In the absence of a carbon tax in Canada, measures to fill the gap are essential
On his first day in office, Prime Minister Mark Carney announced the elimination of the consumer carbon tax, in response to political pressures rather than evidence-based concerns about its effectiveness or impact on affordability. The tax had played a crucial role in reducing the country’s GHG emissions, and along with other carbon pricing policies, was expected to contribute nearly half of Canada’s emissions reductions by 2030. Additionally, the majority of revenues collected were redistributed to citizens, protecting vulnerable households. Thus, without alternative policies to compensate, eliminating the tax could slow emissions reductions and increase inflationary pressure, particularly for low- and middle-income families who benefited financially from the Canada Carbon Rebate funded by the tax.
Responding to a political context
By eliminating the fuel tax, Carney is attempting to prevent conservatives from capitalizing on a measure that has become central to their campaign ahead of the federal elections, taking place by this fall. Since its introduction, the tax’s removal has been a primary demand of the opposition, encapsulated in the slogan “axe the tax.”
The Federal Fuel Charge was a key piece is Canada’s climate policy. It was one of the two components of Pan Canadian Approach to Pricing Carbon Pollution, in place since 2019. The other component, the Output-Based Pricing System (OBPS) –a regulatory emissions trading system for industry– remains in place and is expected to be strengthened.
The decision, which is part of a broader set of measures, responds to a political context rather than the ineffectiveness of the policy or a verified impact on affordability. Since federal carbon pricing took effect, Canada’s GHG emissions have fallen by almost 8%, although other policies were also at work. A report from the Canadian Climate Institute shows that federal and provincial carbon pricing, for industries and consumers, was expected to account for almost half of Canada’s emissions reductions by 2030. Moreover, carbon pricing policies including the Federal Fuel Charge and the British Columbia carbon tax have had a minimal impact on inflation, contributing less than 0.5% to increases in consumer prices since 2019, according to a study published last December by the Institute for Research on Public Policy.
The relevance of Canada’s carbon tax and the need for measures to fill the gap
Canada’s carbon tax was significant for several reasons, particularly its revenue redistribution mechanism that helped protect vulnerable households from rising prices. According to a report published in 2024 by I4CE, 90% of the collected revenue was returned to households on a non-selective basis through the Canada Carbon Rebate, 9% was allocated to supporting small and medium-sized enterprises (SMEs), especially those in high-emission and trade-exposed sectors, as well as farmers, and the remaining 1% was directed to indigenous communities. This mechanism helped protect vulnerable households from price increases caused by the energy crisis, not solely those linked to the carbon tax itself.
Without compensatory measures, eliminating the carbon tax would lead to at least two major environmental and socio-economic issues. First, Canada’s emissions would not decline as quickly, as the tax’s incentive effect would be lost. Second, without the Canada Carbon Rebate—funded by tax revenues—most households would face greater inflationary pressure, particularly low- and middle-income families, for whom the rebate represented a net financial gain.
Aware of the negative effects of eliminating the carbon tax, Mark Carney included a package of incentive-based climate measures in his plan. The plan is based on three main levers. First, the creation of a Canadian Industrial Competitiveness Strategy by strengthening and tightening the Performance-based Pricing System (PPS) for large industrial emitters, among other measures. Second, providing investment incentives for green building, electrification of transportation, and directly rewarding consumers for sustainable behaviour. Third, mobilising investment to create jobs and stimulate economic growth through sustainable finance. The cost-effectiveness of this new policy package is yet to be seen, but it inspires optimism for the way forward.
The global context of carbon taxation and why this is not the end for carbon taxes
The abolition of Canada’s carbon tax highlights the political challenges surrounding its implementation. Canada is not alone in reassessing its carbon pricing policies. In France, the 2018 attempt to increase the carbon tax triggered the Yellow Vest movement. Similarly, in Australia, the carbon tax introduced in 2012 was repealed in 2014 under political pressure.
Despite these challenges, several new carbon taxes were introduced in 2023. Slovenia reinstated its carbon tax, while new carbon taxes were implemented in Taiwan, China, and the Mexican state of Guanajuato. Additionally, Hungary introduced a new carbon tax targeting participants in the EU Emissions Trading System (ETS) who receive at least half of their allowances for free.
Currently, 39 carbon taxes are in effect worldwide, according to the annual State & Trends of Carbon Pricing report by the World Bank, to which I4CE contributes. These taxes, along with 36 emissions trading systems (ETS), collectively cover approximately 24% of global greenhouse gas emissions. The implementation of these carbon pricing mechanisms generated record revenues in 2023, exceeding $100 billion globally, the majority of which have been used for climate action.
