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Ontario’s Greenhouse Gas Reduction Program – Carbon Tax

In my previous post, “Ontario’s Greenhouse Gas Reduction Program – Road Transportation”, I touched on how the Provincial government’s failure to address road transportation in its Greenhouse Gas Emissions Reduction Program meant that it was ignoring the source of almost a third of Ontario’s greenhouse gas (GHG) emissions. This post is directed at the Province’s reluctance to implement a carbon tax.

A carbon tax puts a price on the emission of each tonne of GHG creating a cost incentive that ideally elicits a market response across an entire economy to reduce GHG emissions. Unfortunately, the Provincial government’s reluctance to implement a carbon tax as part of its carbon-pricing regime prevents access to a tool that increases flexibility in implementing GHG policy objectives.

The Province need not look any further than British Columbia (BC) for an economic incentive to introduce some form of a carbon tax. In the five years since the inception of its carbon tax (2008-2012), not only has BC’s Gross Domestic Product outpaced the rest of Canada, its corporate and income tax rates are the lowest in the country and one of the most competitive in North America. At the same time, per capita fossil fuel consumption has fallen precipitously, declining 18.8% more than the rest of Canada (1).

Like any flat tax, a carbon tax is regressive (2) on its own, but keeping the tax revenue-neutral (3) in a way that protects low income Ontarians can minimize its impact or even make the tax progressive (4). Returning carbon tax revenues to the public would also make it easier to raise the tax level over time, as evidenced in BC where a revenue-neutral carbon tax has gradually increased, yet remains politically popular (5). In addition, since a carbon tax is a consumption tax rather than an income tax, it is a sustainable way in which to help fill the fiscal gap created by the drop in tax revenues and the complementary increase in demand for social services from an aging population (6).

Finally, a carbon tax would also help promote economic productivity and innovation in a green industry. While encouraging the adoption of pollution abatement measures, a carbon tax invites industries and consumers to seek greener solutions in response to the added cost of pollution. This has the added benefit of encouraging investment in research and development that focuses on technologies and products with a smaller carbon footprint (7).

In a nutshell, ignoring a carbon tax as part of a carbon-pricing regime unnecessarily hampers Ontario’s ability to implement important policy objectives such as reducing fossil fuel consumption, promoting Canadian competitiveness in green industries and funding social programs.

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1. Josha MacNab, Despite carbon tax, sky isn't falling in B.C., Pembina Institute, July 2013, http://www.pembina.org/blog/740; Stewart Elgie and Jessica McClay, BC's Carbon Tax Shift After Five Years: Results An Environmental (and Economic) Success Story, Sustainable Prosperity, July 2013. http://www.sustainableprosperity.ca/article3685; Environmental Commisssioner of Ontario, A Question of Commitment: 2012 Reivew of the Ontario Government's Climate Change Action Plan Results, December 2012. http://www.eco.on.ca/index.php/en_US/pubs/greenhouse-gas-reports/2012-greenhouse-gas

2. A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. The result is that the average rate of tax is greatest for those on lower incomes.

3. A revenue-neutral tax is a tax that does not increase the government's operating budget. This means that the revenue generated will be returned to taxpayers through tax reductions or rebates.

4. A progressive tax is one where the average rate of tax as the amount subject to taxation increases. The result is that the proportion of income taken in tax rises as income increases. The income tax in Canada is a progressive tax.

5. British Columbia Carbon Tax Review, Sustainable Prosperity, September 2012, http://www.sustainableprosperity.ca/article3085

6. Green Budget Coalition, Recommendations for Budget 2013, November 2012, http://www.greenbudget.ca/2013/main.html

7. Organisation for Economic Cooperation and Development, Taxation, Environment and Innovation, October 2010. http://www.oecd.org/env/tools-evaluation/taxationinnovationandtheenvironment.htm