Our weekend business panel discusses the latest version of the North America Free Trade Agreement, the impact of the federal carbon tax in Canada and Apple’s introduction of a credit card on your smartphone.
Drivers hit by the jump in gas prices at the pumps this week after the introduction of the carbon tax should brace themselves for even higher prices in the coming months.
Some analysts predict gas prices could rise by another 10 to 15 cents a litre by this summer, and that has nothing to do with the carbon tax.
A combination of higher world oil and an increase in demand for diesel, plus seasonal factors such as the shift from winter to summer gasoline and higher demand in the warmer months means the big drop in prices that started late last year could be a thing of the past.
Dan McTeague, senior petroleum analyst at GasBuddy, expects prices to raise another five cents as early as next week as the shift from winter to summer gasoline takes place across much of Eastern Canada.
“Ontario, Quebec, and the Maritimes are looking at a net five cent increase on top of Monday’s five cent increase,” McTeague said. That federal carbon levy at $20/tonne that applied in Saskatchewan, Manitoba, Ontario and New Brunswick added about 4.4 cents per litre.
“Western Canada, sort of, is seeing this being phased in a little slower, and they’ve already started seeing [a rise of] probably about two cents worth.”
B.C. and Alberta already had a carbon tax and their gasoline is refined closer to home, making a difference in when price increases take effect.
Susan Bell, oil analyst at IHS Markit, expects gas prices to rise by 10 cents from now to the end of summer as a gasoline inventory glut in the market starts to ease, and crude oil prices head higher, in part due to demand for diesel fuel.
The IMO is introducing a sulphur limit rule for 2020, known as IMO 2020, which will decrease the amount of sulphur allowed in the fuel from 3.5 per cent to 0.5 per cent. This will affect large ships that use low grade fuel, which is considered the bottom of the barrel, because of its air-polluting qualities. In order to comply, many ships will likely have to switch to diesel, pushing up demand for heavy crude oil, which is used to make diesel.
“International factors such as the International Maritime Organization’s (IMO) global bunker fuel oil specification change will require refiners to increase crude oil runs to meet strong diesel demand,” Bell said.
“This, along with crude oil supply challenges that result from U.S. sanctions against Iran and Venezuela, will support crude oil price increases. Gasoline prices will respond in kind with the increase in crude oil prices.”
McTeague said a more-than-six-cents-a-litre jump in the price of diesel “will pretty much affect the price of everything.”
“It has direct and indirect costs, and I think it’s the indirect ones that we really haven’t calculated,” McTeague said. “But, I do get nervous when I see that food prices, the basket of goods that make up grocery prices have skyrocketed this year compared to last year, much of it driven by fuel.”
He said many people have already made the switch to smaller cars, but this kind of price rise may necessitate new ways to economize.
“Most people have moved to more efficient vehicles, but is there room for more efficiencies? For sure.”
The price of benchmark U.S. crude oil — West Texas Intermediate (WTI) — has surged nearly 47 per cent since hitting a one-year low in December, now trading around $62 US a barrel. Meanwhile, the price of Western Canadian Select (WCS) has quadrupled — jumping more than 300 per cent to around $54 US — since hitting a yearly low in November.
Meanwhile, analysts are split over how much of an impact the carbon tax on fuel will have on consumers.
McTeague said those shrugging their shoulders over a five cent increase in gas prices this week need to remember that a 2.5 cent per litre increase annually over the next three years will result in gas prices higher by at least 12.5 cents when all is said and done.
“When there’s a component that pushes prices up that is discretionary such as the carbon tax, which is a policy decision as opposed to an economic factor, it means that price remains permanently cemented in place, and it will continue to build over the years,” McTeague said.
“We’ll have to see how that affects the bottom line — disposable incomes. The concern, of course, is if you’re not spending on gasoline — what other purchases are they foregoing, and in what parts of the economy and how will this cascade through the economy.”
Bell, however, said while higher prices at the pumps will affect the affordability of fuel, the overall impact of the carbon tax is relatively small when compared to the wild swings in the oil market.
With the carbon tax adding 4.4 cents per litre to the price of fuel, that equates to less than $100 per year of increased cost per vehicle (assuming a typical 20,000 km of driving per year at an average 10 litres/100 km fuel economy).
“On a single [gas] fill of 60 litres, the carbon levy is less than $3. So, the overall impact is relatively small,” Bell said.
“Layering on the 10 cents per litre in expected gasoline price increase that is the result of increased crude oil costs and refining margins results in a more significant hit to the consumer.”
The 10-cents-per-litre increase will cost the consumer an additional $6 per fill-up, or about $200 a year using the same annual assumptions, Bell said. “At this cost increase, some consumers may back away from discretionary gasoline spending.”
