Canada’s Carbon Tax Increase: What You Need To Know

The carbon tax, which is applied to fossil fuel purchases, is intended to encourage Canadians to reduce their consumption of polluting fuels. The federal carbon tax is applied in Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Nova Scotia, PEI, Newfoundland and Labrador, Yukon and Nunavut. British Columbia and the Northwest Territories have their own (but similar) carbon charges for consumers, while Quebec uses a cap-and-trade system. The federal tax affects Canadian individuals, small and medium-sized businesses, First Nations and public sector institutions such as hospitals, universities, schools and municipalities in those provinces and territories.

The carbon tax, also referred to as the price on carbon, first came into effect at $20 per tonne in October 2019. It has gone up since then, and reached $80 per tonne on April 1, 2024, up $15, from its previous cost of $65 per tonne. The carbon tax is scheduled to increase another $15 each year until it reaches $170 a tonne in 2030. This yearly increase is intended to help Canada reach its emissions target while giving Canadians time to make greener fuel choices.

There are more than 20 fuel sources that produce greenhouse gas emissions, such as coal, oil or gasoline, that are affected by the fuel charge. The levy on each fuel source depends on how much greenhouse gas is produced when that fuel is burned. For example, burning one litre of gasoline produces 2.3 kg of carbon dioxide (CO2), while diesel produces 2.7 kg per litre. Here’s how this increase will affect the price of some common fuel sources according to the Canadian Press:

Under the Greenhouse Gas Pollution Pricing Act, passed in 2018, in addition to the “fuel charge” component of the policy (in other words, the carbon tax), there is an “output-based pricing system” that impacts companies from industries that produce greenhouse gas, such as oil producers, chemical manufacturers and power plants.

According to the United Nations, fossil fuels, such as coal, oil and gas, are the largest contributor to global climate change, accounting for over 75% of global greenhouse gas (GHG) emissions and 90% of carbon dioxide emissions. Between 2005 and 2020, global GHG emissions increased by 18.2%. Put simply, rising GHG levels create a warming effect and the earth is now warming faster than at any recorded point in history.

On December 12, 2015, Canada and 194 other countries reached the Paris Agreement that collectively set goals to limit global average temperature increases to 1.5 degrees Celsius. In 2020, Canada ranked as the 11th largest GHG-emitting country (China, the U.S. and India rank as the top three). Under the Paris Agreement, Canada committed to reducing its GHG emissions by 30% below 2005 levels by 2030 (and has since revised its commitment to 40% to 45% below 2005 levels), and to achieve net-zero emissions by 2050.

The intent of carbon pricing is to incentivize Canadians to use less fossil fuels and to switch to greener forms of energy, such as using heat pumps or taking public transit, to reduce greenhouse gas emissions that cause climate change.

According to the Canadian Climate Institute, Canadian households will need to carry the burden of climate-related disasters. In their report “Damage Control: Reducing Climate Impacts,” the Institute argues that climate impacts will place a major burden on Canadian households by 2095 (though effects are already being experienced) as economic growth slows, governments raise taxes to pay for climate disasters, jobs losses increase and goods become more expensive as supply chains are disrupted with GDP falling by 12% (compared to a stable-climate scenarios) and with incomes falling by 18%.

“Our analysis shows that proactive adaptation measures have major economy-wide benefits,” notes the report. “For every $1 spent on adaptation measures today, $13 to $15 will be returned in years ahead in direct and indirect benefits.”

Since the carbon tax was introduced on April 1, 2019, at a cost of $20 per tonne, it is scheduled to increase by $15 per tonne until 2030 when it reaches $170 per tonne. (From 2019 to 2022, it increased to $10 per tonne each year.) The increase intentionally happens slowly over time under the theory that it gives anyone affected by the tax (households and businesses) time to change their consumption habits and switch to less polluting fuel options.

