The End of Canada’s Carbon Price?, with Aaron Cosbey

Notable Quotes

• Canadian Liberal Party no longer sees consumer tax on fuels as politically feasible: “None of the Liberal candidates for power actually vouched for or supported the consumer-facing fuel levy. Carney is in that boat … So, no matter who wins this next election, we will not see a consumer fuel levy anymore. That means we’re going to need to replace it with something else.” (16:27)
• The next election has consequences for Canada’s climate commitments: “We can probably predict that we’re not going to see the same level of adherence by the Conservative Party to targets that were picked by a previous government that was more committed to climate change, compared to what we would see under somebody like Mark Carney as leader of the new Liberal Party.” (20:32)
• The consumer levy on fuel use failed in Canada due in part to poor communication: “The understanding wasn’t there that if you’re paying the money, you still have incentives to improve, even though you’re getting the money back [in the form of a rebate]. You can spend that money any way you want, including by lowering your tax burden … It’s a complicated policy to try to communicate to the public. If you can’t communicate that it’s happening and why it’s happening, then it can be as perfect a policy as you want, but it’s a useless policy, as we’ve seen in Canada. It gets thrown in the garbage.” (26:32)

Top of the Stack

• “The New Abolitionism” by Chris Hayes

The Full Transcript

Kristin Hayes: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future.

I'm your host, Kristin Hayes. My guest today is Aaron Cosbey, from the International Institute for Sustainable Development, a Canadian research and policy think tank.

Aaron is an environmental economist by training and a senior associate with the International Institute for Sustainable Development, where he works on a wide range of topics related to trade, investment, and climate change.

It's tempting to ask Aaron about trade at this moment in time, given the tense and rapidly shifting United States–Canada relationship related to trade, but I'm going to leave that lightning rod alone for the moment and instead talk about what's happening with carbon pricing in Canada, as the country welcomes new leadership and prepares for federal elections later in the year. Stay with us.

Hi, Aaron. Welcome to the show. It's really nice to have you here.

Aaron Cosbey: It's a genuine pleasure to be here.

Kristin Hayes: I've known you for a number of years now, but I would love to give you a chance to introduce yourself to our listeners.

Can you tell us a little bit more about you, your areas of professional focus, and how they came to be your areas of focus?

Aaron Cosbey: I trained as an economist. I have an extensive background, almost 35 years now, on sustainable development related topics, which was my passion. I got there by reading the World Commission on Environment and Development report, known as the Brundtland Report, that first coined the term “sustainable development.”

Back then, my primary focus was trade and investment law and policy. But over the last few decades, I've become less and less professionally focused. In the last 20 years or so, I've expanded to work on climate change policies, and in the last 10 years, I’ve just gone all over the map in the broad, sprawling nexus that joins trade, investment, climate, and sustainable development—mining; green industrial policy; border carbon adjustments; Canadian climate policy, including oil and gas; industrial decarbonization; etc.

Kristin Hayes: That sounds pretty fun. If you can develop interest and expertise in all of those areas, that sounds like a recipe for lifelong learning, which is great.

Aaron Cosbey: It lets you go a mile wide and not that deep, but it does allow you to synthesize and get overviews of how a lot of the key issues are connected, so it is fun.

Kristin Hayes: Right, to pull all the threads together.

I would love to start the meaty part of our conversation with just a refresher on what Canadian climate policy looks like—and its carbon pricing programs, in particular. What do those look like now? What are the key components of Canada's current climate policy? I'll also ask you to reflect a little bit on how effective they've actually been in reducing greenhouse gas emissions.

Aaron Cosbey: Well, I'm going to give you more satisfaction on the first of those questions than the second, but let's get into that.

Canada's climate ambition is framed by its nationally determined contribution. We have said that we're going to get between 40 and 45 percent reduction, over 2005 levels of greenhouse gas emissions, by 2030. We've said that we're going to be at net-zero emissions by 2050.

How have we decided we're going to get there? The most recent government, Justin Trudeau’s Liberal government, has put a suite of policies in place that are designed to get us there. I'm going to wait until later to get to carbon pricing, but we have a number of other policies that complement carbon pricing, so I need to mention those, as well.

