Canada backtracks on a carbon tax

Mary Anastasia O’Grady

Canadian Prime Minister Justin Trudeau’s Liberal government announced last month it will reduce a carbon tax on industry that is set to go into effect next year. The reason for the backtrack has to do with climate change, but not the kind associated with global warming.

Mr. Trudeau is reacting to shifting political winds stirred by Canada’s investment climate, which has turned stone cold. He faces an election in October 2019, and Liberals will have trouble winning unless investors warm to Canada as a destination for capital again. The question is whether the scaling back of the carbon tax is too little, too late.

The initial carbon-tax proposal, which takes effect next year, promised to levy companies on 30% of their emissions at 10 Canadian dollars (US$7.66) a metric ton, rising to C$50 a metric ton in 2022. The revision now sets the taxable emissions at 20%. The Journal’s Paul Vieira reported from Ottawa on Aug. 1 that “government officials are prepared to tinker further with the carbon-pricing regime should domestic industrial sectors bring evidence demonstrating ‘[heightened] competitiveness risks’ due to developments in the global marketplace.”

Canada’s ability to attract capital suffered a setback when oil prices fell hard in 2015. Under Mr. Trudeau, who took office in November of that year, it hasn’t caught up. In an April 13 blog post, Jason Clemens and Niels Veldhuis of the Vancouver-based Fraser Institute noted that Canadian foreign direct investment amounted to C$31.5 billion in 2017, down 56% from C$71.5 billion in 2013. The authors added: “Since peaking in the fourth quarter of 2014, total business investment adjusted for inflation-excluding residential housing-is down almost 17.0 percent. Private-sector investment in factories and other structures is down 23.3 percent. And investment in intellectual property is down 13.3 percent.”

The causes of this capital strike seem to be taxes and regulation, as more than one business leader has noted. Suncor Energy CEO Steve Williams said in February that his company is “having to look at Canada quite hard. The cumulative impact of regulation and higher taxation than other jurisdictions is making Canada a more difficult jurisdiction to allocate capital in.”

For prospective investors, the business climate in Canada is naturally compared with that of the U.S. Recent U.S. tax cuts, including accelerated depreciation, and President Trump’s deregulation push, are increasing the pressure on Canada to step up. In an April interview with the Canadian Press, Royal Bank of Canada president and CEO Dave McKay described the competitiveness problem behind what he called “significant” capital flight and called on the government to address it. “If we don’t keep the capital here, we can’t keep the people here-and these changes are important to bring human capital and financial capital together in one place,” he said.

The new carbon tax is only one of the green policies hurting Canada’s competitiveness. Ontario has long been the nation’s manufacturing hub. But in 2005 the province began phasing out the use of coal for electricity generation, and in 2009 it passed the Green Energy Act, designed to force industry and consumers into renewable energy. The net effect has been skyrocketing electricity prices in the province and declining manufacturing output.

A May 8 paper by Fraser analysts Elmira Aliakbari and Ashley Stedman titled “The Cost of Pipeline Constraints in Canada” blames “environmental and regulatory impediments as well as political opposition” for delays in the expansion of the nation’s pipeline infrastructure. This has depressed prices for Canadian heavy crude, creating a drag on growth, the authors show. Energy company Kinder Morgan recently sold its assets in the Trans Mountain pipeline to the Canadian government because of continuing opposition to its completion by British Columbia and others.

Elsewhere in Canada there has been aggressive pushback against the federal carbon tax. Ontario, under new political management since June, and Saskatchewan have gone to court to challenge the federal government’s authority to impose the tax. Prince Edward Island, New Brunswick and Manitoba have their own proposals to price carbon and are all on record against a federal take.

In Alberta, where the economy depends heavily on pumping oil, the United Conservative Party’s Jason Kenney is the favorite to win next year’s election for provincial premier. He has promised to oppose the Trudeau tax. He says he will keep a provincial carbon tax but limit it to “major emitters.”

Canadian Environment Minister Catherine McKenna said last week that the Trudeau government wants “to have the most energy efficient, smart industries here that create good jobs, at the same time do what we need to do to tackle emissions.” But Liberals may soon find out that as one of the world’s foremost energy producers, Canada can’t have it both ways.

www.wsj.com