Backgrounder on Carbon Taxes within the Canadian Context

There is a lot of talk in Canada about carbon taxes recently as new regulations have been implemented in Alberta and Ontario at the beginning of 2017. The federal government, after the Prime Minister’s announcement on Oct. 3 of 2016, has also mandated that all the remaining provinces in Canada put a price on their greenhouse gas (GHG) emissions by 2018 [1]. All Canadians would then be under a carbon price or tax which is administered by the provincial governments. But the carbon tax is not just applied to carbon dioxide (CO2) as is mostly assumed. It is applied to a variety of GHGs that include methane, nitrous oxide, and various other gases.

Why do we call it a carbon tax?

As talked about above, there are more GHGs than just CO2, these GHGs use a system called global warming potential (GWP) to determine how much equivalent CO2 would carry the same effects. CO2 then is assigned a GWP of 1 to create a reference point for comparison. Methane, because it has a larger impact than CO2, is assigned a GWP of 25. This means that 1 tonne of methane released into the atmosphere has the same impact as 25 tonnes of CO2. The term then becomes CO2e, or CO2 equivalent.

Other gases have GWPs that are much higher than CO2 and methane. Some of these numbers reach the tens of thousands but, we refer to GHGs in terms of carbon as it is the most common form of GHG. Businesses must calculate the tonnes of CO2e that have been emitted so that they may be charged under carbon taxes, which will then be audited. This means that beyond just the CO2 emitted, companies are charged for the other gases which may have a GWP, and also incur all the costs of administration of the system and auditing. But that does not mean that all emissions are taxed, there are some that are exempt.

What emissions are actually taxed and how does it impact export businesses?

Globally 13% of GHG emissions are taxed under some form of carbon pricing, whether that is a direct tax, cap & trade, or a performance-emission standard. The maximum amount of emissions coverage of any system in the world in 2017 is, supposedly, in Alberta with an approximate 90% of emissions covered. In fact, the carbon tax coverage in Canada covers a larger portion of emissions than all but two other jurisdictions, California (which has the same coverage as Quebec in a linked system) and South Africa (which has higher coverage than only BC in Canada) [2].

The governments within Canada have so far chosen to avoid putting a tax on agriculture and waste emissions and on industrial process emissions. The emissions that are priced are those that come from the combustion of fuels (ex. gasoline and coal or natural gas-powered electricity emissions). The industrial process emissions are those that escape intentionally or unintentionally from industry in the normal course of business through methods other than combustion (ex. natural gas leakage in a pipeline).

As can be seen, Canada is pricing carbon emissions more aggressively than any other jurisdiction in the world and, by doing so, will create an unequal competitive playing field for any export-oriented company in Canada. The included emissions are taxed wherever they are generated, regardless of exports or nature of business. This creates enormous risk to those businesses in Canada which are emissions-intensive and trade exposed (EITE). Further compounding the cost is that even if emissions are taxed at some given price, that does not mean that the stated price is all consumers or businesses are paying for carbon.

How carbon is actually priced

Using the above information, governments have chosen a number of ways in which to tackle GHG emissions. Those include the regulations and government controlled actions which reduce carbon emissions or are intended to reduce emissions and carbon pricing mechanisms. All options which the government chooses have an impact on the costs of businesses and consumers in Canada whether implicit (regulations and government-controlled actions) or explicit (carbon pricing mechanisms). Explicit costs of carbon are those which are often much more discussed but they are really only a part of the total cost.

Implicit costs of carbon are not included in the overall calculation of carbon taxes which are being paid in Canada. These are additional costs which must be absorbed by the consumers of services for which they often have no alternative. Most of these implicit costs have been imposed through increases in heating and electricity bills related to changing from a process which is high in emissions to one that has low or zero emissions (ex. Muskrat Falls). These costs will not be broken out to show consumers what is spent on their GHG reductions and, in most jurisdictions, does not come with any consideration to the overall impact on consumer costs.

What does all of this really mean?

Most information is unclear on what exactly is included in carbon pricing. While CO2 is the most common form of gas included in carbon pricing, any gas which is determined to have a GWP is included when calculating the overall cost that emitters have to pay. But not all emissions are created equal in the eyes of the government and some are not taxed. Mostly, emissions from agriculture and waste are not included even though agricultural emissions are the second largest contributor of GHG on a global scale [3]. Lastly, governments have undertaken steps to reduce emissions but these costs are hidden from consumers. By hiding the costs on these emissions they are not included in the overall burden which is faced by businesses and consumers.

All of this adds up to a system that is not easily accessible as people will not be able to truly understand how much they are paying and how much it will cost the economy. It is important for all Canadians to be informed about this issue as it could have extremely large consequences for the future. Everyone must get involved and become informed about the risks associated with poor regulations.

  1. K. Harris, “Justin Trudeau gives provinces until 2018 to adopt carbon price plan,” CBC, 03 October 2016. [Online]. Available: [Accessed 13 February 2017].
  2. World Bank Group, Ecofys, and Vivid Economics, “State & Trends of Carbon Pricing 2016,” The World Bank, Washington DC, 2016.
  3. Environmental Protection Agency, “Global Greenhouse Gas Emissions Data,” US Government, [Online]. Available: [Accessed 13 February 2017].