Axing or Backing: The Crossroads of the Carbon Tax Debate

A Parliamentary Marriage Waiting to Fall

A minority government in Canada is just like a turbulent marriage—a relationship filled with uneasy compromises, constant negotiations, and always just one misstep away from a complete breakdown. In 2015, the future seemed bright for Justin Trudeau after he secured a majority in the House of Commons. Nine years later, the walls have finally closed in for Prime Minister Trudeau. On January 6, 2025, he announced his resignation as Prime Minister and Liberal Party leader, bringing his time in power to an end.

Losses in two key by-elections in traditionally Liberal constituencies—Salle-Émard–Verdun and Toronto–St. Paul’s—served as early warning signs that Canadians were dissatisfied with the Prime Minister and his government. A recent poll from Abacus Data showed that 67% of Canadians believed Trudeau should step down. Within his own party, the Prime Minister faced a caucus with pitchforks at the gate. His Deputy Prime Minister and Finance Minister, Chrystia Freeland, who was considered a staunch ally, resigned on the day she was scheduled to deliver the Fall Economic Statement, citing differences in the best path forward for Canada. More than 50 Members of Parliament (MPs) from the Ontario Liberal Caucus reportedly reached a consensus that Trudeau needed to step down as party leader during a virtual meeting, while the Atlantic Liberal caucus shared a public letter calling on him to resign as the party leader. 

Across the aisle, the Bloc Québécois, New Democratic Party (NDP), and Conservative Party all smelled blood and lined up the Liberal Party in their crosshairs. In September, NDP leader  Jagmeet Singh “ripped up” the Supply and Confidence Agreement with the government, pulling guaranteed support for confidence and budgetary matters.  After propping up the current government in three previous no-confidence motions put forward, the NDP have changed course and Mr. Singh announced on December 20th the NDP will vote to bring down the government.  Yves-François Blanchet, the leader of the Bloc Québécois declared that the “Trudeau’s government is over” and his party is ready to topple the government after their ultimatum to increase old age security payouts and exempt supply-managed farm sectors from any future trade negotiations was not met by the government.

Setting the Stage for an Early Breakup

With support for the Liberal Party in the House of Commons and among the Canadian electorate hanging by a thread, Prime Minister Justin Trudeau announced his resignation on January 6. In a bid to stabilize the political situation and buy time for the Liberal Party to select a new leader, Trudeau requested the Governor General to prorogue Parliament—a request that has been accepted. Parliament is now suspended until March 24, 2025, pausing all proceedings, including debates and votes.

The prorogation gives the Liberal Party a brief opportunity to regroup and prepare for the inevitable showdown when Parliament reconvenes. By that time, the Liberals are expected to have a new leader in place, but the challenge remains monumental. Opposition parties have signaled their intent to topple the government at the first opportunity, and the first vote after prorogation will be a confidence motion. The prorogation may delay the election temporarily, but with NDP leader Jagmeet Singh withdrawing support and vowing to vote down the Liberal government, an early election appears inevitable. When Parliament resumes, Canadians will likely face a confidence motion that will determine the next chapter for the Liberal Party and the country.

According to CBC’s poll tracker as of December 23rd, 2024, the Conservative Party led by Pierre Poilievre leads with 44.0% and the Liberals and NDP a distant second and third with 20.9% and 19.0% respectively. Whether it be during questioning period in the House of Commons or on his t-shirt, Mr. Poilievre’s key message to Canadians has been simple; axe the tax. Mr. Poilievre has made the federal carbon tax the centre of his policy platform and has routinely called for the Prime Minister to hold a “carbon tax election” and let Canadians decide if they want to elect a government to either continue, or eliminate the policy. With a spotlight on the federal carbon tax on the political stage, the key question for politicians, pundits, and the Canadian people is, has the federal carbon tax been effective, and beneficial?

