Analysis of an analysis of Canada's Federal Carbon Pricing System

“Fiscal and Distributional Analysis of the Federal Carbon Pricing System” is a product of the The Parliamentary Budget Officer (PBO). The PBO’s analyses are, in general, performed, “for the purposes of raising the quality of parliamentary debate.” This analysis of the PBO document is intended to raise the quality of debate everywhere.

The Canadian government’s policy on pricing greenhouse gas emissions is to enforce provincial government’s have a policy on pricing greenhouse gas emissions - and where they don’t to impose a “federal backstop” policy. The PBO’s analysis is looking at the impact of the provinces where the federal backstop will be imposed - here I’ll analyse the analysis for only one of them (Ontario) to avoid bombarding the reader with too many figures.

Ignoring the other provinces will only be a portion of what’s ignored. The PBO’s analysis notes there are “two components” of the backstop policy empowered by the Greenhouse Gas Pollution Pricing Act.

• A charge on fossil fuels, or “fuel charge”... and
• A regulatory system for large industry, known as the “output-based pricing system” (OBPS)

The OBPS is glossed over for a few reasons: it’s expected to be a small portion of total revenue (less than 4% for Ontario), it’s not finalized (despite being expected to apply back to the start of the year), and therefore it’s not known which provinces will have satisfactory pricing already in place for large emitters and which the federal backstop will be imposed on.

So... in the PBO analysis, and here, the hundreds of large emitters that emit over one-third of the country’s greenhouse gas emissions aren’t considered.

Image captured from my presentation of data from Canada’s GHG Emissions Reporting Program

We’ll all focus on the millions of residential households instead.

The PBO report has a table, 2-3, showing the quintile distribution of household gross carbon cost, and another, 2.5, showing the same distribution for household “net” carbon costs. The net cost is actually a net benefit for all but the top quartile in Ontario for each year of their analysis. On average (of all quintiles) households receive back 14% more than they pay in the PBO’s analysis.

A footnote to their cost table (2-3) states, “These costs do not include the GST and PST portion of the carbon price impact on households.” I’ve added 13% to the costs and recalculated the household “net” cost (after rebate accordingly. Obviously adding 13% knocks the average net benefit, for all quintiles, close to zero (as it was 14% of costs), but also notable is the fourth quintile joins the top quintile on the losing side ofthe ledger - and the middle quintile is forecast to benefit less than $45 per year.

There’s not a whole lot of reason to believe the numbers. There’s a vast consumption of fossil fuels be groups that are neither residential nor the very large emitters we’ve mostly ignored in this discussion. The consumers in that group, including the MUSH sector and commercial business, must be losing if residential consumers are gaining. Tax revenue may help the MUSH sector, leaving small business singled out as the net loser - unless they manage to pass on all the cost and, in so doing, make the PBO analysis wrong.

Related original content of carbon pricing in Ontario:

• A tool to heal, A tool to steal: Thoughts on a Carbon Tax | 2012
• A Carbon Tax for Ontario, today | 2014
• Carbon Con: It's Only Economics |2018
• Saving TransAlta: a demonstration of Canada's Clumsy Carbon Pricing | 2018

A couple of exchanges on Twitter related to statistics and my claim of a marriage penalty in the Canadian government's backstop policy:

• with Dave Sawyer (on transportation costs by household composition)
• at Brendan Frank (egoFiscal) - on marriage penalty (which I continued to snark on at my Facebook page)