Trudeau’s Fuel Tax Takes Effect in Holdout Canadian Provinces

(Bloomberg) -- A fuel tax is now being charged in four Canadian provinces, as Prime Minister Justin Trudeau advances a carbon levy over the objections of conservative premiers.

The federal “backstop” program applies to Ontario, Manitoba, New Brunswick and Saskatchewan, which make up nearly half of Canada's population. It will add 4.4 Canadian cents per liter of gas, or 12 U.S. cents per gallon, effective Monday, an amount that will rise in coming years. The government is pairing the new tax with “Climate Action Incentive” payments sent overwhelmingly to households, meaning the burden will fall disproportionately on small businesses.

For Trudeau, it's a key way to help reduce greenhouse gas pollution and lower Canadian emissions by -- in his words -- putting a price on pollution. However, the measure has been a rallying cry for conservatives who govern each of those four provinces and who dismiss the move as a tax grab, warn it could spur a recession and are challenging it in court.

The fuel levy that kicks in April 1 comes on the heels of a tax on industrial emitters that began in January, though its details are still being finalized. The new tax is the equivalent of a C$20 ($15) per tonne carbon price. That will rise by C$10 each year, to C$50 by 2022. However, Trudeau faces re-election this fall and his top rival has pledged to scrap the tax.

Short-Term Impact

The fuel surcharge alone will raise about C$2.3 billion in revenue this year, rising to C$5.6 billion by 2022-2023, with the majority sent back to households. The economic impact of the measures is expected to be minimal. Rebates will mean the net impact on gross domestic product will be small in the short term, according to Brett House, deputy chief economist at Bank of Nova Scotia.

“In the near-term, we don't see the calamitous effects ahead that some may be anticipating,” and price pressures will be modest at first, he said. “The longer term effect is a little more unknown.”

Tony Stillo, director of Canada economics for Oxford Economics, echoed that view. “We expect the impact of the federal carbon price to be quite small for the economy overall, though it could be more material for carbon-intensive sectors,” he wrote in a research note. The most visible part of the system will be “a modest bump to fuel prices.”

‘Holding the Bag'

Federal projections show the average household cost of the plan will range from C$202 to C$403 annually starting in 2019, depending on the province, while the average household rebate will range from C$248 to C$598. The rebates will rise in tandem with the increasing carbon price.

Business groups are divided on the measure. Generally, bigger groups have favored it while those representing small businesses have fought against it, saying rebates are too heavily skewed toward households. “Small businesses are left holding the bag,” Dan Kelly, president of the Canadian Federation of Independent Business, said in February.

The federal backstop plan only applies, in whole or in part, to provinces that haven't introduced their own carbon price. Aside from Ontario, Canada's three other major provinces -- Quebec, British Columbia and Alberta -- all have their own, though Alberta is poised to elect a new premier who'd scrap the province's system. If that happened, the federal plan could kick in there, too.

To contact the reporter on this story: Josh Wingrove in Ottawa at jwingrove4@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary, Chris Fournier

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