8 Affordable Energy

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The policies required to achieve Canada’s climate goals will directly and indirectly affect household budgets. Whether a policy subsidizes energy-efficient retrofits to make them more affordable or raises the price of gasoline to encourage the use of cleaner alternatives, households will be affected by the transition to a low-carbon economy. Even policies targeting businesses and industry can trickle down to households through prices for things like vehicles and food. Policies can also positively affect household incomes: for example, by rebating carbon price revenues to households or by influencing the types and availability of jobs in the economy.

Headline Indicator #8: Household Energy Expenditures as a Share of Total Expenditures

These costs and benefits are often distributed unevenly. In some cases, mitigation policies, such as subsidies for public transit or means-tested rebates, can make low-income households and marginalized groups better off. In other cases, policies can have regressive impacts, disproportionately affecting those least able to afford it and exacerbating pre-existing inequities. 

While climate policies cannot be expected to address complex and deep-rooted socio-economic problems, they can at least ensure those with fewer means are not left worse off. In many cases, they can address climate issues and social issues in parallel.

Governments can take steps to design policies to ensure they are fair. Monitoring household costs and impacts allows policy makers to see the real-world implications of climate policies within the context of pre-existing vulnerabilities and assess the affordability of essential goods and services. Such data can help policy makers pivot and adjust accordingly. And while climate policies cannot be expected to address complex and deep-rooted socio-economic problems, they can at least ensure those with fewer means are not left worse off. In many cases, they can address climate issues and social issues in parallel.

To inform distributional impacts of climate policies, we focus on three areas of household energy expenditure most likely to be affected by mitigation policies: energy use in homes, vehicle fuel, and public transit. Figure 8.1 shows the (average) share of these household expenditures across income quintiles between 2010 and 2017.1

The data suggest that households in the second, third, and fourth income quintiles spend a larger share of their budget on energy expenditures and therefore might be the most financially vulnerable to increases in energy expenditures. These three quintiles include lower-middle-class to upper-middle-class households that might live in medium- to large-sized suburban homes, sometimes with multiple vehicles, which together result in higher energy expenditures. 

Climate policies have likely had some influence on changes in household expenditures over time but the aggregate impact is unclear. Regulations to reduce GHG emissions from electricity production, for example, have put upward pressure on electricity prices in some provinces (Doluweera et al., 2018). Mandates to blend biofuels with gasoline and diesel put upward pressure on fuel prices at the pump (Canada’s Ecofiscal Commission, 2016). At the same time, improvements in energy efficiency standards (e.g., for vehicles, appliances, light bulbs, furnaces, etc.) and household rebates/subsidies have helped reduce energy bills but do not show up explicitly in the data, including rebates in provinces and territories where the federal carbon price is applied. Critically, each of these policies have helped Canada reduce its GHG emissions. 

Other factors are also at play with the trends in Figure 8.1. Total household spending on energy over this period increased for every quintile, except the lowest. But because total household expenditures increased at a faster rate (i.e., household spending on everything else), the share spent on energy went down.2 At the same time, changes in global commodity prices, increasing energy demand, and consumer preferences also affect household expenses. Natural gas and gasoline prices, for example, have trended downward since 2014, whereas electricity prices have generally trended upward (CER, 2017a). 

  1. These expenditures include all home electricity and heating energy use (electricity, natural gas, furnace oil), transportation fuels (gasoline, diesel), and public transit (fares for bus, rapid transit, subway, commuter train, and taxis). We include public transit to create a fair comparison for households that do not use private vehicles. Due to incomplete data, we excluded natural gas expenditures for the Atlantic provinces and Quebec. Similarly, we excluded expenditures on ‘other fuels’, such as furnace oil and firewood, for the Western provinces. These missing data are unlikely to change the trends in Figure 8.2, as these fuel sources comprise a relatively small share of the energy system in each respective region.
  2. These higher total expenditures likely reflect higher incomes and higher levels of household debt.
  3. The 10 per cent benchmark for energy poverty was developed by Boardman (1991). It measures households spending more than twice the median amount on household energy and vehicle fuel. Even though the threshold was developed in the 1990s in the U.K., it is still relevant in Canada. While we do not have access to median household expenditures, the average household spent approximately seven per cent of their total expenditures on household energy, vehicle fuel, and transit. Given that the median is likely less than the average, a threshold of 10 per cent would likely work out to close to double the Canadian median.
  4. To estimate the emissions intensity of electricity generation in the Atlantic provinces, we took the average intensity across the four provinces for 2017: Nova Scotia (680 g/kWh), Prince Edward Island (14 g/kWh), New Brunswick (260 g/kWh), and Newfoundland and Labrador (40 g/kWh). Data is from Canada’s National Inventory Report for 2020 (ECCC, 2020).