We have a clean fuel standard, which demands that all fuel producers have to get to a certain level of greenhouse gases embodied in their fuel, all across the life cycle, by lowering, trading, or buying offsets.

We have a zero-emissions vehicle standard, which says we are not going to sell any more internal combustion engines by 2035.

We have clean electricity regulations in force that will start in 2035 to limit the emissions that any electricity generating facility can have to very low levels.

We have draft oil and gas methane regulations, which propose to lower the emissions of oil and gas methane by 75 percent, over 2020 levels, by 2030. Oil and gas in Canada is a big deal; it's about one-third of our national emissions.

We have a proposed oil and greenhouse gases emissions cap. This is more controversial, but it's a draft piece of regulation that will cap absolute emissions from the upstream oil and gas sector in Canada. Again, that's a big source of our emissions.

These are all complementary policies. The mainstay of our climate suite of policies is carbon pricing. We have a price on carbon, or greenhouse gas emissions, in Canada. I'm going to use “carbon” as a shorthand here for greenhouse gas emissions. That price is currently at C$80 per ton—that's about US$50—and is going up to exactly C$170 per ton by 2030. That's about US$130 or US$140, increasing at US$15 a year.

Let me break that down, briefly. It's two prices, in fact. One is a consumer-facing fuel levy, meaning anything that I buy that has gasoline, natural gas, or coal has been assessed with a climate charge that is currently C$80 a ton. That's the consumer-facing fuel levy. I pay that on my heating bill. When I fill up my car, I pay that.

We also have an industrial carbon price. We call it the Output-Based Pricing System, or the OBPS for those that love acronyms. This is just on big, heavy emitters in Canada. It's on industrial facilities that are high greenhouse gas emitters. These folks have to pay the same rate of tax, but it's a little different for them. To protect them from competitiveness concerns, we've tried to lower their average cost of carbon by saying, "Here's a standard for your sector. You have to meet this standard of greenhouse gas emissions per ton of output, and any emissions above that standard, you're going to pay for at the full rate." So, at the margin, when they're producing one more ton, they're facing the full carbon price. But their average price is pretty low, so it protects them from competition from foreign producers that may have no carbon price at all.

We have those two elements, the industrial carbon price and the consumer-facing fuel levy.

I've left off a few things, but those are the major pillars of the suite of climate policies in Canada.

Kristin Hayes: Before we talk about the effectiveness, I feel I should clarify something, at least for myself—we're talking about these as if they exist at the federal level across the country, but my understanding is that provinces are allowed to do their own things as long as they meet the level of emissions reductions, or that there are connections between the provincial policies and the federal policies. Can you talk us through that?

Aaron Cosbey: That distinction is really important. I'm embarrassed, as a Canadian, that somebody had to remind me to bring it up.

It's particularly important in the context of carbon pricing. With the other standards, not so much, but the carbon pricing is actually a federal backstop. The federal government has said, "Here's the price that we're going to impose as a backstop, unless you have a price that we consider to be equivalent at the provincial level. In that case, carry on, fill your boots, do whatever you want at the provincial level. As long as we deem it to be equivalent to this federal price, you can do whatever you want at the provincial level."

Some provinces have opted into their own system. It's a mix. Some have just the fuel level, some just have the industrial carbon pricing. So, now we have this mix of both provincial-level schemes and federal backstop opt-ins.

Kristin Hayes: Great, I'm glad I asked. I knew there was something about the word “backstop” that was stuck in my mind, so thank you for explaining that.

Aaron, this is great, and it really does give a good sense of the layers of policy that are involved here. Let me turn now to that question of effectiveness. You hinted at the answer, but how effective has this combination of policies been?

Aaron Cosbey: Yes, for this question, as I said, I'll give you a less satisfying answer.

