The Ontario government recently announced that it will be challenging the federal government’s carbon tax in court. Ontario will most probably lose. To understand why, we need to consider four issues:
1. The Ontario Court of Appeal cannot hear any of the political arguments the Ontario government has against the tax. What can it hear?
2. What taxes is Ottawa allowed to impose under our constitution?
3. What does the so-called carbon tax actually tax, and who gets to keep the money it collects?
4. Ontario (like Saskatchewan) has said the tax is unconstitutional because it treats different provinces unequally. Is that true?
1. What a Court Can and Cannot Consider
There has been much public debate about the environmental issues that led to this tax. If the US, China and some other major CO2 emitting countries do not have a carbon taxes why should Canada do so? Is this just another “tax grab”? Can this tax can reduce emissions enough without undue harm to the Canadian economy?
Although Ontario may try to present some of these political issues to the court, none of is legally relevant. They are environmental issues, not constitutional law issues. Judges are not here to judge whether this is a good law or a bad law, but only whether Ottawa has the constitutional authority to impose the tax.
2. What Taxes Can the Government of Canada Impose?
The short answer is pretty much any tax it wishes.
Our constitution gives the Canadian Parliament the exclusive authority to raise money “by any Mode or System of Taxation”. (The provinces can also raise money by taxation, but only under a limited list of types of taxes.)
It would be difficult to find a broader authority to tax than the word “any”. The constitution does not say “other than a carbon tax”. It also does not say that all provinces have to be treated equally, and that is not what actually happens.
In the 2018-2019 year, the federal government will pay close to $19 billion of tax revenue in “equalization payments” to the provinces. The provinces are divided into the two categories based on how much they earn through taxes such as on natural resource, income and property. In the 2018-2019 year, provinces receiving equalization payments will be: Quebec, Manitoba, Nova Scotia, New Brunswick, Ontario and Prince Edward Island. Alberta, Saskatchewan, Newfoundland and Labrador and British Columbia will not be receiving this money, even though federal taxes from these provinces contribute to the total equalization pot. The result is a transfer of income from the “have” provinces to the “have nots”. Yet Ontario has not protested or taken Ottawa to court over the unequal tax treatment of provinces that will cause Ontario to receive payments.
3. What’s in the Name of a Tax?
The “carbon tax” is not a tax on carbon. Although it aims to reduce the emissions of carbon dioxide, it is not even a tax on carbon dioxide. Rather, it is a type of consumption tax imposed on the consumption of carbon-based fuels (such as coal, oil, gasoline, or natural gas), based on the tonnage of CO2 emitted when such fuels are burned. Whatever its purpose, and whatever its name, a tax is a tax.
Every consumption tax imposes some degree of economic cost on the consumed goods or services, and is therefore a burden on the people and businesses consuming them. As a practical matter, governments must balance the benefits of the level of taxes against the economic burden they create. However, the Canadian constitution makes no mention of this, because such balancing is not a legal or constitutional issue, it is purely political.
A “carbon” tax may be a new name, but in essence it is just another way of Ottawa “raising money”, as the constitution says. A carbon tax on fossil fuels does not need to be different from other taxes with well known names. For example, Canada has had both federal and provincial taxes on gasoline for decades.
British Columbia and Alberta both have a “carbon tax” on gasoline. What is the difference between British Columbia’s gasoline tax and its carbon tax? An additional 7.78 cents/litre on gasoline and 8.95 cents on diesel (with different levels on other fuels). Alberta’s carbon tax on gasoline is 6.73 cents per litre; on diesel, 8.03 cents. Alberta’s tax is also in effect on other fuels, everything from jet fuel and kerosene to coal. If a carbon tax on fossil fuels is unconstitutional then all federal and provincial gasoline taxes would also be be unconstitutional. Neither Ontario nor Saskatchewan have advocated that.
These taxes may be labelled “carbon tax”, but, despite the label, they are essentially an additional consumption tax on commodities already taxed by both levels of government. There is nothing new and unprecedented about taxing these items, despite the name “carbon tax”. As there is nothing new, there is no need to look to the constitution for approval.
The federal plan does call for new taxes on industrial CO2 emissions, but very recently the Minster announced that their level would be significantly reduced. The result will be significant reduction in the amount of money at stake, so it will have minimal impact on the industries concerned. As the Trump plan for “America first” and the tariff wars take effect on employment and consumer prices in Canada, it is safe to predict that the federal plan will be diluted even further, or abandoned entirely as unfeasible.