Eleven years ago, Jock Finlayson and his colleagues at the Business Council of B.C. were mildly alarmed by how quickly Gordon Campbell’s provincial government implemented North America’s first carbon tax.
“We were concerned, to be candid, about what the implications of this would be for our members and for the business community generally,” Finlayson, the council’s chief policy officer told CBC.
Today, after watching the tax in action for more than a decade, he still doesn’t love it, but he’s also seen the advantages of putting a price on pollution.
“I’d say in macro [economic] terms, because of the way the policy was designed, it’s probably been a wash. In other words, I don’t think it’s either helped or hurt overall growth in the provincial economy,” he said.
As the last four provinces to resist carbon pricing are dragged into a new federal tax scheme, the country’s oldest carbon tax might serve as a good example of what to expect.
To be clear, not everyone is happy with the tax. The right-leaning Fraser Institute argues it makes B.C. less attractive for investors.
“The end result is less investment, lower rates of job-creation, and fewer opportunities for British Columbians to prosper,” the institute’s Niels Veldhuis and Charles Lammam wrote in a 2017 op-ed opposing increases to the tax.
And Finlayson said he’s still concerned that businesses in industries like pulp and paper, mining and food processing can’t compete with rivals in other provinces because of the high price of energy in B.C.
But the economists who spoke to CBC for this story suggest B.C.’s tax is working as it should. By making pollution more expensive to reflect the environmental costs, the tax appears to have changed the behaviour of British Columbians and led to a drop in greenhouse gas emissions.
At the same time, while sectors of B.C. economy that consume a lot of energy have suffered from the higher cost of fuel, others, apparently spurred by corporate tax cuts, are thriving.
“This carbon tax is a model for the world that well-designed carbon pricing can be good for the environment and the economy. In the 11 years since B.C. brought in its carbon tax, it’s outpaced the rest of Canada both on emission reduction and GDP growth,” said Stewart Elgie, a professor of law and economics at the University of Ottawa.
Looking back, the origin story for B.C.’s carbon tax sounds counterintuitive.
The tax, first set at $10 per tonne of carbon dioxide emissions, was brought in by a B.C. Liberal government — the equivalent of a conservative administration in most parts of the country.
But that was July 2008, before the true onset of the global financial crisis. Al Gore’s climate change documentary, An Inconvenient Truth, was still fuelling a wave of concern about greenhouse gas emissions.
“It was a very popular tax. I think it caught both the NDP and the Greens provincially off guard,” said pollster Mario Canseco, president of Vancouver’s Research Co.
The NDP launched an “axe the tax” campaign, arguing it would kill jobs, and leader Carole James promised she’d dump it if she were elected premier in the 2008 election.
She wasn’t, and the Liberals helped ease British Columbians into the idea of a carbon tax by making it revenue neutral. Taxpayers received rebates, and the province lowered corporate and personal income taxes.
Since then, the provincial NDP has come around on the tax. When the party came into power two years ago, James was named finance minister, and she’s overseen a thaw of the carbon tax rate, which had been frozen since 2012.
As of April 1, B.C.’s rate is $40 per tonne of carbon dioxide emissions, which translates to 8.89 cents per litre of gasoline. It’s set to top out at $50 a tonne in 2021.
In the meantime, numerous researchers have tried to determine the impact of the tax. According to a 2015 paper, B.C.’s emissions had dropped by between five and 15 per cent since the tax was implemented, and it had a “negligible impact” on the overall economy.
Elgie, of the University of Ottawa, was part of a wide-ranging 2013 study that showed a 19 per cent drop in B.C.’s per capita fuel consumption in the first four years of the tax, while the province’s economy slightly outperformed the rest of the country.
“The other side of the carbon price is that it creates an incentive for innovation,” Elgie said. “B.C. has now become a leader in clean technology.”
He pointed to Squamish’s Carbon Engineering, which has developed technology that it says can suck carbon dioxide from the atmosphere and turn it into fuel.
Sumeet Gulati, a professor in food and resource economics at the University of British Columbia, has studied the impact of the carbon tax on consumer choices — particularly, the choices of drivers.
A 2016 research paper he co-wrote suggests the carbon tax has pushed B.C. drivers to choose cars that are more fuel efficient.
“If we didn’t have it … we’d be at least emitting on average seven per cent more per person in B.C. in terms of carbon emissions while driving, and cars would be about four per cent less fuel efficient,” Gulati told CBC.
In recent years, the province has abandoned the idea of keeping the tax revenue neutral, and is now using some of the proceeds to encourage development of green technologies.
The folks at the Fraser Institute say that’s a mistake.
