Facing rising energy prices and legitimate concerns around affordability, the federal government is under pressure to carve out exemptions to its carbon pricing system, particularly for rural home-heating fuel in Atlantic Canada.
Keeping essentials like energy affordable is a serious concern, but carbon-pricing exemptions are the wrong solution. There are better options available: temporary, targeted approaches can provide support where it’s most needed, without undermining incentives to reduce emissions.
Energy affordability is critical, and the carbon-pricing system is designed to address this issue, though additional measures may be needed. The federal carbon pricing backstop returns most of the revenue generated back to households in the form of quarterly rebates. People in rural households get a bigger rebate. That means most households—especially low-income households—get more money back than they spend on carbon costs. And contrary to popular opinion, these rebates do not undermine the effectiveness of the carbon price: households that take actions to reduce emissions can avoid the carbon price and get the rebate.
Carbon pricing is Canada’s best tool to reduce the greenhouse gas emissions that cause climate change. It gives businesses and households across the country a powerful incentive to switch to cleaner fuels and use energy more efficiently—and thus avoid paying the carbon price. The evidence shows that it works. But it works best when applied evenly across all regions and all sectors of the economy.
Carbon pricing works to reduce emissions by sending long-term signals to businesses and households. Expectations around future carbon prices matter for families who are considering investing in heat-pumps that can offer energy savings for years. They matter for businesses planning for future growth and competitiveness. And they matter for innovators developing new technologies that will reduce more emissions at lower costs, because they create markets for those products.
In other words, the more policy certainty there is regarding the carbon price and its future path, the more effective the carbon price will be at driving the long-term low-carbon investments required for reducing emissions.
Exemptions to carbon pricing would be short-sighted because they would undermine all of those benefits.
Exempting fuel for buildings, for example, would eliminate any incentives to reduce emissions in this sector – but this is an important and growing source of emissions across the country. So such exemptions would make achieving Canada’s emissions targets more difficult.
Exemptions would also increase the cost of achieving our targets. Doing less to reduce emissions in buildings, for example, would require doing more emissions reductions in other sectors or other regions.
Finally, exemptions would create a dangerous precedent for meddling with carbon pricing systems whenever market conditions get hard, diluting certainty about future carbon prices. If the government were to adjust the carbon price every time there is some kind of economic disruption, we would never get very far on the path to achieving Canada’s emissions goals.
Climate change isn’t going away as a problem, it’s getting worse. So our single best policy response needs to be steadfast.
That’s not to say governments shouldn’t think about affordability. They absolutely should. But other policy options are better than exemptions, which would deliver short-term relief while causing longer-term harm.
Instead of exempting certain types of fuels or activities from carbon pricing, governments could reduce costs for households by creating special rebates (similar to the grocery rebate in the 2023 budget). They could be explicitly temporary, designed to address cost of living issues from high inflation and energy costs. It could be explicitly aimed at low-income households that are most vulnerable to higher costs of living. This approach would be fiscally affordable, and would not undermine incentives to reduce emissions established by the carbon price.
The federal government should be congratulated for having the courage to implement fiscally sound, ambitious climate policy.
But it should also have the courage to stay the course. Diluting carbon pricing through exemptions leads to the worst of all worlds: weaker, less cost-effective policy, and uncertainty for business and investors.