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While the Coronavirus Economy is Shrinking, Canada’s Carbon Tax Increases

The world is facing a terrible health crisis in the name of Coronavirus and it will leave the businesses and economy in tatters.

COVID 19 has claimed over 115,000 lives as of April 13th, 2020 while more than 1.9 million positive cases have been reported from countries around the world. Canada has over 25,000 confirmed cases so far. This crisis, unlike any seen in recent times, is putting tremendous pressure on most public healthcare systems and social fabric throughout the world.

As this situation deepens, news reports on industries are painting a grim picture of a post-COVID 19 world. Kristalina Georgieva, chief of International Monetary Fund (IMF), pointed out that global growth will become sharply negative in 2020, owing to the impact of Coronavirus on the economy. According to a report by IMF, 170 out of 180 IMF members are going to see a sharp decline in per capita income.

Shrinking Global Economy

Nearly 100 countries have closed their borders over the last month, disrupting the regular flow of people and goods. The UN Department of Social and Economic Affairs (DESA) maintains that COVID-19 has single-handedly blocked global supply chains and international trade. It further details that as per the estimate, the global economy in 2020 could shrink by approx. 1% as opposed to previously forecasted growth of 2.5%.

In its report, DESA mentions that the pandemic will adversely affect millions of workers, esp. daily wage earners, around the world. They are the ones who stand to lose their jobs due to this virus. The downward spiral of most of the economies of the world must be stopped by respective governments with the help of curative financial packages, which otherwise might lead the global economy into a deep recession. In the worst-case scenario, it is estimated that the world economy growth rate could shrink by at least 0.9 percent in 2020.

Considering the economic conditions, DESA has postulated two scenarios for global growth in 2020:

  • The first scenario is where a moderate decline in private consumption, investment and exports will further lead to an increase in government spending of the G-7 countries and China. This would result in a global growth rate of 1.2 percent in 2020.
  • The second scenario, which paints a rather bleak picture, is where the global growth rate plunges to 0.9% in 2020 as opposed to previously estimated 2.5%.

For immediate relief, a well thought out financial impetus package, keeping health services a priority in order to contain the spread of the virus while providing economical support to households severely affected by the pandemic might just keep the world economy afloat.

To protect the most vulnerable sections of the society, especially the daily wage workers and the poor, and to protect the growth and stability achieved thus far, urgent and bold policy measures are needed.

The report also warns against the severe adverse effects that a prolonged lockdown can have on developing economies and its trickle-down effects on developed countries via trade channels.

The World Trade Organization said that the overall trade volume will reduce and fall between 13% – 32%. Governments and Central Banks across the globe are constantly trying to manage the situation and salvage it by announcing remedial packages to prevent excessive job loss, bankruptcy cases, etc. It is time for the three forces of economy i.e. fiscal, monetary and trade, to join forces and bring the world out from this recession.

Canada has been facing this situation since January 2020. Though the government has taken a lot of considerable measures, there is still a long way to go.

Boosting the Ailing Economy

Canadian Prime Minister Justin Trudeau announced several recuperating measures on March 27th, 2020, to provide a much-needed boost to the economy. A relief package of $200 million included measures like:

  1. A 2-billion-dollar boost to Canada’s Child Benefit payments.
  2. $900 bi-weekly benefit to provide support to workers, self-employed and stay-at-home people under new Emergency Care Benefit.
  3. An interest-free moratorium of 6 months on students’ loans.
  4. $305 million for a new Indigenous Community Support Fund.
  5. Extension of the tax filing deadline to June 1st.
  6. A direct support package of $27 billion to businesses.
  7. Wage subsidy of 75% for businesses.

Since small businesses are the mainstay of any economy that is facing an unprecedented hardship and uncertainty due to the COVID-19 pandemic, a large part of the stimulus package is meant to provide them with a robust support system. Along with this, the Prime Minister also announced a special support system for the homeless and a GST credit for low-income Canadians.

Increase in The Planned Carbon Tax

According to a prior order by the government, the Carbon Tax was due to rise by $10 to $30 per ton starting April 1st. In layman terms, that becomes 2.5 cents extra per liter of gasoline. Many organizations and small-time businesses have made a plea to the government to cancel this move instead of the present economic conditions.

The farming sector will be the worst-hit sector due to this rise in carbon tax. According to Gunter Jochum, president of the farm advocacy group, a 50 percent increase in the carbon tax will only increase the food prices, and so the burden will ultimately be placed on the Canadian citizens. At the same time, they are under unprecedented pressure to maintain or reduce household expenses and not add to them.

Aaron Wudrick, federal director of the Canadian Taxpayers Federation, took to social media to appeal to PM Trudeau. He urged the PM to take the right step in light of the pressing situation.

