David Yager: Will the Liberals really raise carbon taxes April 1?

 

Because of the coronavirus pandemic, the world has been plenty crazy in the past two years. Governments have borrowed enormous amounts of money to keep the economy functioning as it was legislated into lockdown to halt the spread of the COVID-19 virus. And as the economy recovers and reopens globally, the impact on inflation, prices and energy supply in the past six months has been staggering.

The unfolding drama has been well documented. Climate crusader Joe Biden pleaded with OPEC to increase production and released oil from the US Strategic Petroleum Reserve to hold prices down. Unprecedented increases in electricity and natural gas prices in Europe have caused industries to shut down and left many wondering whether they can afford to heat and eat this winter.

In Canada, the inflation rate – the cost of everything – has ratcheted up, yet again. In December it was 4.8 per cent on an annualized basis, an increase in the cost of living last seen 30 years ago in 1991.

Oil and natural gas prices continue to rise as more people come to the realization there simply isn’t enough. One of the reasons is that renewable energy sources have been oversold for years in terms of their capacity and reliability. Starving the fossil fuel sector for capital to replace supplies has become an international crusade and badge of honour.

The whole mess was summed up well by Daniel Yergin, renowned oil and energy writer and vice-chairman of respected research outfit IHS Markit. A report released in early January was titled, “The Great Supply Chain Disruption: Why It Continues in 2022.”

Yergin wrote, “There is no recent historical precedent for the current disruption in the modern highly integrated global supply chain system that has developed over the last three decades … Delays and disruptions for manufacturers and deliveries on a scale never recorded in our 30 years of PMIs (Purchasing Managers’ Index).”

Because it’s not just oil. It is almost everything, including food. New cars are delayed by a lack of computer chips. Even with higher commodity prices and growing demand, firing up the oilpatch service and supply chain will be delayed by labour, pipe and parts shortages.

Inflation is a proven source of wealth destruction. The cost of everything goes up, including labour, so workers need cost-of-living wage increases. This, in turn, causes the price of everything to continue to rise.

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Once inflation becomes endemic in the economy, it is difficult to get rid of. Think back to the early 1980s when mortgage rates flirted with 20 per cent. Inflation hasn’t been a huge problem in recent years, perhaps because governments keep pumping cheap money and liquidity into the economy, which keeps things affordable.

But that financial flexibility has been consumed in the past two years.

Most central banks have a mandate to keep inflation under two per cent. When it goes above that, they are supposed to raise interest rates. Both Canada and the United States avoided doing that in January. However, this is unlikely to happen again. Business press pundits say there could be as many as four interest rate increases in 2022.

This will have a serious impact on the economy.

First, Canada is one of the most indebted developed nations in the world when combined federal, provincial, household and non-financial institution corporate debt is included. According to the Fraser Institute, combined federal and provincial debt now exceeds $2 trillion. A one per cent increase would cost the economy $20 billion annually.

Household debt is $2.1 trillion based on data from www.consolidatedcredit.ca, which is $1.73 for every $1 of income. A one per cent increase in interest rates on this debt would cost the economy another $20 billion each year.

National tax, accounting and consulting firm MNP LLP publishes regular surveys on household debt. MNP’s October report stated, “But Canadians know that the low-interest gravy train must end at some point … with nearly half (46 per cent) reporting that they are $200 or less away from not being able to meet all of their financial obligations, including 27 per cent who say they already don’t make enough to cover the bills and debt payments.”

MNP continued, “Affordability concerns are widespread across the country, with a large proportion holding the opinion that life’s necessities have become less affordable over the past year. Forty-five per cent say it has become less affordable to feed themselves and their family.”

Rising energy prices are a major factor. The situation is so dire that many central governments are changing course on energy supply and costs. Legislated energy price caps and cash subsidies are becoming more common. In the United Kingdom, multiple electricity generators using natural gas have gone broke because the input costs of the fuel exceed the permitted retail price of the final product. Countries including Japan are firing up mothballed coal-fired generating plants to keep the lights on.

