Policy Memo: Eliminating exemptions to the carbon price in Atlantic Canada is good policy: memorandum to the federal Ministry of Environment and Climate Change

Executive Summary 

Recent exemptions made to the carbon pricing regime risks terminally damaging the standing of the program in the eyes of Canadians. Specifically, exemptions to the federal fuel charge for heating oil will dilute incentives to reduce emissions in the short run, and damage confidence in the government’s commitment to carbon pricing in the long run. 

Instead, the government should implement targeted policies for the most vulnerable groups of Canadians, particularly those uniquely impacted by the carbon price. The following recommendations can put the carbon pricing program back on the right path: 

• Consider accelerated return of the Canada Carbon Rebate to vulnerable Canadians in highly impacted regions, particularly ahead of winter; 

• Work with local and regional governments to increase support for transitioning from heating oil towards alternatives, such as heat pumps and home retrofits; and 

• Build on the success of the proposed Maritime Link transmission line and identify more opportunities to decarbonize and lower electricity supply costs in Atlantic Canada. 

Background 

Experts agree that one of the most economically efficient policy instruments to reduce emissions is by placing a price on carbon (Macaluso et al., 2018). A carbon price works because it changes economic behaviour in response to the price signal (Congressional Research Service, 2019). With expectations of rising carbon prices, consumers and businesses invest in low-carbon technologies or innovation to lower their exposure (Canada’s Ecofiscal Commission, 2018). In Canada, the federal government established a “backstop” carbon price, via the Greenhouse Gas Pollution Pricing Act (GGPPA) (Government of Canada, 2024). It is implemented through two price signals: (i) the federal fuel charge, applied to consumer fossil fuel use, and (ii) the output-based pricing system, applied to large industry. Every year, the price increases by $15 per tonne of carbon dioxide equivalent (CO2e). 

The benefits of carbon pricing in Canada were demonstrated by the experience of British Columbia (BC), an early adopter. BC’s carbon pricing regime was estimated to have lowered the province’s emissions by 5-15%, with limited economic impact (Murray, B., & Rivers, 2015).  

However, empirical research shows that carbon prices have a disproportionate impact on vulnerable populations and carbon-intensive industries, which often makes them politically unpopular (Shang, 2023). Upon implementation in Canada, some commentators deemed the federal carbon price as both uneven and unfair, particularly for rural and lower income regions of the country (Canadian Institute for Climate Choices, 2021).  

In October 2023, the federal government announced a three-year pause on the federal fuel charge on delivery of heating oil (Government of Canada, 2023). Heating oil is primarily used in Atlantic Canada where about 20-30% of all homes in the region use it for residential heating (Natural Resources Canada, 2024). A larger share of Atlantic Canadians face higher home heating costs than other Canadians because heating oil is a higher emitting fuel and there is a lack of natural gas alternatives. They are also among the lowest income Canadians, meaning the higher costs place a greater energy burden on these households (Hughes, 2024).  

However, these exemptions have negative ripple effects, with criticisms of political expediency diluting the program (Government of Saskatchewan, 2023). Worse, it has created policy uncertainty for long-term investments that rely on an increasing carbon price for their own business cases. 

Recommendations 

There is still time for the federal government to redeem the carbon price. Elimination of all exemptions and replacing them with timely and robust interventions for the hardest-hit Canadians would be both politically acceptable and economically efficient.  

Currently, the federal government returns proceeds from the fuel charge to eligible Canadians through a per-capita rebate, known as the Canada Carbon Rebate (CCR) (Government of Canada, 2024). The government can build on this approach and establish an accelerated rebate for Canadians in the impacted regions, particularly ahead of the winter heating season to cushion the burden on their energy bills. 

Next, it is imperative that in the medium-term, residential customers are supported in making investments to transition from heating oil to heat pumps or other alternatives. The federal government should work with local governments to lower costs and accelerate programs such as the Oil to Heat Pump Affordability Program (Natural Resources Canada, 2024). Such programs can be scaled at a faster rate. 

Finally, increasing electricity demand via heating electrification should be supported by a cheaper and cleaner electricity supply. Some Atlantic Canada provinces have relatively carbon-intensive electricity systems, with multiple coal-fired generation units still online. To credibly encourage electrification with a carbon price, federal government should support a lower-cost and lower-emitting electricity grid. For example, the federally supported Maritime Link transmission line between Nova Scotia and Newfoundland is anticipated to reduce generation from coal and oil from 59% of Nova Scotia’s fuel mix in 2012 to 34% by 2030 (Government of Nova Scotia, 2024). More work is needed to ensure the switch to electric heating does not unexpectedly increase costs to Atlantic Canadians. 

A carbon price alone is not a panacea, but if left unsupported without complementary policies, it will be doomed to fail under its own political weight. However, well designed policy interventions can improve its chances of long-term survival. 

 

^References 

^{Canada’s Ecofiscal Commission. Clearing the Air: How Carbon Pricing Helps Canada Fight Climate Change. April 2018} 

^{Canadian Institute for Climate Choices. 2020 Assessment of Carbon Pricing Systems. Prepared for Environment and Climate Change Canada. 2021} 

^{Congressional Research Service. Attaching a Price to Greenhouse Gas Emissions with a Carbon Tax or Emissions Fee: Considerations and Potential Impacts. March 22, 2019} 

^{Government of Canada. Greenhouse Gas Pollution Pricing Act. Most recent revision: June 20, 2024} 

^{Government of Canada. How Carbon Pricing Works. Most recent revision: November 2024.} 

^{Government of Canada. Lowering energy bills for Canadians across the country. October 26, 2023.}  

^{Government of Nova Scotia. The Maritime Link. Nova Scotia’s Connection to a Better Energy Future. August 26, 2024} 

^{Government of Saskatchewan. Government Directs SaskPower to Remove Federal Carbon Tax From Electric Home Heating. December 4, 2023} 

^{Hughes, Larry. Why the carbon tax often costs more in Atlantic Canada. Policy Options. January 23, 2024} 

^{Macaluso, Nick, et al. "The impact of carbon taxation and revenue recycling on US industries." Climate Change Economics 9.01 (2018)} 

^{Murray, B., & Rivers, N. British Columbia’s revenue-neutral carbon tax: A review of the latest “grand experiment” in environmental policy. Energy Policy, 86, 674-683. 2015. https://doi.org/10.1016/j.enpol.2015.08.011} 

^{Natural Resources Canada website. Oil to Heat Pump Affordability Program. Most recent revision: October 2024.} 

^{Natural Resources Canada. Comprehensive Energy Use Database. Residential Sector. Table 21: Heating System Stock by Building Type and Heating System Type. Accessed at: < https://oee.nrcan.gc.ca/corporate/statistics/neud/dpa/menus/trends/comprehensive/trends_res_atl.cfm>} 

^{Shang, Baoping. "The poverty and distributional impacts of carbon pricing: Channels and policy implications." Review of Environmental Economics and Policy 17.1 (2023): 64-85}