Canada federal election

Carbon tax exemption backfires on Canada’s Liberal government

What’s happened?

In late October the Canadian prime minister, Justin Trudeau, announced that the government would exempt heating oil from the federal carbon tax for three years and offer subsidies to help rural households to switch from oil to electric heat pumps. The concession, designed to shore up support for the ruling Liberals in the four Atlantic provinces, has quickly turned into a major political headache for Mr Trudeau.

Why does it matter?

The debate over the carbon tax is undermining Canada’s drive to meet the targets set by the 2015 Paris climate change agreement. The tax is currently set at C$65 (US$47.4)/tonne and is planned to rise to C$170/tonne by 2030. However, the government is under political pressure to implement various carve-outs, and the opposition Conservatives have vowed to “axe the tax” if they win the next election, due by October 2025. Without the tax, Canada will struggle to meet its carbon-reduction goals. The latest audit from the commissioner of the environment’s office, published in November 2023, suggests that the government will fall short of its target of a 40% cut to carbon emissions from their 2005 level by 2030.

Mr Trudeau’s confused messaging on the carbon tax will also undermine his political position. The heating-oil exemption was seen as a way to revive the party’s fortunes in Atlantic Canada, a traditional Liberal stronghold but where dissatisfaction with the government has grown, but has instead sparked a widespread backlash. Politicians in other parts of the country, led by the Conservative premiers of Alberta and Saskatchewan, have demanded that the exemption be extended to other home-heating fuels such as natural gas and propane, which are more widely used in the west. Meanwhile, climate activists, including many Liberal voters, are upset that the government has put political expediency above one of its signature policies. Even the supposed beneficiaries of the heating-oil exemption have voiced concerns that they will face a sharp rise in heating costs at the end of the three-year exemption period, which, as critics have pointed out, will come after the next election.

What next?

Mr Trudeau now faces a dilemma. Agreeing to further carve-outs from the carbon tax would be seen as a sign of weakness and, in any case, would be unlikely to win the Liberals much support. However, resisting the calls for more exemptions—as the prime minister has vowed to do—risks generating further opposition to the tax. We expect Mr Trudeau not to make further exemptions, but at the cost of a hit to the Liberals’ poll ratings and environmental credentials.

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