As we detailed earlier this year, carbon taxes are rapidly becoming a normalized part of the Canadian business environment, yet many companies – even those most likely to feel the impact of this change in environment – are still in the process of mapping out an effective response. To a great extent, this is a wait-and-see approach, and until recently, a reasonable one. There was some confusion about the shape and scale of the carbon tax in any particular province, how it would be administered, and how it would affect any individual business. These questions could only be answered by actual events – and now those events are happening with increasing speed. The carbon tax is here, and Canadian businesses need to know the best way to address it.
Our quarterly Carbon Tax Report is designed to help bring Canadian companies up to speed on the progress of carbon taxation in different jurisdictions, and to provide an informed basis on which to make decisions on mitigating its effect on their business.
The Federal Mandate
The big news last quarter was the release of the federal government’s “Technical Paper on the Federal Carbon Pricing Backstop”, designed to provide a federally-administered carbon tax system for those Canadian provinces that do not have a system of their own, conforming to the “Pan-Canadian” benchmarks that Ottawa established last year. This means, basically, all provinces except Alberta, British Columbia, Ontario and Quebec, which have their own systems in place.
Structurally, the federal system resembles Alberta’s carbon tax. It involves a straightforward levy, applied at the time the fuel is sold by its original producer or distributor. Subsequent purchasers will buy at tax-included prices, and the only effect on them will be the higher purchase cost.
Controversy over the federal system has heightened with the vociferous opposition of the government of Saskatchewan, among others. The nature of Saskatchewan’s concerns continues to be communicated, but appears to be based on Ottawa’s implementation schedule and carbon price – which begins January 1, 2018 at $10 per metric tonne of greenhouse gas (GHG) emissions, and rises by $10 every year till it reaches $50/T in 2022.
It’s worth noting that, while prices vary in provinces operating their own systems, all are ahead of the federal schedule already, whether their price is set by government fiat, as in Alberta, or by market auction, as under Ontario’s cap-and-trade system. Saskatchewan has expressed its intention to fight the federal plan in court. Ottawa claims to be on solid legal ground, however, since the Constitution makes the environment a federal responsibility, but the outcome of this dispute may inform how some other provinces with concerns move forward.
Different Systems
Outside of Saskatchewan, though, implementation of a carbon price is generally proceeding – and its effect on business is becoming more evident.
The Alberta system has the virtue of simplicity, which should reduce a company’s cost of compliance. Edmonton sets a price per tonne of greenhouse gas (GHG) emissions, and then calculates the GHGs each kind of fuel emits per unit. The price per tonne is currently set at $20, giving a tax of 4.49¢ per litre of gasoline, 5.35¢ per litre of diesel, $1.011 per gigajoule (GJ) of natural gas, and so on. When Alberta’s GHG emissions price rises on January 1, 2018, to $30/T, all these unit taxes will rise by 50%.
The Alberta system sets a price per tonne of GHG emissions, and lets the market determine the quantity of fuels it wants at that price. Under Ontario’s cap-and-trade system, the quantity of GHG emissions is set (theoretically, at least), and the market determines, in auction bidding, the price it’s willing to pay. Ontario’s first auction was held at the end of March, and set a price equivalent to $18.08/T of GHG emissions. Bidders included large fuel producers, distributors and suppliers, who are mandated to participate, and the carbon price should then filter through the supply chain to consumers.
Revenue Neutral
Ottawa has declared their intention to make the carbon tax revenue-neutral – returning it to the jurisdiction from which it was collected in one form or another.
In Alberta, this means tax rebates, which are highest for lower-income taxpayers and get smaller as family income increases. The carbon tax revenue is also funding a 1% reduction in the small business tax, and a large amount of promised investment in clean energy innovations, public transit, and other emissions-reducing initiatives.
Ontario has published a list of proposed public investments of a similar kind – energy efficiency measures for social housing and indigenous communities, support to homeowners to reduce energy consumption, incentives to businesses for energy efficient investments, even support for electric vehicle recharging stations – but few specifics have been announced yet.
More controversy arose over the federal government’s application of GST to carbon-tax-paid fuel in Alberta, which some commentators said violated the “revenue-neutral” pledge. This may be an unfair characterization – since inception, the GST has always been applied to the final transaction price of all goods and services in Canada. Consequently, it is frequently levied on top of other taxes – at the gas pump, for instance, or on hotel bills – and while this policy does amount to a “tax on tax”, it is certainly not unique to the carbon tax.
A More Creative Approach
While granting that these expressions of government intent are laudable, we feel that more specific and effective measures are needed. The carbon tax, wherever it is applied, will generate substantial revenue. The purpose of the tax is not merely to punish GHG emitters – it is to provide a negative incentive to consumers, and especially to Canadian businesses, to increase investment in energy efficient technologies. A more balanced approach would include adding more positive incentives to the other side of the ledger.
Small and medium-sized businesses in Canada are very aware of the cost of energy, and would love to reduce their usage. Among the issues that emerged in a recent survey of manufacturers, conducted by the Canadian Manufacturers & Exporters, in association with BDO, the need to implement new technologies and to mothball aging facilities were among managers’ most pressing concerns, together with the rising cost of energy. All of these concerns could be addressed by earmarking more significant amounts of carbon tax revenue to provide meaningful investment incentive programs for businesses. Small and medium-sized businesses need these incentives the most – both because there are far more of them, and because their capitalization does not generally allow them the luxury of such significant investment.
While the respondents to this survey were manufacturers, the sentiments are likely those of small and medium-sized business operators in every sector – transportation, mining, construction and the rest. Alberta exempts fuel for agriculture from its carbon tax – while privileging one sector over the rest, this is nevertheless the sort of bold, creative thinking governments need to apply across the board, if the goals of a cleaner, more energy efficient Canadian economy are to be realized.
The carbon tax, in whatever form it takes, seems here to stay – and Canadian companies need to inform themselves about the impact it will have on their particular business, and what they can do to mitigate it. For a consultation with our energy or tax professionals, to help you map out a way forward, contact us or call your local BDO office today.