4. Does the Federal Carbon Tax Treat Provinces Unequally?
Saskatchewan’s argument is that the federal government cannot impose a tax on one province but not others just because the federal government does not approve of Saskatchewan’s climate change plan. Ontario’s argument is substantially similar. This argument has no merit, and is unlikely to succeed.
The federal response has three strong arguments against these provinces.
1. Environmental issues such as harmful air emissions cannot be contained within provincial borders. Unless all provinces can agree on an effective climate policy, which is not the case, the federal government can, and must, act on a national scale. This principle has been recognized in previous decisions of the Supreme Court of Canada.
But global CO2 emission levels raise environmental concerns that are even broader than just Canada; this is an issue for the entire planet. That is why Canada joined so many other nations in the Paris Accord, by agreeing to reduce this country’s future CO2 emissions. There is nothing in the Canadian constitution that would make unconstitutional Canada’s fulfilment of this commitment through a carbon tax.
In substance the Saskatchewan and Ontario arguments seek the right of a province to prevent Canada from honouring its Paris Accord environmental commitments made on behalf of the entire country. There is nothing in the Canadian constitution that would grant any province the right to do so.
2. It is not true that the federal plan treats provinces unequally. The federal carbon tax sets a “floor price” per tonne, increasing each year. If any province wishes to create its own price on carbon, whether through a cap and trade system or a carbon tax, it must meet or exceed the federal government’s floor price. This flexibility allows any province with an equal or better plan to put it in place. The federal tax will be imposed if and only if a province puts no plan in place that will impose a cost on CO2 emissions at the same level as the federal tax. All provinces that have a federal-equivalent plan in place pay no carbon tax to Ottawa; all provinces that do not will have to have their residents pay the federal carbon tax. The federal carbon tax, therefore, treats all provinces equally, discriminating against none of them.
The federal flexibility in allowing each province to work towards the national target in its own way is a positive feature of this legislation. This allows each province to exercise its discretion to set the least cost way of achieving its share of the national emissions reduction target. It is ironic that the two provinces in this case have tried to turn this positive benefit into a constitutional argument against the entire federal climate plan. They would not have been able to make this argument at all if the federal law had been a uniform federal carbon tax applicable to all provinces, with no room for provincial variation. Bringing this case with these arguments simply discourages such federal flexibility in future legislation.
3. The federal government will keep none of the money from a carbon tax, so the people in all provinces will be no worse off. Any province which imposes a carbon levy equivalent to the federal requirement will keep all of the revenue. Any province which does not will have its residents and businesses pay the federal tax, but all the money the federal government collects from this tax will be paid back, either to the province or directly to the residents of that province. Thus, regardless of who levies the tax, the provincial governments or their residents will receive all the new revenue. Whether some provinces receive the carbon tax revenue directly from their own residents or indirectly from the federal government imposing the tax, the revenue to the province or its residents will be approximately the same. In that respect also, the federal government is treating all provinces equally because the federal government will keep no carbon tax revenue from any of them.
My Bottom Line
Ontario’s court challenge is legally a non-starter, and the Provincial government must know it. So why is it doing this? It is using the courts for PR purposes rather than legal purposes. If a private citizen or business brought this same challenge the court would throw it out without a hearing, calling the claims merely “frivolous and vexatious”. Because it is brought by a provincial government, however, it will be treated as a real constitutional issue to be resolved. It is a waste of taxpayers’ money, done for the purpose of trying to make the Provincial government look good in the eyes of those who oppose a carbon tax.
My personal opinion is that a Canadian carbon tax would be acceptable only if all or almost all developed nations did the same, particularly China and the US, the world’s two largest emitters of CO2. However, Canada cannot do this alone. If we persist, we will be shifting business investment and employment to countries that do not have such a tax. If Canada persists in a carbon tax this will move the emitters to the US and elsewhere, with the same level of emissions, or even higher emissions than before. Thus we will be taxing Canadians and damaging the economy, without achieving any global reduction in CO2 emissions This makes no sense as a policy.
Despite the economic disadvantages of a carbon tax, that is not a constitutional law argument. It is not an issue the court can consider.