Many of these policies have been announced and are not in law, and many are in law but are not yet effective. The oil and gas greenhouse gas emissions cap, for example—we have a first draft of that in process. It's been “gazetted,” in Canadian legal terms, but it's not yet actually in law. Similarly, the oil and gas methane regulations are not yet in law. The clean electricity regulations are enforced, but they don't start until 2035. The zero-emission vehicle standard, as I said, doesn't actually take final effect until 2035. We've had the clean fuel standard since 2022, so only a couple of years, and carbon pricing we've had since 2019. So, you'd think there'd be something you could look at there, but there isn’t much. Our latest data on Canadian emissions only extends to 2022, in the last national inventory report from Canada. So, we don't have that many years of experience on which we can look back and assess the effectiveness of these policies.

There has been some look at the provincial level scheme. We've seen studies from British Columbia's carbon pricing scheme, which predates the Canadian scheme, which show that it has been effective at lowering both industrial and consumer emissions. But we don't have that much evidence yet from the Canadian level.

We know that Canadian emissions have actually hit a turning point, and are starting to go down. That's a welcome change. But we don't have the causal evidence that says that it's because of any of these policies.

Kristin Hayes: Good to know.

Another very important and very timely refresher that I will ask you to weigh in on is the current state of Canadian national politics. We’re recording this podcast on March 11, 2025, and just two days ago, Canada's Liberal Party held elections to replace Justin Trudeau, the head of their party who has been Prime Minister for a decade and who has been facing really sinking approval ratings for a long time. He announced he was going to step down as the party head.

There were elections two days ago for the head of the Liberal Party, which were won by a man named Mark Carney. Tell us a little bit about who Mark Carney is and what he brings to the conversation. He's also going to face off against a Conservative candidate later in the year. Tell us about those two men, who are likely to be the banner holders in federal elections later this year.

Aaron Cosbey: Sure. I would describe our national political scene as dynamic and fast moving, but we're actually a tempest in a teapot compared to the global, dynamic, fast-moving geopolitics, but here we go.

Mark Carney, our new leader of the Liberal Party: He's a Harvard- and Oxford-educated doctor of economics. He's a former Goldman Sachs financier. He was the governor of the Bank of Canada during COVID and helped us through that crisis and later the governor of the Bank of England during their Brexit crisis. So, pretty solid qualifications. He was also the chair of Brookfield Asset Management and chair of Bloomberg.

His climate credit is pretty good, too. He was the UN Climate Finance Envoy. In that capacity, he launched the Glasgow Financial Alliance for Net Zero, which was a group of banking-, finance-, and insurance-related industry players that committed to net zero.

He's not a politician. He started formally advising Prime Minister Trudeau last fall at Trudeau's invitation and was chair of the Liberal Party's task force on economic growth. But he’s very much an outsider to the Canadian political scene. That was seen as an asset in bringing him in because of these low ratings that you mentioned for Justin Trudeau. I think this is one of his strong selling points—as well as his strong curriculum vitae, of course.

He's going to be facing off against Pierre Poilievre. This is the leader of the Conservative Party since 2022. He's been a member of parliament since 2004. He served in the Harper government as the Minister of Democratic Institutions and the Minister of Employment and Social Development. He's a very strong communicator. He's basically personally responsible for the fact that—and we're going to talk about this a little later—we're not going to see a fuel levy carbon tax of that kind anymore in Canada, because of his effective communication and attack against that policy. He has also been, I would argue, instrumental in the downfall of Justin Trudeau as the leader of the Liberal Party.

You couldn't get two more opposite candidates, in terms of their degree of involvement in politics and experience as politicians. Carney is the outsider and Poilievre is very much the insider. So, it's going to be an interesting contest.

As to what that contest looks like, Carney is expected to, within the next few days, maybe even by the time this podcast airs, be sworn in as prime minister by the governor general and call an election. That means we're looking at an election sometime in May of this year, probably, in Canada.

Kristin Hayes: Well, something to keep an eye on.

You've hinted at the heart of today's conversation, merging these threads together: I'd love to talk more about what Mr. Carney and Mr. Poilievre have to say about the current carbon pricing regimes. We can certainly talk about the broader swath of policy options and proposals that you talked about at the beginning, but I will say, I'm particularly interested in the carbon pricing side, because there's been a lot of commentary on this, as you noted. That's been a centerpiece, I would say, of Mr. Poilievre's campaigning and conversation over the past three years.

