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Canadian Prime Minister Justin Trudeau is betting his reelection on a carbon tax

The revenue would be returned to citizens as rebates, which might change the politics.

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Climate policy has taken a remarkable turn up in Canada, where Prime Minister Justin Trudeau is effectively betting his reelection on the political salability of a nationwide carbon tax. (I can’t believe I just wrote those words.)

Back in 2015, when he was first running for prime minister, Trudeau pledged that under his leadership, the federal government would implement a nationwide carbon price — and would impose such a price on any province that did not develop its own.

Trudeau’s government has since developed a fully fleshed-out plan to meet Canada’s carbon targets under the Paris climate treaty, and sure enough, at its heart is a price on carbon emissions. For the past two years, Ottawa has been working with provinces to develop systems appropriate to each province’s circumstances.

Three provinces — British Columbia, Alberta, and Quebec — already have carbon pricing systems in place that meet the federal government’s guidelines. Nova Scotia, Prince Edward Island, and Newfoundland and Labrador have worked out programs of their own that they will announce soon.

That leaves four holdouts: Ontario, Saskatchewan, Manitoba, and New Brunswick. In each case, there is some tangled backstory, but we’ll keep it brief.

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Doug Ford (on the left), back when he was merely a Toronto city councilor, with his brother, then-Mayor Rob Ford.
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Ontario actually had a carbon pricing system (a cap-and-trade system) until it elected Doug Ford, a kind of Canadian Donald Trump and brother of the infamous former mayor of Toronto. He scrapped that system, declared undying opposition to a federal carbon tax, and now plans to sue the feds.

Conservative Saskatchewan Premier Scott Moe, who ascended to his position earlier this year after the previous premier resigned, made his career fighting a federal carbon tax; his province never signed on to the larger climate plan (the “Pan-Canadian Framework”), and earlier this year it pulled out of talks with the federal government entirely.

Somewhat more surprising, earlier this month, conservative Manitoba Premier Brian Pallister — who had been participating in the framework and developing his own plan — abruptly abandoned those efforts and withdrew from talks.

New Brunswick is ... well, it’s complicated.

No one is quite sure why Pallister bailed, but it likely involves pressure from fellow conservatives, who are attempting to use Trudeau’s climate policies to rally their base. Federal elections happen in late 2019. Currently, polls have Trudeau in a tight tie with his conservative opponent, Andrew Scheer, who has promised to revoke any federal carbon tax.

Nonetheless, in the face of all the backlash, Trudeau is persisting. This week, his government announced that it would impose a “backstop” carbon tax on those four holdout provinces. “Pollution doesn’t stop at provincial borders,” he said, “so we’re going to move forward with a federal approach.”

It’s a risky gamble, to say the least. If it fails, liberals could lose control of the Canadian government. If it succeeds, Canada could vault into global leadership on climate change, with a national carbon reduction system that has few equals in scope or stringency.

On its own, Canada doesn’t account for much of the world’s carbon pollution, but as an example to other wealthy developed nations, its fate in coming years will carry enormous symbolic importance. It is fighting its own version of a battle — climate progressivism versus nationalist reactionaries — that is, on a larger scale, going to determine the fate of humanity.

So let’s take a look! What makes Trudeau so confident this is going to work, economically and politically?

Most of the money from the backstop tax goes straight back to citizens

The tax will start at $10 per ton this year, bringing in about $2.3 billion Canadian ($1.8 billion in US dollars), and rise $10 per year to $50/ton in 2022, when it will bring in about C$5.6 billion (US$4.3 billion).

Of that revenue, about 90 percent will be directly rebated to citizens of the provinces, in the form of yearly “climate action incentive” payments. According to the government’s estimates, the average family will pay C$202 to C$403 annually, depending on the province and their level of consumption, and receive a rebate of C$248 to C$598.

Around 70 percent of citizens will get more in rebates than they pay in taxes; that is, the tax system is net progressive. For most people, it is a net financial boost.

Households will get the first of those checks next summer, months before the federal elections. Trudeau’s big political bet is that the experience of receiving tangible benefits will soften the political blow of the tax, and perhaps even turn it into a positive.

This has long been the grand claim and hope of climate wonks who support dividend programs: that the dividends will render a tax politically secure. It’s just never been tested before on any real scale.

Now Trudeau is about to test it. Bigly!

(If you’re curious, the rest of the revenue goes to programs to help individuals and institutions lower their energy use; some is also dedicated to helping people in rural areas dependent on diesel generators.)

