The Impact of the Carbon Tax on Small Business
The carbon tax is a tax imposed by the government that requires carbon emitters (most often businesses) to pay a fee for each ton of carbon emissions they produce.
Background Info: What Is a Carbon Tax?
This article will explain everything you need to know about how carbon taxes impact small businesses, both positively and negatively.
Table of Contents
Impacts of the Carbon Tax On Small Business
Positive Impact of Carbon Tax On Small Business
Negative Impact of Carbon Tax On Small Business
Impacts of the Carbon Tax On Small Business
Small businesses are particularly impacted by climate change, as they have fewer resources that allow them to withstand or recover from catastrophic climate events and other climate-driven difficulties. The government’s implementation of a carbon tax, however, can give small businesses both opportunities and challenges. The impact of a carbon tax on small businesses depends on how the carbon tax is designed and its revenue distribution (how the government chooses to distribute the money made by the tax).
If the implemented carbon tax is too high and does not have an appropriate revenue allocation, it may only damage small business owners by imposing an additional charge on business necessities such as fuel and electricity. For example, a restaurant’s monthly electricity bill will often be elevated by a carbon tax since its electricity supplier pays an extra tax for its carbon emissions. The restaurant may be forced to increase their prices to cover their budget for the carbon tax on their bills. As a result of these price increases, the restaurant might lose some of its customers.
However, if the design of the implemented carbon tax has a business-oriented revenue allocation plan, small businesses might benefit through incentives such as reduction on other taxes and rebates, which could help their budget overall.
Positive Impacts of a Carbon Tax On Small Businesses
Small businesses might benefit from a carbon tax if the revenue is utilized and allocated in a manner that benefits them. Here are some examples of how a carbon tax can positively impact small businesses:
Reduction on other taxes
A carbon tax’s revenue may be put toward tax incentives that offset the impact of the carbon tax on small businesses. Through these tax incentives, small business owners can balance or increase their income impacted by the carbon tax, allowing them to become more resilient to catastrophic climate or environmental events.
For example, in British Columbia, the revenue distribution implemented in 2008 imposed a carbon tax on fossil-fuel emissions that are charged through energy bills and increased pump prices. The government used the tax revenues from the carbon tax to reduce business taxes, which benefits small businesses financially.
Rebates for affected small businesses
Another benefit of carbon tax income may be a rebate for small businesses. This is meant to assist small businesses that are affected by the cost increases on electricity, fuel, or other things on which their businesses rely. The rebates can increase the budget of small businesses for their green investments, such as purchasing energy-efficient equipment.
For example, Ottawa, Canada, announced in 2019 that it would rebate $1.4 billion in carbon tax revenue to small businesses over the next four years to support their energy efficiency initiatives. The rebate could reach up to $20,000 for each small business in Ottawa.
Greener business operations
Revenue aside, a carbon tax could also encourage small businesses to operate in a more energy-efficient and sustainable way. This could take the form of:
- Switching to power-saving appliances like LED lights and inverter equipment
- Reducing fuel consumption through minimizing the use of vehicles
- Switching to renewable sources of energy like solar panels
Greener operations not only help small businesses save money but also contribute to mitigating climate change by lowering emissions.
Negative Impacts of a Carbon Tax On Small Businesses
In some situations, carbon taxes can have a negative impact on small businesses. This may occur when the design of the carbon tax has a high cost and no appropriate revenue allocations. Here are some examples of how a carbon tax can negatively impact small businesses:
Price pressure on energy sources
After the implementation of a carbon tax, small businesses may face higher bills for energy sources such as electricity and fuel, which are essential for any business. This may put pressure on small businesses to increase the cost of their products or services in order to compensate for the budget damage caused by the carbon tax.
For example, the implementation of the federal carbon tax in Ontario in 2019 affected an estimated 470,000 small to medium businesses by increasing their annual heating costs by up to $1,000 by the 3rd year after implementation. Without this additional cost on energy bills, business owners would have had more money that could have been used to produce more products and generate more income.
Lowered quality of products and services
Some economists argue that as a result of the negative domino effect of extra tax costs, small business owners may be forced to reduce the quality of their products or services in order to save money and keep the business operating. This might have a detrimental impact on the small business and the trust of its consumers, which, in extreme cases, can eventually lead to business closure.
Ultimately, the impact of a carbon tax on small businesses depends on how the tax is designed and how its revenue is distributed. Here are the key takeaways about the impact of carbon taxes on small businesses:
- Small businesses can benefit from a carbon tax if the revenue is redistributed as a tax rebate or includes a reduction in other taxes.
- Small businesses can benefit from a carbon tax by reducing their carbon emissions, which usually reduces energy and fuel costs in the long term.
- Small businesses can be harmed by a carbon tax if it does not provide revenue benefits and cuts into their budget or forces the business to raise the cost of their product or service.
- If they don’t benefit from the carbon tax revenue, small businesses may be forced to lower the quality of their products to compensate for increased tax costs.
Finally, small businesses may benefit in the long term due to the positive climate change mitigation effects of a carbon tax.