Tell me a little bit more about what those two gentlemen have to say about the current carbon pricing regime and their plans to modify, repeal, undo, or move forward with it, if elected?

Aaron Cosbey: Sure, so let me start with Pierre Poilievre. He wanted a carbon tax election. He was very happy to have Justin Trudeau sitting there, the architect of Canada's carbon pricing regime, whom he could attack on the grounds of the carbon tax. His mantra has been, “Axe the tax.”

It's clear what he would do. He would get rid of the consumer fuel levy. It is not clear yet what he would do with the Output-Based Pricing System, the OBPS. He hasn't made that distinction clear and hasn't announced what that means. He's being lobbied heavily by a number of folks to keep it or scrap it but has not yet announced what he's going to do with that.

There are other elements of the climate suite of policies that he will definitely eliminate. The oil and gas emissions cap, for example: His base is very supportive of natural resource development, so that's gone. He’ll probably eliminate the electric vehicle mandate, as well, for more or less the same reason.

On the other hand, you have Mark Carney—who has, as I said, strong climate credentials—also pledging to eliminate the consumer-facing fuel levy. This is interesting. Poilievre has successfully maneuvered that to be seen as a political third rail. Nobody's going to touch that. None of the Liberal candidates for power actually vouched for or supported the consumer-facing fuel levy. Carney is in that boat.

His explanation is, "This has become too politically difficult; we have to get rid of it," even though the hidden script is, "I believe in it, but it's gone." So, no matter who wins this next election, we will not see a consumer fuel levy anymore. That means we're going to need to replace it with something else.

For Carney, that looks like a three-pronged platform of competitive strategy. He's going to improve the industrial carbon pricing system with greater price certainty. He's going to put in place a border carbon adjustment mechanism. That's going to charge goods at the border when they arrive based on their carbon content, such that they compete on an even playing field with Canadians. He's going to explore strengthening the oil and gas methane regulations. He's going to offer a number of incentives—building retrofits, efficiency subsidies for house owners and building owners, heat-pump subsidies, zero-emission vehicle subsidies, electric vehicle charging stations. He’s also going to work on sustainable finance, because this is really his bread and butter. He’ll put in place a taxonomy of sustainable investments and order mandatory climate risk disclosure. All of these things are his way of replacing the consumer facing carbon tax.

It's not so clear what that means from Poilievre's perspective. His climate platform is much less elaborated and much less obvious. He's talked about wanting to use technology instead of regulations. Given his base and his background, that probably means technology solutions like carbon capture and storage in the oil field that could lower the effective emissions from oil and gas operations. It probably means nuclear power to decarbonize the grid. We're not really sure.

We know one thing, to wrap this unwieldy ball up. We know we're not going to see a consumer-facing carbon tax. We're not sure about industrial carbon pricing, and the rest of it is anybody's guess.

Kristin Hayes: Fascinating. The politics of this unfolded to be particularly interesting. That's one of the reasons that I really wanted to have this conversation with you today.

Let me make sure I ask another foundational question, though: Would you say Poilievre is committed to some element of decarbonization? It might look very different. He might go about achieving that very differently than someone like Mark Carney would, but is there still that fundamental interest in leading towards a decarbonized future? Or do you feel there might be a situation where the commitments that were made in the most recent nationally determined contribution, about the baseline level of emissions reductions, might change under a Conservative government?

Aaron Cosbey: We're not sure what the Conservative government, should there be one, would do with the existing commitments under the United Nations Framework Convention on Climate Change—the nationally determined contributions.

It is possible, some would say, even likely, that we won't achieve that level of emissions reductions. Some members of the Conservative Party don't believe climate change is happening. Most think it's happening, but that it's not as important of an issue as most would characterize it. A frequent argument is, “Canada only contributes 1.6 percent of global emissions. What are we going to do about it? Why would we wreck our economy to deal with an issue to which we contribute so little?”

That's the basic tenor of the Conservative Party's climate beliefs. Given that, we can probably predict that we're not going to see the same level of adherence by the Conservative Party to targets that were picked by a previous government that was more committed to climate change, compared to what we would see under somebody like Mark Carney as leader of the new Liberal Party. We're just not sure.

