An alternative to Nova Scotia's carbon-pricing system
Larry Hughes, PhD
Electrical and Computer Engineering
Dalhousie University
Halifax, Nova Scotia
Introduction
Nova Scotians, like Canadians in seven other provinces and two
of the territories, are subject to the federal
carbon-pricing system.
The system consists of two parts. First, a tax on carbon-intensive
energy sources such as gasoline, diesel, home heating oil, natural gas and
propane, and electricity. And second, a cheque, the Climate Action Incentive
Payment or CAIP,
paid every three months to households (that is, individuals and families) who
have filed their previous year's federal income tax. The value of the CAIP is based
on the number of people in the household, their province, and where they live
in the province.
The carbon tax raises the cost of energy, while the CAIP is
intended to offset the cost. Ideally, the CAIP equals the total cost of the tax,
and the result is zero.
Which raises the question, if the result is zero, why have a
carbon-pricing system?
The answer, according to Environment
and Climate Change Canada, is "... carbon pricing is
about recognizing the cost of pollution and accounting for those costs in daily
decisions".
However, the cost of the carbon tax is not always offset by
the CAIP. By the federal Department of Finance's own estimates,
"8 out of 10 households [are] getting more money back than they pay".
For a household to get back more than its
pays, can mean living in a well-insulated house heated with a low-energy heating
system (such as a heat pump) or using a low-emissions vehicle (such as a hybrid
or electric vehicle), or both.
Low- and moderate-income households requiring
emissions-intensive energy sources for heating (such as heating oil) and
driving an older, gasoline-powered vehicle must take the carbon price into
account if they want to get back more money than they pay.
The original design of the federal carbon-pricing
system for Nova Scotia meant that families living in older homes using oil heating
paid a considerably higher carbon tax than families living in R2000 homes
heated with electric heat pumps. In some cases, the carbon tax would have
required families living in older homes to pay several hundred dollars more than
their CAIP.
Prime Minister Trudeau's solution to the
CAIP shortfall for oil-heated homes in Nova Scotia and other provinces
(primarily those in Atlantic Canada) was to remove or "carve
out" the carbon tax on home heating fuel for the
next three years.
Since households in Atlantic Canada stood
to gain the most from the prime minister's decision, governments in Alberta and Saskatchewan demanded the same treatment
for households in their provinces.
Despite refusing to make any other changes
to the federal carbon-pricing system, the prime minister's decision to
make the heating oil carve out has played into the hands of those wanting to "axe
the tax".
Fortunately, there is at least one alternative to the design
of the present carbon-pricing system that can help low- and moderate-income Canadians
and still let Canadians recognize the cost of pollution and account for the
costs in their daily decisions.
The problem with the existing carbon-pricing system
The federal government's fuel pricing
system consists of two parts:
The carbon tax, a fuel charge, which is applied to all
carbon-intensive energy sources. This year it is $65/tonne.
The Climate Action Incentive Payment, or CAIP, which is intended to equal
or exceed the total carbon taxes a household would pay on emissions from space
and water heating, electricity, and personal transportation. It is paid
quarterly and intended to cover carbon taxes for the upcoming three months.
The incentive payment varies by province,
family size, and where people live. A rural household currently receives
10-per-cent more than an urban household.
The carbon pricing system works best when most households have
similar energy demands using the same energy sources, such as natural gas for
heating and gasoline for transportation. When this is the case, the CAIP covers
the carbon tax on most households.
However, the carbon-pricing system breaks down in a jurisdiction
where there are several different energy sources with significantly different
emissions intensities being used for home space and water heating. For example,
in Nova
Scotia, about 55% of households use electricity and 33% use heating oil,
whereas in Alberta
and Saskatchewan,
over 85% of the households use natural gas and about 13% use electricity.
Although about 45% of Nova Scotia's electricity was
generated from coal and petcoke in 2022, the federal government's
Output-Based
Pricing System (OBPS) means that electrically heated homes pay a considerably
lower
carbon tax than homes using heating oil.