The Canada Carbon Rebate (CCR), formerly known as the Climate Action Incentive Payment, is a tax-free benefit to help offset the cost of federal carbon pricing. Residents 19 years of age and older in Alberta, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, PEI and Saskatchewan are eligible for the CCR. The amount you receive depends on the province you live in and how many family members reside in your household.

Here is a breakdown of the current base amount of each quarterly payment:

There is a rural supplement of an additional 20% for people who reside outside of city centres because of their higher energy needs and limited access to cleaner options, such as public transit. This means a recipient in rural Alberta would receive a quarterly payment of $270, rather than $225 for an urban dweller, for example.

CCR payments are made four times a year: April 15, July 15, October 15 and January 2025. To receive your CCR payment, you need to file a tax return each year.

The rebate helps Canadians with the cost of living, regardless of whether or not they reduce their personal GHG emissions. However,  those who chose greener options (and therefore pay a lower carbon tax), will benefit more from the rebate. In addition, according to figures from Environment and Climate Change Canada, Canada Revenue Agency and Statistics Canada, there is a projected average net benefit across all provinces.

For example, in Alberta, if the average cost of carbon is $1,056 and the rebate per household is $1,779, the average net benefit is $723. In Ontario, the average cost is $869, the average rebate is $1,124, giving a net benefit of $255.

Related: Canada’s Carbon Tax Rebate: A 2024 Guide

The carbon tax is a contentious issue and has become a hotbed of political mudslinging.

Supporters of the Carbon Tax

The most vocal (and non-partisan) proponents of Canadian carbon pricing came in the form of an open letter by over 100 economists from across Canada, who were concerned with the threats from climate change. The letter is meant to shed light on the “sound evidence and facts” of carbon pricing. The letter states, “We encourage governments to use economically sensible policies to reduce emissions at a low cost, address Canadians’ affordability concerns, maintain business competitiveness and support Canada’s transition to a low-carbon economy. Canada’s carbon-pricing policies do all those things.”

The letter aimed to debunk these main criticisms of carbon pricing:

Critics’ Claim: Carbon Pricing Won’t Reduce GHG Emissions

Response:The economists argued that since federal carbon pricing started in 2019, Canada’s GHG emissions have fallen almost 8%, though other policies also contributed to that decline. The reason is basic economics: when something costs more (namely, fossil fuels), people use less of it. The argument is that carbon pricing gives individuals and businesses the flexibility to choose the best way to reduce their carbon footprint.

Critics’ Claim: Carbon Pricing Drives Up the Cost of Living and is a Major Cause of Inflation

Response: There was a sharp increase in inflation starting in 2021, reaching a 40-plus-year high of 8.1% in June 2022. However, according to Bank of Canada governor Tiff Macklem in February 2023, other global factors drove up price inflation, including global supply chain bottlenecks amid high demand for goods. Macklem said increases in carbon tax only added about 0.1% to Canada’s inflation.

Critics’ Claim: It Makes Little Sense to Have Both a Carbon Tax and Rebates

Response: The argument for both a carbon tax and carbon tax rebate is this: the carbon tax incentivizes consumers and businesses to choose lower-carbon options, such as smart thermostats or hybrid/electric vehicles, while the rebate maintains purchasing power. What’s more, according to the Parliamentary Budget Office, approximately 80% of Canadian households will get more money back from the rebate than what the tax costs them, with lower income households benefiting more than higher income households.

Critics’ Claim: Carbon Pricing Harms Canadian Business Competitiveness

Response: The intent of carbon pricing is to stimulate innovation by encouraging the development and usage of low-carbon technologies for Canadian business. Currently, in most provinces, there’s what’s called an “output-based carbon pricing system,” which means that large industries only pay the carbon tax on the last 10% to 20% of their emissions: lower emitter firms pay less, higher emitting firms pay more.

