Making Sense (Cents) of Environmental Taxes in Canada

With all the talk about carbon taxes lately, Sustainable Prosperity (SP) set out to examine the status of environmental taxes in Canada, define them and measure their value.

What our recent research finds is that Canada doesn’t have many environmental taxes relative to other countries (as measured in the existing OECD database of environmental taxes), and we don’t do a great job of measuring the value or impact of the ones that we do have because the definitions of environmental taxes are unclear.

Environmental taxes are fiscal policy tools designed to address the costs that environmental degradation imposes on society. Environmental taxes are generally levied on four areas of an economy: energy, transportation, natural resources and pollution. For example, we know that air pollution from burning fossil fuels costs billions of dollars every year in health care, reduced worker productivity and clean-up costs in Canada. In theory, the application of taxes that put a price on activities that burn fossil fuels help to address these costs.

The BC carbon tax is a great example of a well-designed environmental tax. In fact, it’s been praised by the OECD(external link) , the World Bank, and the Economistfor being a leading example of its kind and a “textbook” case of how environmental taxes should work.

During the first five years of the tax, provincial fuel use dropped by 16% without having a detrimental impact on the economy. The $30/tonne value is consistent with Canadian estimates of the social cost of carbon, which calculates the economic value of avoided climate change damages for current and future generations. This means that the rate of the carbon tax is equivalent to the rate of the damage that climate change poses on society. This is exactly what well-designed environmental taxes are meant to do, in theory.

But despite results that show the BC carbon tax is good for both the economy and the environment, the use of environmental taxes in the rest of the Canadian economy is limited. Other market-based instruments-but not taxes-are being used in other provinces to reduce greenhouse gas emissions in other provinces (Alberta prices carbon through its Specified Gas Emitters Regulation, and Ontario has just announced it will join Quebec in its cap and trade program with California).

While stalling on carbon taxes may be largely because of political factors, a major constraint to broadening the use of environmental taxes generally seems to be that we don’t have a solid base of evidence that defines, calculates and assesses them in the Canadian context. While we know we have environmental taxes in Canada, we don’t know how many there are, what kind of economic impact they have, or even what kind of environmental impact they have because Canada doesn’t have a methodology for collecting this information. This lack of evidence makes it difficult to point to policy lessons, and crucially, to analyze policy success.

In this context, SP has started the process of unraveling the environmental tax mystery in Canada. We started with our work on the impacts of the BC carbon tax (which you can see on our blog and publications pages on our website), and with our latest primer and Issue Summary on environmental taxes. We have many more questions than answers at this point, but we are committed to continuing our work on discovering and communicating the role of environmental taxes and other fiscal instruments in promoting a greener and more prosperous economy.