Low- and moderate-income Nova Scotian households are the
predominant users of heating
oil in the province. These households can face financial hardships if their
carbon tax exceeds their CAIP. Moreover, households with incomes that prevent them
from taking advantage of free heat pump programs
or benefitting from subsidies
on electric vehicles are caught in a bind.
The Climate Action Incentive Payment
The existing carbon-pricing system does not distinguish
between levels of income and the types of energy used by the household for heating
and transportation. The only distinctions made are the number of people living
in the household and its location (the CAIP for households in designated
rural areas is 10% greater than for a corresponding household in an urban
area).
We see this in Table 1, where all households, depending on
the number of residents, regardless of income, receive the same CAIP. For
example, a household with two adults and a child would receive $868 for an
urban household or $955 for a rural household.
Table
1: 2023-24 CAIP payments for households in Nova
Scotia (Prorated to four quarterly payments)
|
|
Number of people in
household
|
|
One person
|
Two persons
|
Three persons
|
Four persons
|
Five persons
|
|
2023-24 urban CAIP
|
$496
|
$744
|
$868
|
$992
|
$1,116
|
|
2023-24 rural CAIP
(10%
supplement)
|
$546
|
$818
|
$955
|
$1,091
|
$1,228
|
A simple modification to the CAIP would result in low- and
moderate-income households receiving the full CAIP and higher-income households
receiving a smaller CAIP.
The proposed alternative
Any alternative CAIP must be based on a
method that is understandable and uses known values.
In the proposed alternative, the value is obtained
from the Low-Income Cut-Off or LICO published by Statistics Canada. LICO is the income
threshold below which a family is expected to devote at least 20% more of its
income on the necessities of food, shelter, and clothing than an average family
of the same size living in a similarly sized community.
Low-Income Cut-Off (LICO)
Canada's LICO is not specific to a province
or territory, it is assumed to be applicable to all communities across the
country. However, LICO varies by size of community and the number of people in
a household. The most recent LICO (for 2021) for households in communities with
populations between 100,000 and 499,999 are listed in Table
2.
Table
2: Before-tax
Low-Income Cut-Off for differing sized households for communities with
populations between 100,000 and 499,999
|
Number of people in household
|
LICO
|
|
1 person
|
$23,696
|
|
2 persons
|
$29,498
|
|
3 persons
|
$36,265
|
|
4 persons
|
$44,031
|
|
5 persons
|
$49,938
|
|
6 persons
|
$56,323
|
|
7 persons
|
$62,707
|
LICO is used by governments and other
organizations to determine who qualifies for various assistance programs. Nova
Scotia's free heat pump program (HomeWarming.ca) uses the LICO values shown
in Table 2 plus a percentage (see Table
3).
Table
3: Household size and maximum allowable household income to qualify for Nova
Scotia's heat pump program
|
Number of people in household
|
Maximum household income
|
Maximum LICO value for household size
|
Percent over LICO
|
|
1
person
|
$27,800
|
$23,696
|
17%
|
|
2 to 4
people
|
$52,600
|
$44,031
|
19%
|
|
5 or
more people
|
$72,900
|
$62,707
|
16%
|
For example, the maximum allowable
household income for a four-person household to qualify for the heat program is
$52,600, or 19% above the four-person LICO of $44,031.
The alternative CAIP
Nova Scotia's heat pump program is an
either-or situation: Either the household qualifies because its income is below
the cutoff, or it does not qualify because its income is above the cutoff.
Unlike the province's all-or-nothing support for heat pumps,
the alternative CAIP proposed here has households with incomes below a certain
limit receive the full CAIP (this is the Full CAIP Limit). Households above
this point receive a partial CAIP that declines as their income increases (the
point at which the CAIP is zero is the No CAIP Threshold). The Full CAIP Limit is
determined from the LICO and depends on the number of people in the household. The
rate at which the CAIP declines is set by the jurisdiction; for example, a one-dollar
decrease in the CAIP for every $100 above the Full CAIP Limit.