“Firms in British Columbia now not only face the highest carbon tax in North America, but they no longer enjoy any of the offsetting benefits that briefly existed as a result of lower [corporate income tax] rates,” the authors of a January report wrote.
Gulati also believes a return to revenue neutrality is essential.
“It’s important to make it politically resilient, despite who comes into power,” he said.
On the other hand, he’d like to see the rate keep rising, up to $75 or even $100 per tonne of emissions.
As for Finlayson at the Business Council of B.C., he’d like to see more support for businesses that have been hurt by the tax, including exporters, manufacturers and pulp and paper mills.
He’d also like to see a true Canada-wide carbon pricing scheme that would put businesses on an even playing field while tackling emissions.
“It’s unfortunate that the whole national climate change policy framework is in disarray at the moment because of all the opposition that we’re seeing from some provinces and some political parties,” he said.
“If we’re going to deal with this climate change issue and do so through a sensible carbon pricing regime, the logic is very powerful to try and do that in a coordinated, pan-Canadian way.”
The Manitoba government will go to court over Ottawa’s imposition of a carbon tax.
Premier Brian Pallister revealed Wednesday his government will launch a legal challenge against the federal government, which imposed its new levy as promised on Manitoba, along with three other provinces, Monday.
“We’re going to court, sadly, to challenge the Ottawa carbon tax because Ottawa cannot impose a carbon tax on a province that has a credible greenhouse gas-reduction plan of its own, and we do,” he told reporters.
The federal government’s carbon tax came into effect April 1 for four provinces — Saskatchewan, Manitoba, Ontario and New Brunswick — that didn’t meet Ottawa’s standard for a sufficient carbon pricing system.
The carbon tax is now charged on 21 different fuel inputs in those provinces, including gasoline, at a rate of $20 per tonne of carbon emissions. That will gradually rise to $50 per tonne by 2022.
Pallister said Wednesday his government has a strong legal case against the federal tax, separate from a court challenge already launched by Saskatchewan, and backed by Ontario and New Brunswick, because it originally proposed its own tax.
Manitoba backed away from that plan, which proposed a flat carbon price of $25 per tonne, when the federal Liberal government declared it didn’t go far enough.
The premier also said it wasn’t fair that the federal government had offered exceptions to other provinces, but not Manitoba.
He’s previously said Quebec’s cap-and-trade program is much less stringent than the flat $25-per-tonne price he proposed before he withdrew the Manitoba carbon tax, and has argued Manitoba isn’t given credit for the clean energy it produces.
“I’m the only Conservative premier in the country that took steps to develop a green plan, which actually involves our people here contributing somewhat to a levy.”
Pallister said his decision was influenced by discussions with government lawyers, and that Manitoba’s legal argument is more convincing now that the federal backstop is in place.
“There’s no point launching the case unless they were going to intrude on Manitoba’s jurisdiction,” he said of the federal government. “They didn’t do that until this past Monday.”
Manitoba will withdraw the court challenge, which may take two to three years to wind through the legal channels, Pallister said, if the Saskatchewan court challenge succeeds, or if the Trudeau government is defeated in the next federal election.
“My hope would be it’s resolved by previous court decisions and we don’t need to carry it further,” Pallister said. “I guess I could be accused of trying to save money, yet again.”
If Ottawa’s plan is rejected, Pallister wouldn’t say whether he would implement the carbon tax plan his government originally proposed.
Federal Environment Minister Catherine McKenna is dismayed by Pallister’s thinking.
“I think it’s really ironic,” she said from Ottawa.
“The day after we release a climate report for Canada by our scientists that said that Canada’s warming is double the world average that we have the premier of Manitoba deciding to take us to court, to spend taxpayer money fighting climate action as opposed to fighting climate change,” McKenna said.
“Manitoba had an opportunity to have a plan and, unfortunately, they flip-flopped so many times.”
Manitoba NDP Leader Wab Kinew pointed out the province received a legal opinion two years ago that said the federal government has the right to impose a carbon tax.
He said this lawsuit, which he described as “frivolous,” won’t change that.
“We can debate the merits of the carbon pricing measure, but I can tell you one thing for sure: taking the federal government to court on this is just going to waste taxpayer money and it’s going to do absolutely nothing to fight climate change here.”
The legal opinion said the province could legally snub the federal carbon tax scheme if it demonstrated that its plan was equally effective at cutting emissions.
The government would be better off returning to the negotiating table with the federal government, argued Manitoba Liberal Leader Dougald Lamont.
“To go against the advice of a very well-respected law prof who you’ve paid tens of thousands of dollars to give you advice on this matter doesn’t make any sense to me.”