Canada Put a Price on Carbon and Rebated Billions Back to Canadians. Here’s What Worked and Here’s What Went Wrong.

In 2019, the Canadian government introduced a price on carbon pollution and recycled the money directly to households—a policy advocated for by economists from across the political spectrum. The policy reduced the country’s emissions, and the rebates increased most Canadians’ incomes even after considering the impact of the carbon price on their budgets. In short, the policy was a win for the environment and the public. Yet today, both the policy and the Trudeau administration are deeply unpopular, with the opposition poised to win upcoming national elections and vowing to “ax the tax.” Why did a successful policy fail to win public approval?

Carbon rebates, also known as carbon dividends, are regular payments made to households funded by carbon pricing revenue. The fee charged on fossil fuels is passed through the market to consumers, sending a price signal to shift away from fossil fuels. When the revenue is then returned directly to the public, it more than offsets the higher fuel prices for most families because the size of the revenue pie is increased by the heavier carbon footprints of the wealthiest households.

The goal of carbon pricing is to incentivize consumers and businesses to reduce emissions, while giving them flexibility to choose what works best for them. But why give the revenues back? One answer is because the gifts of nature—including the limited capacity of the biosphere to absorb carbon emissions—belong to the people, not the state. Another is that rebating the revenues avoids regressive impacts and in so doing helps to build public support. Despite their lighter carbon footprints, low- and middle-income households spend a larger fraction of their income than wealthy households on necessities, including fuels. Thus, when fuel prices rise, this hits low- and middle-income households hardest. Rebates offset this impact, while preserving the incentive to reduce emissions because households receive benefits—the carbon rebates—independent of their fuel consumption. Those who consume the least fossil fuel get the biggest net benefit. According to an analysis by the Canadian government, ~80% of Canadians see a net positive change in income thanks to the rebate. An updated analysis by the Canadian Parliamentary Budget Officer forecasts that this positive impact on the average household will persist.

The beauty of carbon dividends is that they are not intrinsically partisan: they help protect our natural heritage in a cost-effective way, benefit working-class families, and stimulate clean energy innovation and investment.

How did carbon dividends come to be in Canada? When Justin Trudeau became Prime Minister in 2015, the federal government decided something that may sound obvious: it should not be free to pollute. When firms pollute, they receive benefits but impose costs on the rest of society. Putting a price on carbon pollution helps to internalize this externality, sending a price signal that aligns firms’ and households’ incentives more closely with the public good. To accomplish this, the government devised a way to price carbon emissions and use the revenues collected in a simple, honest way: by giving the money back to Canadians.

Economically, the policy has worked well: most households come out ahead. The policy has not contributed meaningfully to inflation, being responsible for less than 1/20th of the consumer price increases. Environmentally, the policy has worked, too; since 2019, emissions have dropped by ~6%, and the most recent independent research finds that emissions will dip 34–36% below 2005 levels by 2030, if current policies continue. Keeping in mind that emissions would otherwise increase greatly, these reductions are bigger than they look. Furthermore, as the price ratchets up over time, so do the dividends.

So, what went wrong? The Canadian policy’s Achilles’ heel was the poor visibility of the dividends. When the policy was implemented, the Trudeau administration did little to advertise or explain the benefits, apparently assuming that Canadians would figure out for themselves that their dividends were more than compensating for fuel price increases. Meanwhile, the opposition relentlessly attacked the carbon fee, or “tax” as they called it, blaming the policy for any and all price increases even as the Ukraine war drove up world oil prices. And not only did the critics mischaracterize and overestimate the costs, they also totally ignored the benefits—the dividends.

The visibility problem was exacerbated by appallingly obscure payment delivery and labeling. When the carbon rebates first went into effect, they were buried as a line-item adjustment on Canadians’ income tax returns. The rebate was later delivered via electronic bank deposits, but even these were woefully labeled, sometimes as “CANADA FED” or as a string of numbers and letters. The costs of carbon pricing are advertised at every gas station, so to maintain public support the benefits must be equally—if not more—visible.

The Canadian experience has vital implications for the rest of the world. Climate change is accelerating, and its harms are often suffered by those who are least responsible. If we want to mitigate these harms, carbon pricing is a key tool in the policy kit, and dividends are a critical way to use that tool without harming working families.

Of course, there are costs to any climate policy, but they pale in comparison to the costs of inaction. Pay a couple hundred more dollars today (and get a dividend to offset that) . . . avoid paying a couple hundred thousand more tomorrow when your house is no longer insured against hurricanes, floods, or fires.

What happened in Canada highlights the importance of two key considerations: partisanship and visibility. Conserving our environment and our natural heritage is not partisan. Taking steps so that pollution is no longer free is not partisan. Carbon dividends are not partisan, unless weak messaging opens the door to willful misrepresentation. Visibility is also key: the existence and magnitude of carbon rebates must be communicated clearly and consistently to the public. If we can set the record straight and learn from Canada’s experience, then we have a real shot at good policy for the climate and for the people.