Understanding the Carbon Tax

Carbon taxes have a large impact on the profitability and operations of businesses. Jeff Harrison, CPA, CMA, Indirect Tax Partner at MNP LLP recently gave an update on what the carbon tax is and how it might impact the agriculture industry in the future.

Harrison began by explaining that there are several misconceptions surrounding Canadian carbon tax. One of the issues that people often misunderstand is that the carbon tax is actually not a tax at all, rather a levy on fossil fuels used as a tool to encourage reduction in carbon emissions when burned.

Conceptually, it is adaptable to both changes in rate and length of the program by attaching a levy rate to the carbon emission of over 22 fuel types, measured in cents/litre or cents/cubic metre. In 2021, these rates were $0.0805 per litre for diesel, $0.464 per litre for propane, and $0.0587 per cubic metre for natural gas.

Carbon tax is similar to other excise and fuel taxes where the distributor accounts for the tax and passes the cost on in the price, such as the price people see at the gas pump, and not a tax charge like you see in a GST/HST or PST.

The federal carbon tax program was initiated on April 1, 2019, with registration designed for self-reporting additional carbon tax owing or refundable. The program accounts for the issuance of exemption certificates for large emitters, users, and distributors, where entities would purchase an exemption ahead of time and not pay additional carbon taxes. Current proposals suggest legislation changes to an additional carbon tax of $15/tonne/year beyond 2022 out to 2030 which would make the carbon tax rate $170/tonne in 2030.

With carbon tax exemptions, there will be inputs with an indirect price increase as a result of the tax. Specific industries affected include the fertilizer manufacturing industry, which will offer exemptions for natural gas use, but incur tax on other fuel and indirect costs affected by the carbon tax. The potash and phosphate mining industry will not be provided exemptions and will form fuel consumed in mining and transport into their cost basis. Large emitters will likely acquire their fuel exemption for the most part, but account for carbon tax through the OBPS system, allowing some amount of carbon tax to be reflected.

What about the impacts on the Farming Industry?

Whether it is the farm itself or supporting services in the agriculture sector, the industry is heavily impacted by carbon taxes. Energy costs fluctuate with weather conditions and will continue to rise regardless of carbon taxes, wet harvests require larger use of propane and natural gas which are not exempt for farmers, and higher production costs will not always translate to higher commodity prices due to the competitive market. Harrison says Canadian farmers will have to compete with others that do not have a carbon tax, raising the question of who will bear the costs that cannot be passed on in price.

Canada’s Clean Fuel Standards legislation target is to reduce carbon intensity by 13% by 2030, with a proposed start of December 2022. This legislation would require fossil fuel suppliers to supply cleaner fuels in addition to having a credit system for low-carbon, renewable gas/hydrogen, supplying biogas, and more.

Harrison says the future is still uncertain, but it is important to accept that the carbon tax is not going away and that it will lead to additional broader legislation, and will have an impact on the farming industry as well as the retail ag business.