 2030. An even more aggressive approach—starting at $50 per ton carbon tax and boosting it by 5% per year—would reduce emissions by up to 47% compared to 2005 levels by 2030.

Not only do such policies bring down carbon emissions, which is necessary to prevent catastrophic climate change, these taxes produce revenue that can be put to work ameliorating the effects of climate change on vulnerable communities and retraining workers in the fossil fuel industry to advance a green economy.

In addition to these benefits, having strong climate regulations and a carbon tax on imported goods can help countries ensure that domestic firms remain competitive in a fast-changing world.

All provinces and territories in Canada have a carbon tax system of some kind; some have opted to adopt the federal system while others have created their own systems that meet federal standards. Some have taken a partial approach in which their own policies are “backstopped” by federal regulations where necessary.

Refer to this helpful map to see the system active in each province and territory.

Carbon “refunds” come in the form of tax rebates to eligible residents of Alberta, Saskatchewan, Manitoba, and Ontario. These rebates will soon change form and get the name Climate Action Incentive Payments (CAIP). Eligible residents will automatically get a tax-free payment four times a year. To qualify, you must be a resident of one of the four provinces mentioned above on the first day of the month you’re seeking a rebate and the last day of the previous month. You also must be at least 19 years old; be/have been married or be in/have been in a common law marriage; OR have/had a child who lives with or used to live with you.

Children can also be eligible, and tax-filersget a credit for each eligible child in the household. Criteria are that the child must be under 19, live with you, depend on you as their primary caregiver, and be registered for the Canada child benefit.

Elsewhere in Canada, British Columbia has a climate action tax credit; Yukon has a carbon rebate; and both Newfoundland and Labrador and Prince Edward Island have reduced their provincial tax on gas.

Residents are likely to see their gas prices and heating bill rise as the carbon tax rises. Residents of some provinces will get a rebate in the form of Climate Action Incentive (CAI) to cover the higher costs. Others will get rebates and/or programming from their provincial governments to make up for the costs.

Last Updated March 28, 2022

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