> ## Content Index > Fetch the complete content index at: https://www.borealian.ca/llms.txt > Use this file to discover other available public pages before exploring further. # Do we need a carbon tax? - URL: https://www.borealian.ca/do-we-need-a-carbon-tax/ - Published: 2020-03-26T16:00:00.000Z - Updated: 2026-10-13T00:49:32.000Z - Description: Canada’s federal pricing scheme mixes a fuel charge with an output-based system for big emitters. In theory it is elegant. In practice it fully prices what households cannot easily change and underfunds the substitutes that would replace it. - Author: Innis - Tags: Economics, Carbon pricing Canada’s federal carbon price is elegant on a whiteboard and awkward in a driveway. In [*Forward: A Real Plan for the Middle Class*](https://2019.liberal.ca/wp-content/uploads/sites/292/2019/09/Forward-A-real-plan-for-the-middle-class.pdf?ref=borealian.ca), the Liberals’ 2019 platform, the party pledges to “continue to lead with a price on pollution and a plan to help reduce emissions.” Conservatives, in [*A Real Plan to Protect Our Environment*](https://web.archive.org/web/20191125173205/https://arealplan.ca/ARealPlan.pdf) (2019), reject a consumer carbon tax as punishing Canadians for driving to work and heating their homes. A September 2019 Conservative [backgrounder on a national energy corridor](https://cpcassets.conservative.ca/wp-content/uploads/2019/09/28103239/196864d0c220d7e.pdf?ref=borealian.ca), hosted on a party domain, likewise lists “repealing the carbon tax” among its energy pledges. Canada’s [Paris Agreement](https://web.archive.org/web/20200301144809/https://www.canada.ca/en/environment-climate-change/services/climate-change/paris-agreement.html) commitments are the backdrop. The real question is narrower: what is being priced, who can respond, and does the hybrid earn the economists’ praise it claims? Governments tax for two reasons. To pay for the machinery of government (i.e. income and property taxes); and to disincentivize certain behaviour (i.e. a cigarette tax raises the price of tobacco to discourage harmful purchases). A carbon price belongs to the second family: its stated purpose is to deter GHG emissions by putting a cost on them. A Pigouvian tax — named for the economist A.C. Pigou — is a charge equal to the external harm of an activity. Applied to carbon, the textbook case is powerful: a single, transparent price on each tonne of carbon dioxide equivalent (CO2e) lets every emitter find its own cheapest cut, whether by efficiency, fuel switching, or new technology. Regulations and subsidies can miss cheap abatement and overpay for expensive cuts. On that efficiency test, a well-designed carbon price beats a thicket of rules. Emitters facing the charge will tend to reduce output, relocate, or innovate to shrink both their emissions and their tax bill. That is the strongest case for carbon pricing, and it deserves an answer on its merits. How does Ottawa’s scheme actually work? It is not a pure carbon tax. It is a hybrid of a fuel charge and an industrial credit system under the *Greenhouse Gas Pollution Pricing Act*. The **fuel charge** is a levy on carbon-producing fuels such as gasoline, coal, and natural gas. Rates are set per unit of fuel using carbon content and published by the [Canada Revenue Agency](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/fcrates/fuel-charge-rates.html?ref=borealian.ca). Because the underlying price is per tonne of CO2e, lower-carbon fuels face a lower charge per unit of energy than higher-carbon ones. The **Output-Based Pricing System (OBPS)** is the industrial half. Under the [*Output-Based Pricing System Regulations*](https://gazette.gc.ca/rp-pr/p2/2019/2019-07-10/html/sor-dors266-eng.html?ref=borealian.ca), SOR/2019-266, as made in 2019, covered facilities face an emissions-intensity benchmark tied to output. Facilities above their limit must compensate — by paying an excess-emissions charge and/or remitting compliance units; facilities below can generate surplus credits. The point is to price industrial GHGs while limiting competitiveness and carbon-leakage risks relative to taxing every industrial tonne at full strength. Environment and Climate Change Canada’s [OBPS overview](https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/output-based-pricing-system.html?ref=borealian.ca) describes the same architecture. OBPS proceeds are returned to the jurisdiction of origin. The fuel-charge proceeds tell a different story from the “prevention programs” claim sometimes attached to sin taxes. In provinces under the federal backstop, Environment and Climate Change Canada stated in [May 2019](https://www.canada.ca/en/environment-climate-change/news/2019/05/government-of-canada-announces-plans-to-provide-support-for-energy-efficient-projects-and-equipment-in-small--and-medium-sized-businesses.html?ref=borealian.ca) that approximately 90 per cent of direct fuel-charge proceeds would be returned to individuals and households through Climate Action Incentive payments claimed on personal income tax returns, with the remainder supporting small businesses, municipalities, schools, hospitals, and other prescribed recipients. Finance Canada’s [2019](https://www.canada.ca/en/department-finance/news/2018/12/minister-of-finance-confirms-amounts-of-climate-action-incentive-payments-for-2019.html?ref=borealian.ca) and [2020](https://www.canada.ca/en/department-finance/news/2019/12/climate-action-incentive-payment-amounts-for-2020.html?ref=borealian.ca) announcements describe the same household-return design. That is revenue recycling, not a dedicated abatement fund. Here the paint begins to peel. Excessive GHG emissions raise serious climate risks. The design problem is that the hybrid fully prices behaviours many households cannot cheaply change, while softening the load on industrial emitters who can invest in abatement — and then helping to pay for it. A power plant can cut emissions through efficiency, fuel switching, or carbon capture whether or not a consumer levy exists. Meanwhile, the average Canadian in 2020 drives a gasoline car and heats a home with fossil fuel. Electric vehicles, heat pumps, and transit exist, but for many households they are still costly. Those households face the full fuel charge. The rebate returns most proceeds in aggregate, but it does not supply a ready substitute at the pump or the furnace. The OBPS recognizes carbon leakage — the risk that production moves to less regulated jurisdictions. In my opinion, this is one of the most consequential risks of this policy. Especially considering that there are far more accommodating jurisdictions for Canadian emitters to move to (the United States and Mexico, to name two), and only time will tell if this policy becomes a decarbonizing strategy or a wholesale deindustrialization policy. The fuel-charge logic is shakier still. The stated goal is to embed the calculated cost of pollution in the end product. However, unlike cigarettes, where consumers can quit or switch, many Canadians in 2020 have few practical substitutes for gasoline cars or fossil heating at comparable cost. This raises an obvious question: why put the demand-side price ahead of a supply-side policy to create alternatives? The greatest externality of this policy is to raise the cost of living while providing little to no off-ramp for Canadians. It turns into a tax that punishes living in Canada, rather than a tax to punish high emitters. While the system does discourage some use of carbon-intensive products, it lacks support for adequate substitutes. Compounding this issue, most fuel-charge proceeds are returned to households rather than dedicated to abatement technology. A serious climate policy should recognize how Canadians actually live. Set GHG standards and fine violators. Help decarbonize homes and industries. Replace high-emitting electricity with lower-emitting supply and make low-emitting energy affordable. Invest in technologies that fit Canada’s geography; intensify regional transit so commuters have choices; and get transitional energy and green technology to global markets so large emitters abroad can cut faster. Those steps can be pursued without a consumer fuel charge, without treating carbon credits as a panacea, and without raising the cost of living through the pump and the furnace. The economists are right that a price can be the lowest-cost tool when emitters can respond. Canada’s 2020 hybrid policy asks households to bear the cost while the energy transition sorts itself out. This policy fails to create clean price signals. It is a blunt, ideology-based levy ahead of credible substitutes.