Canada is in the early stages of embarking on the grand experiment of carbon taxation.
Such a tax would be levied on the carbon content of fuel. It is a form of carbon pricing.
Carbon is present in every hydrocarbon fuel (coal, petroleum and natural gas) and is released as carbon dioxide when they are burned.
CO2 is a heat-trapping greenhouse gas, which has a negative impact on the world climate.
Environmental issues now seem to dominate government decision making around the world, sometimes adversely affecting other economic concerns.
A tax on greenhouse gas emissions can be levied by taxing the carbon content of fossil fuel at any point in the product cycle of the fuel. Last fall, the federal government announced it would require all provinces and territories to have some form of carbon pricing by 2018.
The argument is that putting a price on carbon emissions encourages individuals, businesses and industry to use less fossil fuel and therefore generate less greenhouse gas.
It must be said that it is still too early to tell whether increased taxes will lead to reduced consumption because data isn’t available to support the conclusion. If taxes don’t succeed as planned, history tells us the individual taxpayer will absorb the impact through in-creased pricing.
As with most legislation and taxes, there can be exceptions.
British Columbia brought in a carbon tax in 2008, which provides special treatment for farmers.
Qualifying farmers may buy coloured gasoline and diesel for authorized uses exempt from carbon tax.
The fuel is tax exempt at point of sale if the fuel is delivered to a storage tank on the farm, sold from a bulk agent on the farmer’s account or sold through a card lock system on the farmer’s account.
The coloured fuel is not tax ex-empt if sold from a retail gas station, but the farmer can apply for a refund of the tax.
Some U.S. states bordering B.C. do not allow the use of coloured fuel in vehicles on their highways.
If a B.C. farmer buys clear gasoline or clear diesel in B.C. for use in a truck with a farm licence plate while operating internationally for a farm purpose, such as travelling to the United States to deliver farm product to a customer, they may apply for a refund of the carbon tax paid on that fuel.
From a tax perspective, the additional carbon tax is tax deductible to farms and other businesses.
Any GST assessed, which should not include carbon tax, may be claimed as an input tax credit. The challenge is how to budget for this when these costs in many provinces are currently unknown.
Ontario launched a cap and trade system Jan. 1. This works by providing credits to low emitters of CO2 and financial penalties to high emitters. The high emitters may then buy the credits from those who have them to offset the penalties.
How this lowers overall fossil fuel consumption is a bit of a mystery.
Carbon taxes can offer a potentially cost-effective way to reduce greenhouse gas emissions if higher taxes do indeed lead to less consumption of fossil fuel.
Unfortunately, carbon taxes can also be regressive in that they may directly or indirectly have a greater impact on low-income groups.
Many large users of carbon resources, such as the U.S., Russia and China, are resisting carbon taxation. Canada, in its desire to be an environmental leader, will impose taxes in a country of 35 million people when competitors in countries of 350 million and 1.5 billion people (the U.S. and China, respectively) will have no such burden.
Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: email@example.com or 800-265-1002.