JANUARY 2017
www.bdo.ca
2017: The Year of the Carbon Tax
For many businesses across Canada, carbon taxes coming online by the end of 2017
represent a new and significant variable to consider when making decisions. Having
an awareness of their mechanics and implications to your operations will help you
formulate the most appropriate and effective strategies moving forward, and this
primer is intended to help you get started.
First Things First: What Is a Carbon Tax?
A carbon tax is a cost imposed on any activities that release carbon-based gases, such as carbon dioxide, into the atmosphere.
Most greenhouse gases (GHGs) are carbon-based, and are produced in the burning of fossil fuels (oil, gasoline, diesel, coal, jet
fuel, etc) to provide energy for transportation, manufacturing, electricity generation and other industrial purposes. It is believed
that GHGs being emitted into the atmosphere are affecting the global environment, and governments are enacting legislation
to encourage businesses to scrutinize their carbon requirements more closely.
Currently, carbon tax policy is in the hands of the provincial governments, and varies from province to province. Some, like
Quebec and B.C., have had a system up and running for some time now. Others, like Alberta and Ontario, are implementing
them in the first quarter of this year. And there is a lot of uncertainty about what will happen south of the border with our
closest trading partner, which will undoubtedly have an impact on us as well.
Late last year, the federal government ordered all provincial and territorial governments to impose a minimum cost of $10 per
tonne of GHGs emitted within their borders, beginning by the end of 2017. That “pan-Canadian” minimum will rise by another
$10 a tonne each year, until it totals $50 a tonne in 2022. At that point, the federal and provincial governments intend to
assess the situation, the costs and benefits, and respond accordingly.
If you’re uncertain about what all this means and how it will affect your business, you are definitely not alone. One immediate
reality is that it’s going to add a cost to all activities that produce carbon emissions, right across the country. However, no
one really knows how much influence a carbon price of $10 or, eventually, $50 a tonne will have on consumer behaviour, or
whether it will actually incentivize a reduction in the use of fossil fuels and GHG emissions. Nor does anyone know what’s
going to happen after 2022. However, looking at markets where the tax has been in place for some time, like B.C., the general
consensus is that the economy adjusted for the better and that some of the headwinds were due to the fact that other
jurisdictions did not yet have any carbon pricing in place.
2017: The Year of the Carbon Tax | BDO Canada LLP
To be fair, governments are trying to make this policy as simple and consistent as they can. That’s the thinking behind the federal
government’s “pan-Canadian” carbon price—so the cost of doing business won’t suddenly change at the provincial border.
But in some ways, uncertainty seems to be baked right in to carbon pricing. That’s why there are two main ways to price
carbon, and different provinces have chosen different methods.
Carbon Tax vs. Carbon Trading (ETS)
As stated, the general idea behind pricing carbon is to add a cost that businesses have to pay when they engage in GHG-producing
activities.
There are two approaches to this—(1) a straight-up carbon tax, set by the government, or (2) a market-based carbon trading
approach, often called cap-and-trade, that uses an Emissions Trading System or ETS. Some provinces (BC, Alberta) are going
with a carbon tax, while others (Ontario, Quebec) have opted for ETS.
The straightforward carbon tax sets a clear price that businesses and consumers know they will pay when purchasing goods and
services at any point in their supply chains. It is also generally introduced as either a revenue-neutral instrument, meaning that
any taxes collected for carbon would be offset by cuts to corporate or income taxes, or revenues are specifically earmarked to a
specific cause, such as greening the economy.
The carbon tax has the benefit of familiarity, in that it can be applied and collected much like any other tax. B.C.’s carbon tax,
for instance, which focuses entirely on the burning of fossil fuels, is designed to operate in the same way as the province’s
existing motor fuel taxes. The province hopes this simplicity will minimize the costs of administration and compliance.
Alberta’s carbon tax came into effect on January 1st of this year, priced aggressively at $20 per tonne, rising to $30 per tonne in
2018. That will put Alberta at par with BC’s tax, already at $30 a tonne.
An ETS or cap-and-trade system, is more complicated, since it involves the creation of a whole new market for carbon emissions.
In this model, each year the government will set a ceiling on the total amount of emissions for the economy as a whole, and
create “allowances” to emit that same amount of GHGs. The GHGs are measured as “carbon dioxide equivalent” or “CO2e”—as
determined by scientists and set by government regulation. One allowance equals the right to emit one tonne of CO2e.
The general idea behind pricing
carbon is to add a cost that
businesses have to pay when they
engage in GHG-producing activities.
Then, four times a year, the government will hold an
auction, and businesses will need to purchase enough
allowances to cover their expected emissions. Those
whose operations require more allowances will have to
buy surplus from another business who is under their
quota—perhaps because of an innovation that has
reduced their emissions, or through other concerted
efforts to find efficiencies.
The government may also provide a secondary pool of
allowances for companies that find themselves caught
short. These will be sold at a price significantly higher
than the market price, and cannot be re-sold.
2017: The Year of the Carbon Tax | BDO Canada LLP
Year by year, governments using ETS will reduce the total number of allowances available—which, by restricting the supply,
should theoretically raise the price on the open market over time.
Ontario’s first auction is scheduled for March 2017. A practice run in January should help the government work out any major
bugs in advance. They have also been closely studying how ETS is working in Quebec and California. Ultimately, Quebec,
Ontario and California hope to combine their auctions in some way yet to be determined, with the goal of building a “pancontinental” carbon market.
Most Importantly: What it All Means for Your Business
For individual businesses, much uncertainty remains. But the basic fact is that an economy-wide carbon price is here for the
foreseeable future. There is no one-size-fits-all business solution—and what works this year may need to be modified in coming
years, as the situation evolves.
Long-term, that means looking for ways to minimize GHG emissions in your business. For manufacturers, this only adds to the
incentive to invest in new technology, new processes and Industry 4.0 innovations. For transport, that means looking for fuel
efficiency solutions, alternative fuels, and even non-carbon-based vehicles. It is our belief that many Canadian businesses will find
their most effective solutions through innovation, clustering and collaboration, and the thorough evaluation of their supply chains.
These are things we have already been helping our clients with in jurisdictions where carbon pricing has been implemented.
Regardless of the of carbon pricing method in your province, all companies will be required to track, record, and reconcile their
carbon usage and remittances to the provincial Government. There are also likely going to be exceptions (the agricultural sector
and airline industry, for example, are exempt in some provinces), and credits (for innovation and investment, most likely)
offered by Governments to further incent the private sector to modernize their operations, and these may be complicated to
interpret and apply for.
When it comes to carbon pricing, getting the best advice, information, and expertise before making any decisions is more
important than ever. Nationally, we will continue to publish more sector-specific information as it becomes available, and those at
your local BDO office would be more than happy to help you understand its more immediate implications for your business.
Did you know there is funding available for manufacturers that are purchasing new equipment to
reduce GHG emissions or reducing electricity costs? Learn more here.
To learn more, please contact your local BDO office or:
Michael Gillespie, CPA, CA
Partner, National Manufacturing Leader
519 502 2662
[email protected]
Marcus Sconci, CPA, CA
Partner, National Transportation,
Warehousing and Distribution Leader
905 272 7830
[email protected]
Justin Friesen, CPA, CA
Partner, National Oil and Gas Leader
403 205 5770
[email protected]
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