The test for the tax is entirely political

The boring truth behind all the fighting over carbon taxes is that until they get much higher than anyone has actually proposed, they just won’t have much of a macroeconomic impact. Canada has a $2 trillion economy — pulling $5 billion out of that is effectively nothing.

The Canadian government estimates about 0.1 percent lower GDP in 2022 as a result of the tax.

GDP with and without carbon tax Canada

And those models don’t even take into account public health improvements and innovation-induced growth, which could easily turn the net GDP impact positive. Either way, the effect is tiny relative to the larger uncertainties in GDP projections. It’s a fart in a hurricane — no one will hear it.

However, while Canadians are unlikely to notice the effects of the carbon price directly, they will definitely hear about it, through media. In fact, their primary experience of the tax is likely to be mediated through newspapers, television, and social media.

The outcome of the political fight will have little to do with the objective features or merits of the plan and everything to do with who wins the battle for public opinion.

The fact that the plan improves the financial situation of 70 percent of the people it affects is inconvenient for conservatives, so they’re mostly just ignoring it. Ford said, “This massive tax hike from the federal government will jack up the cost-of-living for each and every Ontario family and business.” Scheer said, “Life is going to get a lot more expensive for hard-working Canadians and families.”

Except ... it’s not. Most of them are going to be better off, especially as their insulation improves, they get an electric car, and they reduce their carbon consumption (and thus their carbon tax bill), while still getting the same size revenue check.

The other rhetorical strategy is simply to refuse to believe that the system will do what it says. Beyond that, what possible reality-based reason could there be for opposing a policy that simultaneously reduces carbon emissions (in the way economists almost unanimously agree is most efficient and costs the least) and fattens the pockets of most voters?

Conservatives will have a lot of familiar anti-tax narratives on their side, along with their own devoted media outlets. On Trudeau’s side? The checks.

People will receive the checks in the mail and see them with their own eyes. Then they will have to make a very personal decision about whether they would like to keep receiving the checks — whether they really want to rally and vote for politicians who promise to stop those checks coming.

Nothing blunts the effects of ideology like a few loonies and toonies in the pocket. Money is money. At least that’s the bet.

This is not a completely clean political test of tax-and-dividend — it won’t be in place very long before the election, and there will be many other political forces at play — but it’s about as close to a clean test as things get in the real world. It’s fascinating.

Two more things about Canada’s carbon tax

While I’ve got your attention, let’s quickly touch on two other things worth knowing about Trudeau’s plan.

First, the tax and rebates referred to above all come from the “fuel charge.” But there’s a second element of the plan: an output-based pricing system (OBPS) for emissions-intensive trade-exposed (EITE) industries.

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The Syncrude oil sands facility, extremely trade-exposed.
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Wait, what?

EITE industries are high-emitting industries that are exposed to intense international competition (think oil sands, petrochemicals, and pulp/paper). Because of their emissions, they are particularly vulnerable to a carbon price — and if it drives them out of business, international competitors simply pick up the slack. Emissions get moved offshore, not reduced.

So Canada would exempt EITE industries from the fuel charge (a.k.a. the tax). Instead, they would participate in these OBPS. Canada’s Ecofiscal Commission has a good explainer on output-based allocations (OBAs), but the basic idea is pretty simple.

Emitters in a particular sector are allocated credits based on their carbon output — or rather, based on the average carbon output of a facility in their sector. This average is the performance standard for the sector.

Poor performers, which fall beneath their sector’s performance standard, will have to buy more credits. Top performers, who beat the performance standard, have extra credits to sell. None of the money leaves the sector — it just circulates from worse to better performers. In this way, the sector as a whole is protected from a carbon price, but the incentive to reduce carbon emissions is retained. Pretty clever!

Second, this is not a carbon tax uber alles plan. Pricing carbon is not the only thing Canada is doing to reduce emissions. Rather, the tax is (appropriately) one part of a comprehensive plan that contains a range of complementary policies, including phasing out coal, boosting renewable energy and efficiency, and working with remote communities to reduce the use of diesel.

It’s a thoughtful plan, remarkably simple, transparent, and economically sound for something cooked up in a politically fraught context. If it’s put into place (and stays in place), it would vault Canada to the head of the international pack on climate policy.

But first it’s got to pass through the eye of a political needle, as the country decides in 2019, as the US did in 2016, whether it wants to ratify recent progressive changes. Until then, Trudeau is really hoping those dividend checks make an impression.

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