The structure of the alternative CAIP is shown in Figure 1.
Figure 1:
Structure of the alternative carbon-pricing system
CAIP limits and thresholds
The CAIP limits and thresholds are
determined by the LICO for a specific household size. The full value of the
CAIP is paid to the household as long as their income is less than the Full
CAIP Limit (a multiple of the LICO). When the Full CAIP Limit is reached, the
CAIP amount begins to decline (i.e., it is the Partial CAIP) until it reaches
zero (the No CAIP Threshold). The rate of decline is determined by the
jurisdiction. For example, a rapid decline would be a decrease of one dollar of
CAIP for every dollar over the Full CAIP Limit; whereas a slow decline would be
a decrease of one dollar of CAIP for every $50 over the Full CAIP Limit.
In Table
4, we see an example of three different Full CAIP Limits determined
by the value of the LICO multiplied by 1, 1.5, or 2 (that is, a zero percent
increase, a 50% increase, and a 100% increase). For example, a three-person
household has a LICO of $36,265, the Full CAIP Limit for this household would
be $36,265, $54,398, or $72,530 for LICO multiples of 1, 1.5, and 2.
In this example, the
CAIP reduces at a rate of one dollar for every $50 of income earned over the Full
CAIP Limit. For example, a household earning $500 over the Full CAIP limit
would see their CAIP decline by $10. The No CAIP Threshold is $79,665, $97,798,
and $115,930 for LICO multiples of 1, 1.5, and 2 for the three-person household.
Table
4: Examples of Nova Scotia's alternative CAIP values for different sized urban
households
|
Household size
|
LICO
|
LICO x 1
|
LICO x 1.5
|
LICO x 2
|
|
Full CAIP
Limit
|
No CAIP
Threshold
|
Full CAIP
Limit
|
No CAIP
Threshold
|
Full CAIP
Limit
|
No CAIP
Threshold
|
|
One person
|
$23,696
|
$23,696
|
$48,496
|
$35,544
|
$60,344
|
$47,392
|
$72,192
|
|
Two persons
|
$29,498
|
$29,498
|
$66,698
|
$44,247
|
$81,447
|
$58,996
|
$96,196
|
|
Three persons
|
$36,265
|
$36,265
|
$79,665
|
$54,398
|
$97,798
|
$72,530
|
$115,930
|
|
Four persons
|
$44,031
|
$44,031
|
$93,631
|
$66,047
|
$115,647
|
$88,062
|
$137,662
|
|
Five persons
|
$49,938
|
$49,938
|
$105,738
|
$74,907
|
$130,707
|
$99,876
|
$155,676
|
Applying the alternative CAIP to Nova Scotia
The alternative CAIP consists of three
parts. The CAIP itself, currently set by the federal government, although there
is no reason it couldn't be set by the province; the Full CAIP Limit; and the No
CAIP Threshold.
In the following examples, the Full CAIP
Limit is the value of LICO x 2
and the reduction rate is $1 in every $50.
The following figure is a graphical
representation of the alternative CAIP for LICO x 2 shown in Table
4. For example, a three-person family, would have a Full
CAIP Limit of $72,530 (double the three-person household LICO of $36,265). This
means that the family could have an income up to $72,530 before the CAIP is
reduced. The no CAIP threshold for the family is $115,930.
Figure 2:
Alternative CAIP showing urban household sizes, the household CAIPs (in
parenthesis), Full CAIP Limit, and No CAIP Threshold
Households with incomes between the Full CAIP Limit and the No
CAIP Threshold receive a partial CAIP. Calculating the partial CAIP is a three-step
process for both urban and rural households (this example uses urban household
values):
1. The difference between
the household's income and the Full CAIP Limit must be determined. The
difference for a three-person household with an income of, for example, $96,000
and the full CAIP limit ($72,530) is $23,470.
