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Smart business money is on carbon tax

Backstop carbon pricing will come in two forms. And most businesses won’t notice it.

Power station

Assuming everything goes to plan (and the plan isn’t quite what it used to be), starting in April the Trudeau government will be imposing a carbon tax on provinces that have no carbon pricing mechanisms of their own.

Right now, that’s four provinces — Ontario, Saskatchewan, Manitoba and New Brunswick. (P.E.I., Yukon and Nunavut are adopting the federal carbon pricing scheme voluntarily.) The federal Conservatives under Andrew Scheer plan to make the fight against carbon pricing a key part of their 2019 election campaign. Ottawa’s carbon strategy seems to have split Canada politically, deepening the chasm between resource-dependent provinces like Alberta and Saskatchewan and the eastern urbanites who tend to support environmental initiatives.

Or has it? A recent Angus Reid poll suggested 54 per cent of Canadians now support the carbon tax. The poll tracked a remarkable 18-point spike in support for the tax in Saskatchewan, to 29 per cent. Most Ontarians opposed carbon pricing in July; a narrow majority now supports it, despite Premier Doug Ford’s ferocious opposition. (Ford’s government introduced a climate change plan in late November, but since it doesn’t mandate a carbon price, it’s believed the federal carbon tax will still apply in Ontario.) The shift in support seems to have followed Prime Minister Justin Trudeau’s promise of generous household rebates.

Given the shifting political and public opinion landscape, Canadian businesses can be forgiven for wondering whether the carbon tax will join electoral reform in Trudeau’s discard pile of ambitious, failed promises.

“Most businesses … they look at the carbon tax debate and tell themselves that proposals have come and gone so many times now, politically, that there’s no reason for this to be a top-of-mind issue,” says Jason Kroft of Stikeman Elliott in Toronto, whose practice covers emissions trading and climate law. “They’re inclined to wait and see.”

That might be a mistake. If the Trudeau Liberals lose in 2019, the carbon tax is probably dead. If they win, it’s a go. It won’t change things quite as much as supporters or detractors seem to think — but the smart money is preparing for it.

Here are a few things Canadian businesses need to know about the carbon tax right now.

It’s probably constitutional

Imposing a carbon tax was never Ottawa’s plan to begin with. The pan-Canadian carbon pricing framework completed two years ago was signed by the premiers of every province except Saskatchewan and Manitoba. The federal carbon tax was always presented as a backstop to be imposed only on provinces that failed to come up with carbon pricing tools of their own.

Because provinces were given the opportunity to design their own carbon pricing mechanisms, the court challenges being pursued by Saskatchewan and Ontario against the carbon tax are unlikely to succeed, says Richard Corley of Goodmans LLP, Toronto.

“Arguing that the federal government imposed a system by fiat is going to be a very steep hill for the provinces to climb,” says Corley, who advises corporate clients on clean technologies and environmental law.

The constitutional experts, meanwhile, seem mostly convinced that the plan will survive the courts — not on the basis of the federal taxation power alone (since that covers taxes designed to raise revenue, which isn’t the purpose of the carbon tax), but probably under the “peace, order and good government” catch-all.

“I don’t think the provincial challenge has much of a chance,” says lawyer Laura Zizzo of Zizzo Strategy, a boutique firm advising businesses on adapting to climate change.

Most businesses won’t notice it

Backstop carbon pricing will come in two forms.

The carbon levy — the tax — applies to all fossil fuels at a rate of $20 per ton of carbon dioxide equivalent (CO2e) next year, and rises by stages to $50 per ton by 2022. This is the aspect of carbon pricing meant to shift consumer behaviour away from emissions-heavy products.

For smaller businesses, the levy’s impact should be negligible, says Corley. “The initial cost is so minimal — about four cents on a litre of gasoline — that it’s overwhelmed by the typical variances in the price of fossil fuels, which can be ten times greater,” he says. “And it applies generally to small businesses across the board.

“The Canadian economy didn’t shut down because the cost of crude swung up and down. It’s not going to suffer from the carbon tax.”

Large emitters in backstop jurisdictions — those that reported emissions of 50,000 tonnes of CO2e or more in any calendar year between 2014 and 2017 — fall under the federal Output-Based Pricing System. Companies registered under the OBPS get credits back on emissions below a certain threshold. The idea is to encourage low-emissions operations and discourage high-emissions ones — without creating an incentive for trade-exposed emitters to cut output in a backstop jurisdiction and simply move it elsewhere.

As designed, the OBPS is controversial: it imposes different rebate rules depending on the fuel source being used. That means coal-fired plants face much less stringent penalties for exceeding the emissions threshold than do plants using other, cleaner fuel sources.

The federal government might have been attempting to prevent the OBPS from giving an economic leg-up to backstop provinces lucky enough to have access to copious low-emissions power. But the effect might be to nullify the backstop’s intended effects. Writing recently in Maclean’s magazine, economist Blake Shaffer warned that looser rules for coal mean “more coal generation, delayed coal retirements, less investment in clean generation and natural gas, and, critically, increased emissions.”

Which brings us to our last point …

Backstop carbon pricing is just the beginning

Economists call energy use “inelastic” — meaning that it resists outside pressure to shift up or down. No matter what it costs, you still have to heat your home between October and May. Over time, however, carbon pricing has been shown to nudge consumer behaviour toward lower-emissions products.

On its own, the carbon pricing scheme being introduced by Ottawa probably won’t push Canada’s emissions low enough to meet its commitments under the 2015 Paris climate change accord. That will require further tweaks to the carbon price, along with government investments in low-emission tech and green industries, re-shaping the economy for a low-carbon future.

That re-shaping process is happening anyway. A combination of costlier, harder-to-reach supply and the swift appearance of cheaper, more efficient electric and hybrid vehicles is cutting into the profits of the oil majors. General Motors says it’s shuttering its Oshawa plant in part to concentrate on zero-emissions vehicles — a trend being driven by consumers, not governments. Shifting markets, and the effects of climate change themselves, point to the need for businesses to change what they do and how they do it.

“Consumer preferences are changing, technology is changing, and that opens up new risks and new opportunities,” says Zizzo. “Businesses also have to contend with the physical effects of more extreme weather events, on infrastructure, on supply chains. They’re going to have to plan for these things better.”

Part of that planning should entail businesses keeping track of their carbon output and exposure to infrastructure damage from extreme weather — things that can affect the share price of publicly trade firms. The state of New York is suing ExxonMobil, accusing it of concealing its climate exposure from shareholders. Climate change is going to be a factor in how smart businesses plan for the future — because shareholders expect to be kept in the loop, and because consumers want products they don’t have to feel guilty about.

“Even if climate change isn’t a principle factor in your business model, it’s still something that could separate you from your competition in future, in either a good or a bad way,” says Kroft. “Over time, carbon pricing is going to become more and more central to the way everyone does business.”