Carbon Tax

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Slippery slope for carbon tax

Heating oil tax pause comes with risk

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I have, in the past, been a strong advocate for the carbon tax in these pages.

That's because I believe that markets work to allocate resources efficiently and to the greatest benefit for the largest number of people.

By pricing carbon pollution to reflect its cost to the future, we signal to consumers and producers that they will benefit by finding less polluting alternatives.

That way we get the change we need without regulations and laws and the unproductive bureaucracies that enforce them. I have consistently praised the government for its resolute commitment to this approach.

No tool is perfect however. In the case of the carbon tax, if your only alternative to heat your house has been oil, because you live in an area without natural gas supplies, you will pay a lot more carbon tax because burning oil generates more carbon than natural gas does.

If you get the same climate action incentive (rebate), until a better option comes along, you will suffer financially more than other Canadians.

That seems unfair. In response to this the federal government has just decided to pause the carbon tax on heating oil for homes and small businesses for three years, increase the climate action incentive rural top up and provide incentives for heat pumps.

This is doubtless well-intentioned, but it raises questions.

One: it favours one technological solution to the problem, identified by the government, rather than by the market. Heat pumps may well be the right answer to heating homes with less carbon pollution, but so might geothermal or some technology not yet imagined.

Two: it means natural gas users are now paying carbon tax to heat their homes when oil users are not. This is perverse, since oil generates more carbon emissions than natural gas does.

Three: it opens the door for other groups to claim unfairness and argue for further exemptions, which we are seeing in spades as some provinces are pushing back and groups such as farmers look for relief.

A different way to address the burden of higher heating costs for oil-fuelled furnaces would have been to increase the climate action rebate for rural users, which is already higher than for urban residents. They need a bigger rebate because they are paying more carbon tax.

This would have left in place the high cost of heating with oil and created a market incentive to seek less expensive alternatives, which would mean ones that don't attract as much carbon tax: cleaner options.

This would have increased the opportunity for consumers to find other options and for industry to develop those options as quickly as possible, offering consumers savings with alternative ways of heating their homes.

And it would have left the market to pick the winners, instead of the government anointing the heat pump as the solution.

Full disclosure, I have an air source heat pump. It makes the house very comfortable both in summer and winter, and it cuts the gas consumption from the furnace substantially. It doesn't eliminate it though, as it only works to about -5 degrees Celsius. Ground source heat pumps are better, but still expensive.

If my heating costs get higher as the carbon tax rises, industry will look to develop improved ways for me to save that money, because it can profit by doing so. 

The carbon tax is not just aimed at consumer behaviour change. It is also aimed at making it pay for industry to invest in research and development to find less polluting ways to heat and cool homes and businesses, grow food, manufacture products, and lower transportation emissions.

The idea of the rebate is to make the carbon tax revenue neutral to the government while rewarding industry and consumer moves to cut carbon pollution. It's impossible to anticipate every possible unfairness that might arise from this, but this one was significant and needed addressing.

Choosing to do so by pausing the carbon tax on one of the most polluting fuels does help those dependent on it, but an increase in the rebate would have been a better approach. No doubt this was considered. The challenge of disadvantaging urban users of heating oil may have led to this imperfect option winning the day.

However, this is the first exemption to the carbon tax and will open the door for requests for others, putting the whole principle at risk. 

The government will have its hands full having opened up this argument. It is essential that it holds to the principle of taxing carbon and letting the market find ways to cut pollution to cut the cost of the tax, rather than cutting the tax itself.