What Will We Gain from Axing the Tax?

Abstract

In March 2015, the Canadian Prime Minister terminated the federal carbon price and rebate system, in response to widespread belief that the carbon price was a major factor in the ongoing affordability crisis. The previous autumn, the Parliamentary Budget Officer (PBO 2024) released a report indicating that, including both cash and economics effects, approximately 60% of households paid more on the carbon price than they received in the rebate, and therefore the average household across the eight affected provinces (all but BC and Quebec) was made worse off by the policy. However, there are several features of PBO (2024) which were apt to create confusion and lead to misunderstanding of the results, including: (i) vagueness about income levels, (ii) disproportionate emphasis on 2030 results, (iii) use of after-tax (disposable) income as the basis of analysis, (iv) use of average income, rather than median income, to summarize typical impact, and (v) lack of information on greenhouse gas (GHG) emissions at different income levels. We address these issues and provide a clearer picture of the distributional impacts of the carbon price and rebate system. In 2024-2025, the policy made 50% or more of households, in four of the eight affected provinces, better off financially, and all households were forecast to be better off by the final year of the policy, 2030-2031, than they were in 2024-2025, as standard growth factors were forecast to outweigh the modest costs associated with the policy. We conclude that, far from making most households worse off, the federal carbon price and rebate policy was an effective policy to counteract the affordability crisis among those who needed help the most, and of course it was forecast to result in important environmental benefits as well.