Carbon Pricing Costs for Households and the Progressivity of Revenue Recycling Options in Canada

Abstract

Canadian federal policy mandates a floor price on greenhouse gas emissions in all provinces and territories or an equivalent quantity instrument. Provinces that implement a system consistent with the federal benchmark maintain control of revenues. Provinces that do not implement a carbon price are subject to a federally administered pricing system, with revenue recycling via lump-sum household rebates. Using rich synthetic household microdata, we quantify the direct and indirect tax burden on households and carbon pricing revenues in each province. We also calculate carbon pricing revenue available to each province. Using these data, we measure the net cost to households and the overall progressivity of carbon pricing under four revenue recycling scenarios: (a) a means-tested sales tax credit increase, (b) a lump-sum dividend, (c) a sales tax rate reduction, and (d) a personal income tax basic exemption increase. We find that the carbon tax is generally progressive even without revenue recycling, the sales tax credit and lump-sum rebate are progressive, the sales tax rate reduction is mostly regressive, and the income tax change is regressive. We also show that Canada’s outputbased pricing system for large emitters helps to mitigate indirect carbon pricing costs with a notable effect in reducing household costs.

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