The Groundwork for a Carbon Tax

Since the industrial revolution, human activities have released large amounts of carbon dioxide and other greenhouse gasses into the atmosphere, which has changed the earth’s climate. Global average surface temperature has consistently grown, and the 10 warmest years in the historical record have all occurred in the past decade. Climate change brings with it a major price tag, with the World Economic Forum estimating the global cost of climate change damage is estimated to be between $1.7 trillion and $3.1 trillion per year by 2050 which includes the cost of damage to infrastructure, property, agriculture, and human health. At home, the Canadian Climate Institute projects that by 2030, Canada could face annual losses to real GDP of $35 billion. With the key threat climate change presents, governments across the world are implementing policies to reduce greenhouse emissions.

In 2015, then Liberal Leader Justin Trudeau secured a majority in the House of Commons with a mandate from the Canadian people to implement a new progressive direction for Canada, including action on climate change. In 2016, Prime Minister Trudeau announced the Pan-Canadian Framework on Clean Growth and Climate Change, Canada’s first national climate plan. The plan outlined federal actions for a clean growth economy, with a pricing carbon pollution included as policy initiative. In 2018, the Greenhouse Gas Pollution Pricing Act (GGPPA) was passed by Parliament and starting January 1st, 2019, the legislation would go into effect.

The Nuts and Bolts of the Federal Carbon Tax

When the term “federal carbon tax” is used by politicians and political pundits, it refers to the pricing system on greenhouse gas emissions outlined in the GGPPA. Canada has two pricing systems for greenhouse gas emissions. There are two pricing systems; the first is a fuel charge which is paid by fuel distributors and other registered persons. The second is an output-based pricing system for industries and provides price incentives for industrial emitters to reduce their greenhouse emissions. Provinces and territories are required to meet minimum national standards when choosing a pricing system. If they fail to meet these standards, the federal government steps in to enforce compliance. Canadians are most likely to be impacted by the fuel charge and in particular, four key fuels; gasoline, light fuel oil, propane, and natural gas. In practice, the fuel charge works similar to any other tax. For example, a consumer in Ontario who pumps gasoline into their vehicle pays 17.57 cents per litre for the gasoline fuel charge in addition to other federal and provincial taxes levied on gasoline. Approximately 90% of the revenue from the fuel charge is returned to Canadian households that meet these requirements through rebates with the other 10% goes to farmers, small- and medium-enterprises and Indigenous governments.

The Debate on What the Policy Costs

A key debate on the policy between the Liberal Government and the Conservative Opposition is the cost to Canadian households based on projections from the Parliamentary Budget Office (PBO) for the federal fuel charge. In its latest report, the PBO outlined figures for the cost of the federal fuel charge with 2030 as its base year, given the price on pollution will reach its maximum level and so will rebates. As best highlighted by the showdown between Conservative Party House Leader, Andrew Scheer and Minister of Environment and Climate Change Steven Guilberualt, the dispute lies between whether to only consider the fiscal impact, or fiscal and economic impact of the policy. Mr. Scheer and the Conservative Party outline that when considering the fiscal and economic impact (including the loss in employment and investment income from the fuel charge as a distinct cost to the household), the policy costs households more money then they get back. Minister Guilbeault and the Liberal government highlight, when measuring only the fiscal impact, the policy provides households with more money in rebates than what they pay. For instance, when only considering the fiscal impact, the average family in Ontario will receive $331 more than what the policy would cost them. In contrast when considering the fiscal and economic impact, the policy will cost the average Ontario family $903.

Exhibit A

Exhibit B

Measuring the Environmental Impact

A core pillar of the GGPPA is to put a price on pollution with the intention that it will reduce emissions. Since the carbon tax went into effect in 2019, emissions have fallen below pre-pandemic levels and in general, emissions per capita have declined since 2005 from 24 tonnes to 18 tonnes in 2022. Environment and Climate Change Canada also estimates that the carbon tax and both pricing systems will account for almost 80 million tonnes of greenhouse gas emissions reductions in 2030. While the data may suggest that there is improvement with respect to a reduction of greenhouse gas emissions, it is still too early to evaluate the environmental success of the tax. The COVID-19 pandemic caused major economic disruptions which led to lower levels of emissions and in order to make an effective evaluation of the environment progress, more time needs to be given.

