Canadian Liberal and Green Parties Release Carbon Tax Plans

It appears that the next Federal election in Canada (which must be held sometime between now and October 19, 2009) will be fought on the issue of carbon taxation, as two of the five big political parties in Canada recently released their carbon tax plans. While both plans call for increased taxes on greenhouse gas emissions and other taxes to be reduced, there are a significant number of differences.

The Liberal Party plan calls for a $40 per tonne tax on “greenhouse gas emissions” to be phased in over 4 years, though the plan does not define what is covered under the definition of “greenhouse gas”. This tax would replace a number of existing taxes on fossil fuels including excise taxes on gasoline and diesel fuel. An interesting note is that the existing excise tax on gasoline is equivalent to a $42 per tonne tax on carbon dioxide emissions, so the Liberal plan would not be an increase on the existing Federal gas tax.

The plan assumes that taxes can be collected on 75% of greenhouse gas emissions and after taking into account the facts that greenhouse gas emissions will be reduced and that the fossil fuel excise taxes will be eliminated, government revenues will increase by just over $15 billion once fully implemented. There is no indication of how this figure was arrived at or how much the Liberals expect greenhouse gas emissions to be reduced, but my rough back-of-the-envelope estimate is around the same level.

The plan claims revenue neutrality, but only $9 billion of the revenue is allocated towards actual tax cuts. Specifically a 1.5-percentage-point reduction in the lowest income tax bracket, and a 1-percentage-point reduction in the middle two income tax brackets. The highest tax bracket, however, would see no tax reduction. The remaining $6 billion in revenue is allocated towards a number of “tax credits”, primarily aimed at low-income families with children.

Calling the Green Party‘s document a plan would be generous – there are very little details given, and what details are given are either contradictory or lead to more questions than they answer. The press release states that “[b]y taxing carbon at the rate of $50 per tonne, the Green Party will raise $40 billion for the federal treasury”. A tax on carbon would raise no more than $9 billion. If we assume what is meant is carbon dioxide (not carbon), it is still difficult to see how the tax would raise more than $20-25 billion, once issues such as compliancy and reductions in emissions are taken into account.

The plan also calls for a one-percentage-point increase in sales taxes. The money from the carbon tax would be used primarily to increase the “basic personal amount”, that is the amount a person can earn before paying income taxes, from $9,600 to $20,000. A decrease in the employer contributions to two payroll taxes – Employment Insurance (EI) and the Canada Pension Plan (CPP) are proposed. These, however, appear to be poorly thought out, as they leave three big questions unanswered:

  1. The EI rates for the province of Quebec are different than for the rest of Canada – but the Green plan appears to assume they are the same. How will the Greens account for this?
  2. Quebec is exempt from the Canadian Pension Plan, as they have their own version, the Quebec Pension Plan. Any cuts to these contributions must be made by the Government of Quebec, not the federal government. How will the Greens account for this?
  3. CPP contributions do not go into general revenue – they go into a separate fund. But the carbon tax would go into general revenues. How will the Greens account for this?

The Green Party plan would have to address a number of issues if it were ever to be implemented as law. Given that the party has around 8% support in the polls, this likely will not be an issue. The Liberals, on the other hand, have a fighting chance of forming the next government.


Mike Moffatt is the Economics Guide for About.com.

5 Responses to "Canadian Liberal and Green Parties Release Carbon Tax Plans"

  1. Rachel Ziemba
    Rachel   July 2, 2008 at 9:32 am

    Nice post – glad to see you joining us here and for pointing out some of the inconsistencies in the prevailing plans. I agree that carbon taxes and climate change will be a big issue in the next election cycle for Canada, particularly as they expose so many federal and provincial issues. Do you think that either of these plans would increase the attractiveness of carbon capture technology? And would either of them respond to concerns about the environmental costs of oil sands production?

  2. Mike Moffatt
    Anonymous   July 2, 2008 at 9:50 am

    Hi Rachel,Thanks for the kind words – I’m happy to have joined the team.RE: "Do you think that either of these plans would increase the attractiveness of carbon capture technology?"This is a huge unanswered question. As far as I can tell both plans tax the carbon content of fossil fuels and do not directly tax the emissions. Suppose an tar sands operation uses a lot of fossil fuels, but can somehow sequester the carbon rather than just emitting it. Would they still have to pay the carbon tax? As far as I can tell they would, but this doesn’t make a lot of sense.I suspect if the Liberals do form the next government and try to implement this plan, there will be a lot of issues like this that will have to be dealt with in committee."And would either of them respond to concerns about the environmental costs of oil sands production?"Not directly, no. With oil at $100+ a barrel, tar sands operations would still be profitable even if they decided to absorb the entire cost of the tax. Given the rate of the tax, is it more profitable for companies to just pay the tax rather than develop and implement technologies to reduce/eliminate emissions (such as carbon sequestration). That’s as much a technological question as an economic one; I am not familiar enough with the state of these technologies to give an informed opinion.Cheers,Mike

  3. Mike Moffatt
    Mike Moffatt   July 2, 2008 at 9:51 am

    I accidentally clicked on "Post anonymously" on the last post. But it was from me.

  4. villager   July 2, 2008 at 10:02 am

    Thanks for clarifying the position of Canadian political parties on this matter. Hopefully, the following comment adds some context to the Canadian situation. In their hurry to choose a new leader for their party in December 2006, the Liberal Party failed to take the opportunity to establish a policy direction and platform. In the meantime, their grasping at various policies and directions might not suggest or convey that as a political party they have now acquired a strong conviction towards climate warming/environment. Rather it may come across to voters and citizens as a ploy to regain power by the tactical use of a motherhood issue. In this regard, the Green party has more legitimacy. Moreover, the carbon tax plan of the Liberal party might be construed as a tax grab that will be used to fund programs yet to be defined. At this time. neither the Liberal party nor the minority ruling Conservative party inspire strong public sentiment. Like elsewhere in the world, Canadians are adjusting to continually rising gasoline prices. Similarly, economic prospects are fading and are moving slowly in the direction of a sustained recession. When Canadians go next to the voting booth, they may be responding with personal rather than social objectives. It remains to be seen which political party will be the ‘winner’. The cast of characters does not inspire trust.

  5. Mike Moffatt
    Mike Moffatt   July 2, 2008 at 10:36 am

    Hi villager,Thanks for your comments. I just wanted to pick up on one thing.RE: "Moreover, the carbon tax plan of the Liberal party might be construed as a tax grab that will be used to fund programs yet to be defined."The "tax credit" programs are defined, albeit not very well. The most interesting is the program that receive’s the lion’s share of the money is the child tax benefit – a program a senior Liberal strategist decried as "beer and popcorn money" during the last election:The tax credits roughly break down as follows:- Universal Child Tax Benefit (2.8 Billion)- Working Income Tax Benefit (0.5 Billion)- Disability Creidt (0.4 Billion)- Credits for Rural Canadians (0.8 Billion)- Green Investment Credits for Business (1 Billion)I just realized an omission in the analysis. After this:"The plan claims revenue neutrality, but only $9 billion of the revenue is allocated towards actual tax cuts. Specifically a 1.5-percentage-point reduction in the lowest income tax bracket, and a 1-percentage-point reduction in the middle two income tax brackets. The highest tax bracket, however, would see no tax reduction."A sentence describing a 1-percentage-point reduction in corporate income taxes and corporate income taxes (small business rate) is missing. I will have to see what happened to it.