2. The difference
is divided by $50 to give the reduction in the CAIP. In the three-person
household example, the CAIP reduction is $469 ($23,470 divided by 50).
3. The partial CAIP
paid to the family is determined by subtracting the CAIP reduction from the
full CAIP. In this example, the household receives $399 (the household CAIP
value of $868 minus the reduction of $469).
The example shown here is for a Full CAIP
Limit of the LICO × 2 with a
reduction rate of $1 in every $50 earned over the Full CAIP Limit. Other limits
and reduction rates could be used. The example assumes that each household in
the province has the specified number of occupants and only one person in the
household receives the CAIP.
Currently, all Nova Scotian households with
at least one member paying income tax receives the full CAIP based on the
number of members in the household. In this example, it is assumed that all Nova
Scotia households, both urban and rural, pay income tax, and 40% of households
are urban and 60% are rural. This results in about 51% of all households
receiving the full CAIP, 25% receive a partial CAIP, and 24% receive no CAIP
(their incomes are above the No CAIP Threshold).
Figure 3 shows the number of urban and
rural households receiving full and partial CAIPs, and no CAIP. The Full CAIP Limit
is the same for the same size of urban and rural household (twice the LICO
value), but the No CAIP Threshold is different both for the size of household
and the CAIP, which is 10% higher for rural households.
|
|
|
Rural households by size and income limits for
Full-CAIP limit and No-CAIP threshold
(Total number of households is 284,550)
|
|
|
|
Urban households by size and income limits for
Full-CAIP limit and No-CAIP threshold
(Total number of households is 189,700)
|
Figure 3: Total number of rural (top) and urban (bottom)
households by household size and their maximum income limits for full-CAIP
limit and no-CAIP threshold (Statistics
Canada)
The carbon tax is unchanged and is still applied to all
purchases of carbon-intensive energy sources. The same revenues are collected.
However, in this example, the disposition of the carbon tax changes:
240,435 household receive the full CAIP; 119,740 receive the partial CAIP; and
114,075 do not receive the CAIP.
At present, assuming all urban and rural households receive
their full CAIP, it costs about $350 million.
If the alternative CAIP is used, it would cost about $210
million.
In this example, the difference between the current and
alternative system is about $140 million. These funds could be used to assist
low- and moderate-income household reduce their carbon tax by, for example, helping
offset the cost of winter heating for households in need, expanding the free
heat pump program, and supporting existing residential building upgrade programs.
Other carbon tax systems in Canada
There are two provinces with federally
approved carbon-pricing systems other than the federal carbon-pricing system:
Québec and British Columbia.
Québec
Québec is part of the Western Climate Initiative's Cap-and-Trade
system which includes California. Companies that are major emitters in the
system have emissions caps and are expected to pay for emissions above their
cap. This is done in an auction held every three months. The
cost of a company's emissions is passed on to the consumers when products are
purchased.
Unlike the federal system, this means the
price of, for example, a litre of gasoline, is not fixed for a year at 14.31
cents per litre (as it is in Nova Scotia and other provinces and territories
under the federal system), but can vary. The range of possible carbon prices
for commonly used fuels in Québec in 2023 are listed in Table
5 (minimum and maximum values determined from auction lower
and upper carbon price limits):
Table
5: Minimum and maximum possible carbon prices (cents per litre or cents per
m3) for 2023
|
Fuel
|
Minimum
|
Maximum
|
|
Gasoline
|
6.6
|
24.2
|
|
Diesel fuels
|
8.3
|
30.5
|
|
Light oil
|
7.6
|
27.9
|
|
Propane
|
4.3
|
15.7
|
|
Natural gas
|
5.2
|
19.2
|
The average carbon tax on gasoline in
Québec was about 9.23 cents per litre in 2023.