Numbers That Do Not Reflect Reality

When it comes to the numbers, both the Liberal and Conservative Party have logical rationale to support their position based on both the projections from the PBO when considering the fiscal and economic impact of the fuel charge. Though, within the debate on what the policy costs, the concept of the time value of money seems to be overlooked. In a nutshell, money is worth more now than at a future date because it can be used, invested, or grown. Taking the Liberal government’s point of view and looking past the loss in employment in investment income, even if Canadian households receive more money in rebates than they pay in tax, the policy still causes more financial harm. Rebates are distributed on a quarterly basis while Canadians will have to pay the cost of the tax in the present moment. The timing difference is particularly important since February 2020 and the start of the COVID-19 pandemic, prices are 22.1% more expensive today and the country is experiencing a cost of living crisis. 43% of Canadians worry they don’t have enough money for food, with Food Banks Canada reporting there were more than two million visits to Canadian food banks in March 2024 alone, which is a 90% increase from 2019. In a report from the Financial Consumer Agency of Canada, two-thirds of mortgage holders report having trouble meeting their financial commitments. Given that 50% of Canadians live paycheck to paycheck, now more than ever, Canadian households need every cent and dollar they can get in order to afford basic necessities like food and shelter.

Canadians Treated Differently Based on Region and Politics?

In October 2023, Prime Minister Trudeau announced that the federal fuel charge for home heating oil would be exempt for 3 years. The measure was taken with the expressed intention to benefit Canadians living in the Atlantic provinces where 30% of homeowners still use furnace oil to heat their homes and also Canadians living in rural communities. The policy would give more time to switch to alternative sources like electric heat pumps, in addition to government funds to help lower-income households to switch away from fossil fuels. This does however, bring reasonable speculation of partisanship driving the change in policy, with the Conservative Leader Pierre Poilievre accusing Prime Minister Trudeau of creating “two classes” of Canadians based on regional political alignment. Prime Minister Trudeau stated there would “absolutely not” be any more exemptions to the carbon tax, leaving the request from the governments of Saskatchewan and Alberta to exempt natural gas from the carbon tax to fall on deaf ears. This is a significant decision given 72% and 79% of households in Saskatchewan and Alberta respectively use natural gas as their primary heating system. In the past three federal elections, the Liberal Party has won a large majority of seats in Atlantic Canada while only securing two seats in Alberta and none in Saskatchewan in the 2021 election. Putting politics aside, the simple reality is that Canadians are hurting financially, with 52% of Canadians stating that they are worse off or much worse off financially compared to where they were in 2023, according to a Narrative Research study.

The cost of living crisis and the financial burden Canadians feel is not just a regional issue—it’s a national one. With Prime Minister Trudeau stepping down and the Liberal Party facing new leadership, questions remain about whether this policy will evolve to address the economic struggles felt across the country. That being said, all Canadians deserve financial relief to alleviate the strain put on their wallets from additional costs like the federal carbon tax.

A Verdict Soon to be Delivered

When it comes to the talk of elections, the answer remains unclear as to whether the government will fall in a vote of non-confidence and trigger an early election before the original date of October 20, 2025. With Parliament prorogued until March 24, 2025, and Prime Minister Trudeau announcing his resignation, the Liberal Party finds itself in a precarious position. What is clear is that the Canadian people are struggling with an affordability crisis, and the federal carbon tax can be viewed as an addition to a long list of costs Canadians have to pay for without immediate financial benefits in return.

While policy experts, environmentalists, and politicians may argue the carbon tax is needed to combat climate change, it is not their decision to make. That decision belongs solely to the Canadian people who elect public officials they believe best represent their interests and vision for the country. Currently, a key issue to Canadians  is the rising cost of living, and it will be up to the electorate to determine which political party can best address that issue.

With Prime Minister Trudeau stepping down and Mr. Poilievre and the Conservative Party continuing to see their popularity rise, only time will tell when the next election will occur and which party will form the next government. When that time comes, the Canadian people will deliver their verdict on the federal carbon tax, and whether to back, or axe the tax.