The thing is, whether they're committed or not, I believe the Conservatives will have to say they're doing something on climate change, because they'll need broad appeal. They'll need appeal beyond their own base. What that looks like is the interesting question. They have said they don't want to have so much of a regulatory approach. They want more of a carrots-and-incentives approach. That’s fine and good, but we're not sure what those carrots and incentives would go to. A major part of them would probably be focused on the oil and gas sector in Canada. Again, that's a big part of our emissions profile, so that's something, and it would be pro-growth. That would be aligned with their basic tendencies.

They have also said that they don't intend to subsidize profitable industries—not just ones related to climate change, but as a general principle. You have to wonder how that translates into what they're going to do with the oil patch, which is a very profitable sector in Canada.

Again, it's not clear, but I think we can predict that a future Conservative government would struggle to uphold the commitments that the previous Liberal government had made on climate change.

Kristin Hayes: Interesting.

I want to talk about revenue use, for just a minute. One of the classic arguments for a carbon tax is that it is a climate policy that also raises revenue that can be used for other purposes. In this case, my understanding is that a lot of the use of that revenue, at least from the fuel levy, has actually been given back to the Canadian public as rebates. I'm going to quote here from CBC News, so I'm just going to quote and ask you: What do you make of the fact that “90 percent of the revenue from the fuel levy is rebated to Canadians”? “The parliamentary budget officer has found that most households, particularly low-income households, receive more from the rebate than they pay in additional costs.”

Here we have a situation where a lot of this revenue is, in fact, going back to households. Many of them, at least in budgetary and strict dollar terms, are ending up better off than they would've been. And yet, there's been this very successful campaign to axe that fuel levy, such that even the candidate who might believe in that policy is backing away from it.

What do we make of all this? In your view, what are the lessons to be learned here by other policymakers as they consider carbon pricing?

Aaron Cosbey: Wow, that is such a good question. Let me start by saying that I'm an economist, and for me the idea of a revenue-neutral carbon tax—a carbon tax that is levied and then rebated back—is the ideal policy. It's a foundational ideal policy. By itself, it's not enough, but it is a foundational and good policy.

Yes, in the parliamentary budget officer's analysis that they updated last October, by 2030, at the top price of C$170 a ton, there were only three backstop provinces that experienced any average cost in any of their income quintiles. A quintile is a 20 percent chunk of the population. The only people that actually experienced a cost to the carbon tax were in the highest quintile of income, and even then, that was only in three provinces. It shows you that there's a great discrepancy between how much carbon is emitted at different income levels, because the average consumer of goods, the average emitter of carbon at a household level, is going to get exactly the same amount back as they pay. Most folks get more, so this is a very progressive policy. The poorer you are, the more you get back, which is, in some cases, quite a significant amount. Meanwhile, the highest paying quintile averaged only 0.1 percent of its disposable income paid in the carbon tax.

This sounds like a fine policy. You've got nice incentives at the margin. You've got progressive impacts on low-income earners in Canada. What happened to this policy? Why is it now in the tank?

This is a great lesson, because, fundamentally, this policy was miscommunicated. There are two problems: One, it was miscommunicated. Nobody even knew the rebate checks existed. At first, they showed up as part of your income tax return, and it was absolutely invisible, so nobody knew they were getting it. Then, we started putting it in people’s bank accounts by automatic deposit, but it wasn't billed. The little note that you got when you looked at your bank statement, didn't say, "This is your carbon tax rebate." It had some wording that wasn't clear.

The lesson is, if you're going to rebate a carbon tax to folks, send them a paper check in the mail, with big red words at the top that say, "This is your carbon tax rebate. Thanks very much." That way, people know they're getting it. The survey evidence was clear: people didn't know they were getting this money back, they didn't know how much they were getting back, and they consistently underestimated it. So, communicating the tax better is lesson number one.

Lesson number two: As an economist, I think the thing is beautiful. You get the tax back, but you still have the incentives. But nobody understood that. The argument was, "This thing is a scam. I'm paying, I'm getting it back. Why do it at all?" The understanding wasn't there that if you're paying the money, you still have incentives to improve, even though you're getting the money back. You can spend that money any way you want, including by lowering your tax burden.