Critics’ Claim: Carbon Pricing Isn’t Necessary

Response: The word “necessary” is a loaded term. There are costs to any type of carbon pricing and the carbon tax is arguably, according to the letter-writing economists, the most cost-efficient way for Canada to meet its climate targets. While critics want to amend or scrap the tax altogether, there has not been a viable replacement offered for the tax that would help Canada reach its emissions reduction goals.

Critics of the Carbon Tax

The most vocal critic of the carbon tax has been Conservative Leader Pierre Poilievre and his supporters (including Ontario’s Doug Ford, Newfoundland’s Andrew Furey, PEI’s Dennis King and New Brunswick’s Blaine Higgs, all conservative premiers) touting his catchy and percussive “Axe the Tax” and “Spike the Hike” slogans. (Back in 1989 there were “Axe the Tax” rallies over the proposed GST.) Their argument is that the tax creates an unfair financial burden on Canadians already reeling from the cost of high inflation. Poilievre said he would scrap the tax if he forms a government after the next election, currently scheduled for 2025. However, there is no clear indication of what would replace the carbon tax to help Canada reach its emissions reduction targets.

In addition, if the carbon tax was axed, the Canada carbon rebate would also be scrapped, and that would affect Canadian households in different ways. While higher income Canadians (who, in general, have higher carbon tax costs) would benefit from scrapping the tax, lower income Canadians, who pay less in carbon tax and benefit more from the rebate that makes up a larger share of their income, would lose out. According to a Statistics Canada model, as reported by CBC, 94% of households with incomes below $50,000 received rebates that exceeded their carbon-tax costs in 2023.

Another vocal critic of the carbon tax has been Canadians themselves: according to a November 2023 Angus Reid poll, 42% of Canadians are calling for the tax to be abolished, while 17% would lower it temporarily for the next three years, and 25% would hold off on any increases. Only 15% said that the carbon tax should increase as planned. It’s important to put this within the context of changing priorities: only 22% of Canadians said that climate change is among the top issues facing Canada, compared to 34% in 2021 and 40% in 2019.

What’s more, a survey released by Nanos Research in December 2023 found that almost half of Canadians (46%) said that the carbon tax is ineffective at combating climate change, while 21% say it is effective. Looking more closely at the key findings, 44% said the carbon tax is an ineffective way to encourage people to use less fuel, while 11% said it was effective or somewhat effective (25%). Over half (or 52%) of Canadians prefer protecting the environment in the long-term over keeping costs down today (40%). Notably, 6% more Canadians said the carbon tax was effective since the survey was last conducted in July 2023.

Part of the problem lies in that the government’s carbon pricing policy, both the tax and the rebate, has been poorly communicated to Canadians who might not clearly understand the economic and environmental harm that could result if we do nothing to curb greenhouse gas emissions. It can also be challenging to parse out how much impact the consumer tax is having as it is just one of a multi-pronged approach to reducing GHG emissions.

There are also questions on whether consumers should carry the burden of pollution pricing. According to a report from the Canadian Climate Institute, climate policies are working. However, industrial carbon pricing has three times the impact on greenhouse gas emissions as the consumer carbon tax. Put differently, industrial carbon pricing is projected to reduce emissions by between 23% and 39%, while the consumer carbon tax reduces emissions by between 8% and 9%. However, the report also notes that, “Achieving Canada’s emissions reduction targets requires that governments implement a mix of policy measures—no single policy will get the job done.”

A study from August 2022 concluded that carbon taxes can “effectively reduce carbon emissions or at least dampen their growth while not negatively affecting economic growth, employment, and competitiveness.” Meanwhile, B.C.’s provincial carbon tax, first implemented in 2008, has reportedly cut emissions between 5% and 15% without adversely affecting economic growth. However, it can be a hard sell to get Canadians to understand how paying more at the pump or in home heating costs can help save the environment—even with a rebate aimed at helping soften the blow. What’s more, while the carbon tax may arguably be an imperfect solution to a massive problem, any action taken to address climate change will have its costs.