Reporters that have been visiting Rideau Cottage for the daily briefing have been asking PM Trudeau to clear his stance on the Carbon tax. However, the Prime Minister steered clear of making a clear statement.

Before we explain how this will impact the economy in the given times, let us first understand what carbon tax is.

Understanding the Carbon Tax

Governments of the world have started levying a kind of tax on businesses and companies who use any form of fossil fuel. This tax is called ‘Carbon Tax’ and it helps to determine the actual cost of burning carbon and its impact on the environment. Another presumed reason is that levying such a tax will help to reduce emissions as companies, households, and others adopt a more environmentally friendly option.

How Does It Work?

The federal government of Canada established a benchmark for a carbon tax to meet its emission goals as outlined by the Paris Agreement. As per the plan, carbon prices will start at $10 per ton in 2019 and will keep on periodically increasing until it reaches $50 by 2022.

Critics have pointed out that this is still not substantial enough to bring about any noticeable difference. A large portion of them has maintained that such a tax, though the right first step, is still a short-term solution. To achieve our goal for 2030 and to have any kind of substantial impact on the environment, Canada expressly needs a long-term plan with concrete measures. The government must find a way to help the industries with a high carbon footprint to switch to more efficient and eco-friendly technology.

This tax applied to provinces that do not have any such mechanism in places such as Ontario, Saskatchewan, Manitoba, and others. The rest of the provinces already had a carbon tax in place. For example, the province of British Columbia had targeted to reach $50 per ton by 2021.

How It Impacts Consumers?

Although a general consumer will not be paying the carbon tax directly, they will have to deal with the higher prices for various goods and services. For instance, people who use fossil fuels to warm their houses or drive more than others will have to cough up more money. On average, the cost per year will vary from $200 in New Brunswick to $400 in Saskatchewan.

However, there is a positive in all this. The federal government has announced that it will return all revenues collected to states, which will then be passed on to consumers as rebates. For example, an average household in the province of Saskatchewan will receive a rebate of $598, while the households in Ontario will receive a $300 rebate.

>Benefits of Carbon Tax

Imposing a tax on emissions has multiple benefits:

  • Increase in the cost of fossil fuels will push the industries to adopt clean energy such as solar, wind, or hydropower.
  • To reduce the extra cost incurred, consumers will become more efficient in using gasoline or electricity.
  • It may have a positive effect on the economy in the long run. A good example is the country of Sweden, where carbon tax reduced emissions by approx. 23% over 25 years. In the same duration, the country saw a growth of 55% in the economy.
  • The tax can add to the resources of the government enabling it to deal more effectively with climate change and its impacts.

Carbon Tax in Times of Corona

Several agencies, organizations, and opposition have been demanding the cancellation of the planned increase in carbon tax. Edmonton Conservative MP Tim Uppal noted that at a time when a large number of Canadians are worried about their future and whether they will be able to pay their rent or be able to put food on the table for their families, it is akin to a crime asking them to cough up extra money to pay for gas, food, etc. A 50% increase in the carbon tax is tantamount to robbing them in plain daylight.

Replying to MP Uppal, Prime Minister Trudeau mentioned that the federal government is giving back in the form of rebates to the citizens. The government has made provisions for paying back to citizens for their service to the nation at the end of the year. We must not lose sight of our fight to prevent and protect our environment and our planet because it is the only one we will have for us and our children.

Others have suggested that it is time to do the things that are good for the country. They suggested that though the carbon tax is good for the country in the long run, as it promises a cleaner environment for the citizens, it may hurt the economy which is reeling under pressure from the pandemic. Industries whose carbon emissions are high may remove workers to balance the bottom line. It is then very important that the government devise a plan to retrain these workers for future industries.

Due to the global pandemic and the impending economic slowdown, the price of crude oil has gone to a 20-year low. The crude oil is now at $20 per barrel from $60 per barrel at the beginning of 2020. This increase in the carbon tax of $10 will eventually increase the price by a mere $3 per barrel. The increase in comparison to the decrease in oil prices is fairly insignificant. Thus, it is safe to deduce that there will not be a much greater impact on the economy per se.

However, this increase will make it difficult for the various small businesses to thrive or even retain their employees during this slowdown. Oil companies in Alberta have announced major capital cuts in 2020, which according to some will reflect in layoffs. Alberta’s Premier Jason Kennedy opined that this undue increase in the carbon tax at such a time will have a negative impact on the workers in the energy services sector. He further called for urgent support and relief to help keep Alberta’s industry running.

Though climate change remains a daunting challenge, it cannot be a priority in this situation. The need of the hour is for the government to provide all the available help and resources to support the public health services, businesses, and households.

Once this crisis is averted, the government can surely go ahead with its plan to reduce carbon emissions and meet its target for 2030. Raising the carbon tax will be welcomed then and will prove to be more impactful.