In his first major move to address the economic fallout of the war in the Middle East, Prime Minister Mark Carney has temporarily axed Canada’s federal fuel tax.
But experts warn that the temporary sugar high of tax relief fails to address Canada’s dependence on an increasingly volatile energy source.
“This measure sends the wrong signal,” said economist Jim Stanford, who is a director at the Centre for Future Work. “The big problem not only hasn’t been solved; it hasn’t even been properly identified.”
The tax cut, which Carney said will remain in place until Labour Day, is expected to shave 10 cents per litre off the price of gasoline and four cents off diesel and aviation fuels. Doing so will likely cost the government around $2.4 billion in lost revenue. Even with the cut, gas remains about 40 cents per litre above prewar prices.
Carney’s tax cut is among the many responses emerging among countries reeling from the largest supply disruption in the global oil market’s history. The weeks-long closure of the Strait of Hormuz has choked off 20 per cent of the world’s oil supply, prompting an unprecedented economic fallout with an uncertain end.
Some countries heavily affected by the supply shock have responded to the crisis by curtailing fossil fuel use by mandating four-day workweeks for government officials, limiting air conditioning in public buildings and shifting to online classes. Regions like the European Union are considering tax cuts on electricity to speed electrification and windfall taxes on oil companies to rein in runaway profits.
Canada’s gas tax cut placed it among a growing list of countries turning to measures like fuel tax cuts — which amount to taxpayer-funded fossil fuel subsidies — to lessen the immediate pain. The move has garnered praise from groups like the Canadian Taxpayers Federation, which has called for the pause to be made permanent and for provinces to follow suit by cutting their own fuel levies.
Opposition Leader Pierre Poilievre has called for the fuel tax cut to remain until the end of the year.
But the approach is garnering pushback, including from groups like the International Monetary Fund, which warned last week that “broad measures such as fuel subsidies, while politically appealing, are costly, poorly targeted, difficult to reverse, and encourage higher consumption when supply is constrained — pushing global prices even higher.”
What’s wrong with the gas tax?
Canada’s federal gas tax has been fixed at its current price for over two decades and plays a relatively small role in filling government coffers and on Canadians’ pocketbooks. The government’s estimated revenue loss of $2.4 billion compares with a projected deficit of $78 billion this year.
Cutting the tax is likely a political move, said Blake Shaffer, an economics professor at the University of Calgary.
“It’s something they can do with immediacy. And it’s very visible to the electorate.”
Shaffer describes the policy as a “blunt tool” that fails to target low-income people who are particularly affected by the coming economic turmoil.
“You’re helping to offset those who use a lot of gasoline,” he said, adding that a targeted tool, like a GST rebate or a boost to the child tax benefit, could better address impacts without artificially stoking demand for a product that is globally scarce.
He said the cut also dampens the “substitution effect” of high fossil fuel prices, which can prompt people to change their behaviour and energy consumption through actions like choosing public transit or buying an electric vehicle. Though the effect is gradual, Shaffer said, the substitution effect is real — eventually, those considering buying an electric vehicle will get pushed over the line.
“We’re really getting closer to that threshold,” he said. By cutting gas taxes, Shaffer said, the government is “dampening that signal at exactly the time when we actually need people to shift away — not even for decarbonization reasons, just simply because there’s not enough gas.”
Some doubt the time-limited tax cut will have a meaningful long-term impact.
“It won’t affect decisions that much,” said Dave Sawyer, an environmental economist at the Canadian Climate Institute. But Sawyer warned against making such cuts permanent. “If it gets locked in, then that’ll change that assessment.”
Overall, the larger effect of the supply shock and its associated fuel price rise is more likely to lead Canadians away from fossil fuels, Sawyer said. If energy prices remain high, consumers will be more likely to look for alternatives, like buying an EV.
A recent analysis from Clean Energy Canada found that the fuel price cut will save Canadians an average of $17 per month on gas — a far cry from average fuel savings of $250 per month for drivers of electric vehicles.
Oil companies shielded from view
Canada’s fuel tax cut deflects from the real problem at hand, Stanford said.
“Government is kind of signalling that the problem isn’t the oil industry, the problem is government,” he said. “The problem that we face is that we’re reliant on a fossil fuel energy system that is controlled by powerful, concentrated vested interests and is very vulnerable to all kinds of shocks.”
In the first month of the war in the Middle East, Canadian oil companies made about $6 billion — $4 billion more than the previous month — according to an analysis from the Canadian Centre for Policy Alternatives. The think tank estimated industry profits could rise to $90 billion before the end of the year.
Stanford, new NDP Leader Avi Lewis and a growing number of others have called for a windfall tax on oil company profits. Because spiking oil prices drive up costs on everything from gas to groceries, such a tax could bring in revenues to address the coming inflationary shock, Stanford said. About three-quarters of Canada’s oil consumption occurs in businesses that use oil to make or transport their products, meaning rising costs quickly flow through to consumers.
During the last oil price spike, which was driven by the COVID-19 pandemic and the war in Ukraine, oil-price-driven inflation cost Canadians $12,000 on average over its three-year surge, Stanford estimated.
“This one is going to be worse,” he said.
A windfall tax could also support Canada’s electrification efforts to reduce its economic reliance on oil and gas, he added.
Oil and gas companies owe it to Canadians, he said.
“If anybody should be giving something back to consumers, it’s them.”
Unlike a cap on oil prices themselves, Stanford added, a windfall tax wouldn’t allow companies to divert their products elsewhere.
Windfall taxes are not unheard of: Canada imposed them on banks and the financial sector during the pandemic, when profits boomed, and they remain in place today.
Austria, Germany, Italy, Portugal and Spain have also recently called for the European Commission to implement a windfall tax on fossil fuels. In a letter to the commission, the countries warned of the economic hardship to come.
“It is important to ensure that this burden is distributed fairly,” they said.