While this is about 5 cents per litre less
than Nova Scotia's carbon tax on gasoline, it is important to remember that Québec does not have a carbon-tax rebate
as we do in Nova Scotia.
British Columbia
British Columbia has a federally approved
carbon pricing system: a carbon tax on carbon-emitting energy sources
($65/tonne this fiscal year) and a quarterly rebated, the Climate Action Tax Credit (CATC).
CATC is similar to the CAIP in that it is
based on household size, the larger the household, the larger the CATC.
CATC is similar to the alternative CAIP
proposed for Nova Scotia, in that the CATC is determined by the household's income.
Like the alternative CAIP, when the income reaches the full CATC limit, it
starts to decline to the No-CATC threshold, at which point the household does
not receive the CATC.
The CATC value and income limits for
2023-24 are summarized in Table 6.
Table
6: BC's CATC
rebates and income limits
|
Number of people in household
|
Maximum CATC value
|
Income limits
|
|
Full CATC limit
|
No CATC threshold
|
|
Single
|
$447.00
|
$39,115
|
$61,465
|
|
Two
|
$670.50
|
$50,170
|
$83,695
|
|
Three
|
$782.00
|
$50,170
|
$89,270
|
|
Four
|
$893.50
|
$50,170
|
$94,845
|
|
Five
|
$1,005.00
|
$50,170
|
$100,420
|
There are a number of significant differences between the
example alternative CAIP for Nova Scotia example shown above and BC's CATC:
- Nova
Scotia's alternative CAIP is more generous than BC's CATC. For example, a three-person
household has a full CAIP of $868, whereas BC's CATC is $782.
- The
proposed alternative CAIP has higher income levels for those receiving the full
CAIP than does BC's CATC. In Nova Scotia, the Full CAIP Limit is a multiple of
the LICO, whereas in BC, the Full CATC Limit is $39,155 for single-person
households, and $50,170 for all other households, regardless of the number of
occupants.
- The
income at which no rebate is paid is also higher in the alternative CAIP than
in BC's CATC program. For example, in a four-person household, the alternative
full-CAIP limit is $88,062 and its no-CAIP threshold is $137,662, while BC's
CATC, the full-CATC limit is $50,170 and the no-CATC threshold is $94,845.
The future of Nova Scotia's carbon-pricing system
As the prime
minister's decision to remove the carbon tax from heating oil showed, Nova
Scotia needs an alternative to its current carbon-pricing system.
At present, all households receive the same
CAIP (based on the number of occupants) regardless of the energy they use for
heating and transportation. Households using electric heat pumps pay far less carbon
tax than comparable-sized ones using oil furnaces. Similarly, drivers of electric
vehicles pay far less carbon tax than those driving gasoline-powered vehicles.
In some cases, the CAIP is less than the
carbon tax paid by households using oil heat and driving
gasoline vehicles. Many of these are low- and moderate-income households.
This report has described a progressive
carbon-pricing system that meets the objectives of the federal system by retaining
the carbon-tax, helping Nova Scotians who need assistance with their energy
costs, and encouraging the purchase of low-emissions technology by those unable
to afford it.
This is in keeping with Environment
and Climate Change Canada's statement that carbon pricing is "about
recognizing the cost of pollution and accounting for those costs in daily
decisions".
In 2022, the premier wanted a Made-in-Nova-Scotia
carbon pricing system; it was rejected
by the federal government.
Since the federal government has accepted British Columbia's
carbon pricing system, they would have a hard time rejecting the alternative to
Nova Scotia's carbon-pricing system described in this report.
Plus, it is made in Nova Scotia.
Acknowledgements
The author of the report would like to
thank Michael Godwin, Sheheryar Mubarak, Sara Sohrabikhah, Augustine Okafor, and
Mike Shea for reviewing the report. Sandy Cook edited it. The author is solely responsible
for any mistakes.
The work in this report was not funded by either
the federal or provincial governments.
