Several provinces are currently challenging the federal carbon tax. At last week’s meeting of premiers, Quebec’s François Legault confirmed Quebec would be joining several other provinces before the Supreme Court to defend provincial autonomy in the choice of GHG (greenhouse gas) reduction policies.
The tug of war between Ottawa and the provinces obscures a fundamental problem: neither the federal government’s carbon tax nor the cap- and-trade carbon market Quebec operates jointly with California is currently applied properly. In addition to being harmful, they are inefficient, hurting our companies’ competitiveness.
The problem is the same in both cases: in an economy where imports and exports represent a significant share of GDP, a carbon tax applied only to local producers makes them less competitive. For Quebec companies not to be disadvantaged by the cost of emissions permits, the province’s carbon market would have to be adopted by most of its trading partners. But it hasn’t been.
The United States, Quebec’s main trading partner, does not generally tax GHG emissions. Though California is part of the same carbon market as Quebec, it does not trade much with the province. Most American companies selling into Quebec therefore benefit from a competitive advantage in being able to charge less for their goods and services.
This holds true both for American companies selling to Quebec and for those based in the U.S. that compete with Quebec exporters. It’s also true for interprovincial trade: differences between carbon pricing systems across Canada create competitive distortions that hurt some companies and benefit others.
From this perspective, the advantage of a harmonized carbon tax in Canada is easier to understand. So is the opposition of Alberta, Ontario, and Saskatchewan to the federal tax. Though it will reach $ 50 per tonne of GHGS in 2022 the price of carbon in Quebec could remain around $23 per tonne.
It was precisely to allow Canada to be more competitive that the Manufacturer’s Sales Tax was abolished several years ago, to be replaced by a value added tax (the GST) that does not discriminate between companies, be they local or foreign. We should take the same approach in this case. If we must adopt a carbon tax in Canada without our trading partners doing the same, it should be a tax on consuming carbon, not producing it. When you fill up your tank, you should pay the same carbon tax whether the gas came from Canada, Algeria or the United States. The same should be true for all consumer products.
It’s not a question of who pays the tax, companies or consumers. Companies will pass it on to consumers when they can but will have to swallow it when their foreign competitors haven’t had to pay it. You don’t need to be an economist to see how this will affect companies’ financial health or their ability to provide employment.
To be fair, a consumption tax of this sort should be fiscally neutral for consumers, either by lowering their tax burden accordingly or by returning the revenues generated directly into their pockets.
European experience illustrates the limits of taxing pollution. Several European countries brag about how they have reduced their GHG production, but the products they consume are often made in emerging countries whose environmental records are considerably worse than ours.
In sum, if the provinces want to tax GHG emissions themselves, they have every interest in harmonizing their rates. But they should target the consumption of carbon, not its production. As for Quebec, the conclusion is obvious: the carbon market, in which our province is all but alone, has to go.
Luc Vallée is Chief Operating Officer & Chief Economist at the MEI. The views reflected in this op-ed are his own.