Ottawa’s heavy-handed approach undermines carbon tax incentives

There was always an incongruity between the strength of a carbon tax as a way to encourage reductions in greenhouse gas (GHG) emissions and the Trudeau government’s more activist approach to policy and managing the economy. That incongruity recently became irreconcilable, with the government’s heating oil exemption, which has raised the ire of western provinces.

The basic idea of a carbon tax is to increase the cost of emitting GHGs and thus encourage businesses, individuals and entrepreneurs to fully incorporate the cost of emitting in their economic decision-making. This bottom-up approach relies on individuals to make decisions within a larger economic environment that includes a price on carbon.

Some may decide to incur the carbon tax to retain their production processes, supply chains and technologies. Others might assess the costs of the carbon tax and decide to invest in new technologies, and/or change their production and supply chains. But the key is that individuals, businessowners, managers and entrepreneurs determine their response to the cost and benefits of GHG abatement.

This “create the right environment and let people make their own decisions” is largely anathema to the Trudeau government, which prefers a much heavier, hands-on approach whereby politicians and bureaucrats determine outcomes and then impose regulations and provide subsidies to ensure their preferred outcome is achieved.

This is not hyperbole. After the Trudeau government introduced the carbon tax, it imposed additional regulations. For example, it banned the shipment of fossil fuels off the west coast (but allowed it on the east coast), created a new process for the approval of large infrastructure projects that all but prevented new pipelines (the Supreme Court recently overturned many of these regulations), and decreed that all vehicles sold in Canada by 2035 be electric, and the list goes on and on.

And so the picking winners and losers continues in Ottawa, but now with a new twist. This time rather than layer new regulations on top of the carbon tax, which violates the basic principles of a carbon tax, the Trudeau government has instead exempted home heating oil from the carbon tax for three years.

The Trudeau government seemingly made this unexpected change based on feedback from Atlantic Canadian MPs who are hearing from constituents about rising home heating costs at a time when affordability is by far the most important issue to Canadians.

Rather than broadly exempt home heating sources from the carbon tax, Prime Minister Trudeau narrowed the exemption to home heating oil only. According to data from Statistics Canada, home heating oil comprised up to 55.8 per cent of the energy used to heat homes in Atlantic Canadian provinces in 2019, the latest year of available data. But in Ontario and western Canada, natural gas—not home heating oil—is used for the vast majority of home heating, up to 80.5 per cent in 2019 depending on the provinces. Simply put, the Trudeau government picked winners (Atlantic Canadians using home heating oil) and losers (the rest of Canadians who use other sources to heat their homes).

This government’s entire approach to climate change runs contrary to a well-designed and functioning carbon tax. So there’s a legitimate question to ask—given its predisposition to pick winners and losers, and actively manage the economy, will the Trudeau government ever implement and maintain a functioning and effective carbon tax?