We need to decarbonize to avert climate catastrophe, according to the scientific consensus. (There is about as much disagreement on this as there is on the law of gravity at this point, so if you don’t buy into that, best to stop reading here.)
At long last Canada has decided to take steps to do our part. The centrepiece of the plan is a carbon tax that economists say will be large enough to bring our emissions down to meet the targets we promised to meet in the Paris agreement on climate change. There will be some other incentives and regulations, but new carbon tax is the key element of the plan.
So, what does it mean to an Oakville family?
- The bad news: The price of gasoline and heating fuels are going to go up, noticeably, over the next few years. Because so much of what we do creates carbon, like transporting food and other goods, making building materials, mining metals, pretty much everything in fact, the tax will raise the price of groceries, clothing, electronic equipment and appliances, housing and home improvement materials, flying and everything else. Your cost of living will go up.
- The good news: The government will compensate you with a rebate cheque every three months. For most people, this cheque will be for more than your costs increase. If you have a very large or inefficient home, drive gas guzzlers, and fly a lot, the cheque won’t offset the increases entirely, but most of us will actually be a little better off.
So, how is that supposed to help the country decarbonize?
Let’s try to illustrate with just one example of what a family might do in response to new carbon tax. Say the family has two cars and spend $300 per month on fuel today. In a couple of years, with the tax, the price of fuel will gradually increase, to $350, and then to even more. If the family does nothing, their standard of living will not change because the $50 increase is covered by the rebate. But knowing prices will keep going up, they decide to buy electric vehicles, putting $300 of the $350 per month they save towards the payment or depreciation of the new cars. Their rebate won’t change: so that’s a $50 per month raise.
If their natural gas home heating bill is $50 per month today and goes up with the carbon tax to $70 by 2024 (figures are for illustration only), let’s say they put in a heat pump to replace their air conditioner. Their furnace will work much less in the winter, so they will pay a bit more in electricity. Today, that would increase their heating bill because electricity is more expensive than natural gas. With the carbon tax that will change because in Ontario electricity generation produces very little carbon, now that Ontario’s coal plants are closed. So, with the carbon tax, natural gas will become more expensive, covered by the rebate, and shifting more of their heating to electricity will make sense. With the carbon tax, let’s say they save $20 per month using electricity instead of the ever higher priced natural gas. Their rebate won’t change, so there is another $20 in their pocket.
Now, groceries are shipped from all over by truck. The carbon tax on truck fuel will make them more expensive. Competing grocery chains will try to outdo each other to keep the costs down, and win consumers away from each other. They will do this by converting to less carbon intensive transportation and may even source produce from local suppliers: the closer the supplier the lower the transportation costs. So only part of the carbon tax will actually be coming out of a family’s pocket once this transition occurs, and eventually none, as growers and transporters eliminate carbon from the process of bringing us food. The carbon tax rebate will still be coming so that’s another raise.
The same thing will happen with electronics manufacturing, mining, building materials and everything else that we use in modern life.
The amount of revenue collected by the carbon tax will be equal to the amount given back to taxpayers, plus a little more.
As carbon usage drops by everyone making decisions, the amount collected will be maintained because the carbon tax keeps going up. Eventually though, the idea is that we squeeze all the carbon out of the system. As we get closer and closer to that point, there will be less and less tax collected and smaller rebates to pay.
On the way there, whoever cuts their carbon footprint the most will be getting paid to do so by the ones still paying the carbon tax: rebates will be subsidized by those who have not shifted to lower carbon transportation alternatives, heating options, or chosen to purchase less carbon intensive products. Their standard of living will not have changed, but a family will have had a raise in disposable income, if the family reduces the amount of carbon they use.
That means this is a race: the financial benefits of decarbonizing will go to those who do it the fastest, and the costs of those benefits will be borne by those who do it last. The faster a person cuts their use of fossil fuels, the more the rebate will be a bonus and not just an offset to the carbon tax. The slower they do it, the more the tax they pay will be bigger than the rebate they get. Since changing to less carbon intensive practices requires investment, the sooner you do it the more that investment will bring returns.
By moving as quickly as you can and being smart about it, the carbon tax and rebate can actually make you meaningfully better off.
Ladies and Gentlemen, we are at the starting line: to the victor go the spoils!