As an economist, I think it's great, but it's a complicated policy to try to communicate to the public. If you can't communicate that it's happening and why it's happening, then it can be as perfect a policy as you want, but it's a useless policy, as we've seen in Canada. It gets thrown in the garbage.

Kristin Hayes: That is so fascinating to me, and you summarized those two lessons very well. It does strike me that the first of those, as challenging as it is, is less challenging than the second, which is about educating people about the principles of economics. That seems to me to, at this moment, pose even greater challenges.

I will be on the lookout to see if other jurisdictions that have tried this cap and invest or cap and rebate are facing any of those same challenges, or if they've tried different tactics that are trying to get around some of those challenges you laid out. Again, that was a great explanation, and it's a fascinating reality.

Aaron, we're pretty close to the end of our time here. I've really enjoyed this. I'll close with one more substantive question and, then, of course, our regular closing question.

We've talked a bit about these nationally determined contributions, or NDCs—the long-term commitments for decarbonization. This year is actually a year where countries are submitting new ones as part of the Paris Agreement and the international climate negotiations process. Canada submitted their next NDC on February 11, when the Trudeau government was still in place.

I'm curious if that NDC, which was submitted under the previous government, was nonetheless impacted in any way by this carbon pricing debate, knowing that the fuel levy was pretty much going to go away. We weren't sure who was going to be in charge, but, nonetheless, the Trudeau government had to submit something. Do you have any sense of whether this debate played out in that NDC?

Aaron Cosbey: Once again, I'm not going to give you full satisfaction on this question, because it's not clear.

The NDC that you talked about does assume carbon pricing, but we're not sure if that means the consumer fuel levy is built into those models or just the OBPS. The assumption is, yes, they have built the consumer fuel levy into their projections of how much mitigation is possible in Canada. That's the assumption. The big question that’s lying on the table is, If we know it's not going to happen, how do you make up for that gap? How do you fill that hole?

To be clear, the OBPS is a much bigger workhorse, in terms of mitigation potential, than the consumer fuel levy. But the consumer fuel levy is still important. There is a hole to fill; we don't know how it's going to be filled.

Kristin Hayes: We’ll watch this space in many ways.

Aaron, this has been great. Thank you so much for talking through this.

Let me close with my regular final segment, Top of the Stack. I'd love to invite you to recommend more good content. It can be content of any type that you think our listeners might be interested in. Aaron, what's on the top of your stack?

Aaron Cosbey: I thought I would dig into something that most of the listeners may not have seen but which struck me, and continues to strike me, as fundamentally important, because I do a lot of work on oil and gas and the trajectory for the phaseout of oil and gas and carbon budgets.

This is a 2014 piece. 10 years ago, I read an article by Christopher Hayes in the Nation called “The New Abolitionism.” He draws the parallel between the Civil War in the United States and the end of the slave trade and our current situation. Before anybody misunderstands, let me be clear: He's not making a moral equivalent between slavery and oil and gas. He absolutely rejects that. But he says that, back in the Civil War, we asked the South to give up the modern equivalent of trillions of dollars of assets that they owned, because we believed it was important to do that. We're currently asking the oil and gas companies of the world, if we don't want to exceed our carbon budget, to give up trillions of dollars of assets. What can we say about the parallel between how these two things were accomplished?

The parallels run more deeply than I'm explaining here. It is a brilliant and eye-opening piece for anybody that wants to think about how we accomplish the transition from our current dependency on fossil fuels to a zero-emissions economy.

Kristin Hayes: That’s a great recommendation for a piece by my cousin. I'm just kidding. He's not really my cousin. Ha, ha, ha, got you!

Aaron Cosbey: It’s a paid plug!

Kristin Hayes: That's great. We will put a link to that, as always, alongside the transcript of the podcast, so our listeners can check it out.

Well, Aaron, thank you again. It's been a pleasure, and we'll talk soon.

Aaron Cosbey: Thank you. It has been a pleasure.

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