Canada’s carbon pricing system can leave households out-of-pocket when they heat with oil rather than natural gas. But there are ways to fix this.
by Larry Hughes. Originally published on Policy Options
January 23, 2024
Ever since the 2015 UN climate conference in Paris, Prime Minister Justin Trudeau has stuck steadfastly to his climate policies.
By last summer, the federal carbon pricing system was in place in all provinces and territories except British Columbia, Quebec and the Northwest Territories, which have their own federally approved carbon pricing systems. The carbon tax – the federal fuel price – was being applied to all carbon-intensive energy sources such as gasoline, natural gas and home heating oil.
But the federal pricing system changed in late October 2023, when the prime minister announced that the carbon tax on residential heating oil is being removed for the next three years.
The move is expected to primarily benefit the roughly 20 per cent of households in Atlantic Canada that pay the carbon tax on heating oil (figure 1).
The announcement brought fast objections from Canadians in other provinces – notably Ontario, Manitoba, Saskatchewan and Alberta, where natural gas is used to heat most homes. With the carbon tax applying to natural gas, Canadians in these provinces argue they should be given the same benefit.
This is understandable, but it is not as simple as this.
The carbon tax is already structurally unfair. Because of the way it’s calculated, households using emissions-intensive energy sources can be left out of pocket. There are ways to fix it. But first, how and where does it fall short? A comparison of households using heating oil and natural gas shows the problem.
Heating oil. Natural Gas. What’s the difference?
Heating oil and natural gas are carbon-based fuels. When they are burned, they release heat and greenhouse gases.
A litre of heating oil and a cubic metre of natural gas both contain about 0.037 gigajoules of energy.
However, there is a significant difference in their emissions intensities – that is, the greenhouse gases emitted when a fuel is consumed.
A litre of heating oil emits between 40 and 43 per cent more greenhouse gases than does a cubic metre of natural gas.
A new deal for energy affordability and net-zero emissions
Heating oil (light fuel oil) has an emissions intensity of about 2.75 kilograms of CO2e (carbon dioxide equivalent, a mixture of greenhouse gases) per litre.
The emissions intensity of a cubic metre of natural gas varies from about 1.92 kilograms of CO2e in Ontario, Manitoba and Saskatchewan to kilograms of CO2e in Alberta.
The difference in emissions intensities means a resident or owner of a building heated with oil pays a higher carbon tax than someone in a building that uses natural gas for the same heating requirements.
Space heating
The energy required to heat a home in Canada also varies greatly because of climatic conditions, as figure 2 shows.
For example, it takes less energy to heat a home in Nova Scotia than it does a similar-sized home in Alberta: an average of 0.410 gigajoules/m2 in Nova Scotia vs. 0.585 gigajoules/m2 in Alberta. Total emissions depend on house size, furnace efficiency and the type of energy used.
(Furnace efficiency is beyond the scope of this analysis, but suffice it to say that 80-per-cent to 90-per-cent efficient natural gas furnaces are better than the 78-per-cent efficient oil furnaces used in much of Atlantic Canada.)
For example, a 2,000-square-foot home in Nova Scotia would require 76.2 gigajoules for heating. If heating oil were used, 5.7 tonnes of CO2 would be produced. The same-sized home in Alberta would require significantly more energy for heating — 108.7 gigajoules. However, by using natural gas, it, produces the same 5.7 tonnes of CO2
Since Canada’s price on a tonne of CO2 is $65 this year, both homes would pay about $370 in carbon tax for space heating.
Water heating
Water heating is the second-largest residential use of energy. Like space heating, this varies by province, as figure 3 shows.
The difference in the emissions intensity of heating oil and natural gas is apparent when comparing the carbon tax paid by households for water heating.
For example, a household in New Brunswick using heating oil and requiring 11.2 gigajoules of energy would produce about 840 kilograms of CO2e, which is slightly more than the 834 kilograms produced by a household in Ontario using natural gas that requires 16.2 gigajoules of energy – almost 50 per cent more.
Although the Ontario household uses more energy, the lower emissions intensity of natural gas means it would pay about the same carbon tax as the New Brunswick household, slightly more than $54.
The carbon pricing system
The federal government’s fuel pricing system consists of two parts: the carbon tax and the federal rebates.
The carbon tax – a fuel charge – is applied to all carbon-intensive energy sources. It is $65/tonne until April 1, when it rises to $80/tonne.
The climate action incentive payment (CAIP) is intended to equal or exceed the total carbon taxes a household would pay on emissions from space and water heating, electricity and personal transportation. It’s paid quarterly and intended to cover carbon taxes for the upcoming three months.
The incentive payment, like the residential energy requirements, varies by province, family size and where people live. A rural household currently receives 10 per cent more than an urban household.
Figure 4 shows the annual urban incentive payment for a family in the eight provinces paying the federal fuel charge.
A family of four living in Alberta receives almost $600 more than a family of four living in Prince Edward Island and $800 more than a family living in New Brunswick.
The incentive payment is to cover a household’s carbon tax expenses. The percentage of the CAIP required for a family of four’s carbon tax on space and water heating varies by province and the size of the home, as figure 5 shows.
If the family lives in one of the Atlantic provinces and uses heating oil for space and water heating, a larger percentage of its CAIP will be used to offset their heating carbon tax than a family living in the other provinces using natural gas.
Consequently, a smaller portion of the incentive payment will be available to cover the cost of the household’s carbon tax on transportation and electricity. Hence, there is a possibility of households being left out of pocket because of the tax.
Fixing the carbon pricing system
As the prime minister’s decision to remove the carbon tax on heating oil has shown, the federal carbon pricing system does not make allowance for different types of household space and hot-water heating systems, the type of energy used and its level of energy consumption.
This shortcoming could be addressed by making the incentive payment dependent on these differences or by developing a payment system to offset a household’s additional carbon tax costs. Such a program could complement existing provincial energy-assistance programs.
Another approach could be income-based, with low- and moderate-income households receiving a higher incentive payment than high-income households. This is the approach taken in British Columbia.
This would shield low- and moderate-income households from the carbon tax and encourage high-income households to reduce their emissions by, for example, purchasing an electric vehicle or a heat pump.
Such an approach would be in the spirit of the objective of the federal government’s carbon pricing program, notably “recognizing the cost of pollution and accounting for those costs in daily decisions.”
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This article first appeared on Policy Options and is republished here under a Creative Commons license.