Canadian carbon taxes will hit emissions-heavy industries hard
The Canadian Federal Government has vowed to establish a pan-Canadian policy to tackle climate change following the UN Climate Conference in Paris (COP21) at the end of this month. Currently, four provinces in Canada have established a carbon cap-and-trade or carbon tax system, with the rest likely to follow in the months following COP21. However, according to a report by the Ecofiscal Commission, several industries engaged in emissions-intensive or trade-exposed activities would lose their competitiveness if a carbon tax was introduced across the country, including refining, cement production and oil sands.

Chris Ragan from the Ecofiscal Commission looks at a new report about what impact carbon taxes would have on the competitiveness of industry.

Certain sectors of Canada's economy are at risk of losing their competitive edge if provinces miscalculate their adoption of carbon taxes.

It's a danger as governments look at how they can put a price on carbon, which is viewed as one of the best ways to reduce emissions and address climate change.

Four provinces already have some type of carbon tax or cap-and-trade system. The rest of the provinces will likely follow suit, as the federal government is vowing to establish a pan-Canadian policy to combat climate change within 90 days of the UN climate conference in Paris, which begins in two weeks.

This is way too important of an issue to ignore. – Chris Ragan, Ecofiscal Commission

Introducing a carbon tax raises the price of most products, but the real risk for provincial governments that mishandle the policy would be driving some companies out of business or out of the country.

These are some of the findings in a new report released this morning by the Ecofiscal Commission, a think-tank based at McGill University. The group's board members include an oilsands executive, the head of an environmental group and politicians of every stripe.

The group advocates for taxing pollution and recycling the money back into the economy.

Most sectors are OK

The Ecofiscal report looked at how much of the country's economy would lose its competitiveness if a carbon tax was introduced. Its findings were simple — most of Canadian business is fine.

That's because much of our economy consists of the service sector, things like financial services, and adding a carbon tax wouldn't make much of a difference.

Conversely, the vulnerable industries are those that are emissions intensive or trade exposed. Companies that produce significant emissions will see costs rise, while businesses that rely on exports won't have much ability to increase their prices to cover the added expenses of a carbon tax. Examples of these industries include refining, cement production and the oilsands sector.

Impact of carbon pricing Duration 6:23 Chris Ragan of the Ecofiscal Commission says Canada’s economy can withstand a carbon tax The oilsands, in particular, fall into both categories as an emissions-heavy operation that also relies significantly on exporting to international markets.

"This is way too important of an issue to ignore. The last thing we want is for our producers, our firms, to shrink or close down shop and jump across the border and start up business there. Because we then bear the economic costs," said Chris Ragan, chair of the Ecofiscal Commission, in an interview. "Canada's emissions fall, but someplace else, they go up. Globally, there would be no environmental benefit, but we would bear the domestic economic cost."

This year, some companies in Alberta's oilpatch threatened to move investment dollars outside of the province whenever the government talked about making changes to corporate taxes and royalty rates. So it's not out of the question that, depending on how a new carbon tax was introduced, it could drive some companies to spend money elsewhere.

"You need to pay attention to this competitiveness issue," cautions Ragan. "If you are going to design a carbon price, let's actually identify which sectors are potentially exposed to this issue and then let's design a policy in a way that deals with it."

Where will the tax money go?

While the oilpatch is one industry that would be affected by a carbon tax, that doesn't mean it is against such a policy. In fact, the industry is in favour of pricing carbon in an attempt to improve Canada's environmental reputation.

The oilpatch has two demands, though. It wants everyone to pay the carbon tax, whether you produce oil, burn gas in your car, or use natural gas to heat your store. It also wants the government to spend the revenue generated by a carbon tax on innovation into reducing emissions.

The latter could almost be seen as a subsidy to industry. Oil executives often admit that whenever they can find ways to reduce emissions, they are often able to cut their costs. For example, if a company can find a way to use less energy to extract bitumen, it saves money and produces less greenhouse gases.

Oilsands companies are in favour of a carbon tax in Alberta, as long as it applies to everyone, producers and consumers. (Kyle Bakx/CBC) "If you want to change those behaviours, you should do that through a carbon tax. A broad carbon tax across industry," said Al Reid, a vice-president with Cenovus Energy, at a conference in Calgary last week. "But anything from a broad carbon tax should be used to fund innovation."

Whether the Alberta government will choose to levy a carbon tax and, if so, where it puts the money, isn't clear. Environment Minister Shannon Phillips said this week the government is still weighing its options. There are varying opinions about where the money would be best spent — whether it should be given back to taxpayers, used for general revenue or put into an innovation fund.

All of this discussion is happening as the Alberta government is expecting a deficit of more than $6 billion this year.

"What's the best way to increase revenues?" said Ragan. "I would argue one of the best ways to increase revenues would be to price carbon rather than to tax profits or to tax income. It's more efficient, it's better for the economy."

Subsidy for affected industries?

For industries such as the oilsands, which could see its competitiveness reduced by a carbon tax, the Ecofiscal Commission suggests governments should look to provide some sort of targeted financial relief — transparent and temporary — to give firms incentive to become cleaner over a specific time. Such relief could mean temporary corporate income tax cuts or carbon price relief.

There is still not consensus that a carbon tax will create the environmental change that everyone hopes.

Kenneth Green, with the Fraser Institute, likes the premise of pricing mechanisms, but he doesn't think it will actually work for carbon.

"You raise the price of goods and services across your economy," said Green. "What happens with that, you raise prices, you reduce demand, you reduce compensation and you reduce competitiveness compared to other jurisdictions that don't have the price."

Specifically, for Alberta, Green said it has to stay competitive so companies keep investing in the province. He warns, "Texas is not going to put in a carbon price any time soon, I can assure you."