The European Union has revisited its green policies and concluded natural gas and nuclear power are now acceptable as backup power for interruptible solar and wind generation. Major windmill manufacturer Vestas is warning customers it can’t meet demand because of a shortage of turbine blades. China has stated that ensuring its citizens have the most affordable energy possible is more important that any previous commitments it may have made on decarbonization and reducing emissions.

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It seems the whole world has realized that the grand, centrally planned energy transition from fossil fuels to low-carbon renewables has gone too far, too fast. The primary considerations this year are energy cost and supply, particularly now that more people are realizing oil is far more likely to hit US$100 in 2022 before it ever revisits US$50 a barrel.

Everywhere but Canada.

At this point the federal carbon tax is scheduled to rise by 25 per cent on April 1, from $40 a tonne to $50 a tonne. This will increase the price of gasoline by about $0.022 cents per litre as the carbon tax rises from $0.088 to $0.11. The master plan is to raise it to $170 a tonne by 2030, at which time the carbon tax will reach $0.396 per liter.

Why? To encourage people to use less gasoline. The whole concept of carbon taxes is they are a powerful market force that will change consumer behaviour.

However, what people don’t appreciate about gasoline (and diesel fuel) is that in a large, cold, underpopulated country like Canada, gasoline is an essential commodity and not that sensitive to price.

It’s like food. When the price of food rises you may eat something different and you may eat less. But you don’t quit eating.

Thanks to the rising price of oil, the Liberal’s desired higher price for gasoline to reduce consumption has already arrived. But nobody is using less fuel. Here’s some year-over-year average gasoline prices figures for Saskatchewan (Regina and Saskatoon) from Statistics Canada.

 

The carbon tax increase from 2021 to 2030 is slated to be $0.308 per liter.

The good news for the climate concerned is this targeted increase in the price of gasoline has already been met or exceeded in four of the past five months for which data is available. The Liberals should be overjoyed. They met their price target eight years early!

Except oil producers and their suppliers got the money, not governments.

But the bad news is the Liberal’s aggressive climate agenda is less affordable than it has ever been. The pledge to show the world how Canada was going to exceed its 2015 Paris climate commitments was made in mid-2021 and repeated again at the COP 26 Climate Summit in Glasgow in November. Trudeau was heralded on the global climate stage as being the leader of the only major oil-producing country in the world with a carbon tax.

Bravo.

But that was three months ago, eternity in the current environment of energy and price chaos. Around the world, COP 26 commitments are sinking fast as governments deal with the more pedestrian realities of keeping the citizens of their countries warm, fed, moving and healthy.

In Canada, all we’ve heard from the Liberals since November is how former environmental activist and now Minister of Environment and Climate Change Steven Guilbeault plans to legislate that a portion of all new light vehicles sold in Canada next year will be electric. And that the nation’s electricity grid will have net zero emissions by 2035.

But not everything the Liberals promise actually happens.

In 2015, Prime Minister Trudeau campaigned on balancing the books by 2019. The federal deficit for his first year in office was $2.9 billion. By the 2019-20 fiscal year it was $14 billion, a $14 billion miss. A year later it rose to $39 billion. For the fiscal year ended March 31, 2021, it was $354 billion.

To use the old sports analogy, it really is “gut check time” for the Liberal party and its management of the nation’s finances.

Faced with higher inflation, rising interest rates, higher debt servicing charges, rising food costs and increasing energy prices, will the Liberals really increase the carbon tax 25 per cent on April 1?

Probably. But it will have nothing to do with the climate. Ottawa needs the money.

 

David Yager is an oil service executive, oil writer and energy policy commentators and analyst. He is currently president and CEO of Winterhawk Casing Expansion Services, which is commercializing a new way of mitigating methane emissions from surface casing vent flows. He is author of From Miracle to Menace – Alberta, A Carbon Story. More at www.miracletomenace.ca.

 

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