The Carbon Tax and Carbon Tax Credit in Ontario

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. The province of Ontario has one of the most impactful carbon taxes in the country of Canada.

In this article, you will learn more about the carbon tax in Ontario, including its history, its current state, how it impacts businesses, and how communities benefit from the carbon tax credit in Ontario.  

Table of Contents

The Carbon Tax in Ontario: Background and Current State

The Impacts of a Carbon Tax in Ontario


People: The Carbon Tax Credit

Key Takeaways

The Carbon Tax in Ontario: Background and Current State

History of the Federal Carbon Tax in Canada

In Ontario, there are numerous major sources of carbon emissions. The transportation sector is the largest contributor to carbon emissions in the province, accounting for 35% of total emissions, followed by the heavy industry sector, which accounts for 24% of total emissions, and finally, the residential and commercial sector, which accounts for 22% of total emissions in Ontario.

A national carbon pricing plan was proposed by Prime Minister Justin Trudeau during his campaign in 2015. He proposed introducing a carbon tax across the country, with provinces entitled to design their own taxation plan as long as it achieves all the federal requirements. 

During the 2015 Paris climate summit, Prime Minister Trudeau and other provincial officials announced that Canada was committing to reduce 30% of its carbon emission by 2030.

At the 2016 Vancouver Conference, Trudeau and the provincial premiers decided to develop a national strategy for the reduction of carbon emissions. The provincial premiers announced their commitment to the Vancouver Declaration, which sets out the actions they intend to take for the transition to a low-carbon economy.

In October 2016, the federal government implemented the federal carbon pricing strategy. This included a carbon tax across the country, with provinces entitled to design their own taxation plan as long as it achieves all the federal requirements. Under the carbon pricing strategy, a carbon tax must be set in every province of at least $10CAD per ton, which must annually increase to meet $50CAD by 2022. If the provinces, however, adopted the cap-and-trade program instead, they would be required to reduce the emission cap periodically (thus making emissions more expensive) to achieve the carbon reduction goal by 2030. 

The Carbon Tax in Ontario

In 2018, Ontario’s premier, Kathleen Wynne, agreed to implement the cap-and-trade program utilized by Quebec and California. A cap-and-trade program is similar to a carbon tax, because it places a financial burden on greenhouse gas emitters. However, the cap-and-trade program puts a price on the amount of gas emitted, whereas a carbon tax puts a price on carbon itself.

Read more about carbon taxes versus cap-and-trade systems: A Cost Benefit Analysis of the Carbon Tax.

Under a cap-and-trade program, there is a carbon market where corporations may purchase and sell certifications for their carbon emissions. This incentivizes corporations to reduce the amount of carbon they emit. However, the program was abolished later that year by Ontario’s newly elected provincial premier, Doug Ford.

In 2019, after Ontario’s failure to set their own carbon pricing plan, the federal government set a carbon tax on several Canadian provinces including Ontario, with the rate of $20CAD per ton of carbon, a price that increased annually by $10CAD per ton until it reached its $50CAD planned trajectory.

Other provinces that fell under the federal government’s pollution pricing system include: 

  • Saskatchewan
  • Manitoba
  • New Brunswick
  • Prince Edward Island
  • Nunavut
  • Yukon

On April 1, 2022, the federal carbon tax increased to its maximum goal of $50CAD per ton of carbon emission. There is much debate over whether the carbon tax (and its resulting carbon tax credit) has a positive or negative impact on the residents and businesses in Ontario. 

The Impacts of a Carbon Tax in Ontario

Impacts of a Carbon Tax On Businesses in Ontario

There are several different impacts of a carbon tax on businesses in the province of Ontario:

Businesses might be forced to relocate to countries with no carbon tax policies.

Due to the high rate of the federal carbon tax in Ontario and other provinces, in order to keep costs down, some businesses might be forced to relocate their business operations to countries with no carbon tax policies. For example, according to a 2019 analysis, with a $50CAD carbon tax rate, the carbon tax will increase the production cost of different major industries by around 5%. These include industries that produce coal and petroleum products, manufacturers of agricultural and basic chemicals, and electric power supply industries. To avoid further loss of profit due to the increased production costs, these industries might transfer their operations outside the country. 

Small businesses might experience 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 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 of energy bills, business owners would have $1,000 that they could utilize to produce more products and generate more income. 

Businesses receive increased security against extreme climate events.

On the bright side, with the help of a carbon tax in Ontario, emission reductions could be accelerated, which would help mitigate climate change in the long run. This could provide a safer environment for businesses in the province, allowing them to thrive and be more profitable through different seasons and as climate change’s effects worsen. As many in favor of the tax argue, businesses will not be able to survive in the long run without a reduction in emissions.

Impacts of a Carbon Tax On People in Ontario: A Carbon Tax Credit

A carbon tax would also impact the residents of Ontario:

The carbon tax credit supports Ontario residents with direct payments

In the federal carbon tax, 90% of collected revenue is returned as cash directly to households and individuals in Ontario. This is called Climate Action Incentive Payment (CAIP). In a household with four members, CAIP will reach up to $745CAD. The purpose of this rebate is to ensure that Canadians are not burdened by the high rate of a carbon tax. It could support families in budgeting and paying for their other bills and daily necessities.

The remaining 10% of the revenue is utilized to provide assistance to farmers, indigenous people, schools (which could help in providing better facilities for students), and local municipalities, who can then use the money for other climate action initiatives for the improvement of the community. 

Residents in Ontario will be encouraged to use cleaner energy sources and climate-friendly practices 

To avoid further additional charges due to the carbon tax, residents in Ontario will be encouraged to use cleaner energy sources and practices, such as installing solar panels and using LED lights. With the help of CAIP and other carbon tax credits in Ontario, it would be easier for residents to adopt these energy-efficient initiatives. 

Key Takeaways

The implementation of a carbon tax in Ontario creates new opportunities and different impacts on the community and the province as a whole. Here are the key takeaways about the state of a carbon tax in Ontario and its potential impacts, including a carbon tax credit. 

  • The federal government issued a carbon tax to Ontario in 2019, with a carbon tax cost of $20CAD. Three years after the implementation, the current carbon tax cost in Ontario reached $50CAD in April 2022. 
  • There are different impacts of a carbon tax on Ontario’s businesses and people. These include increased costs for businesses, which may cause new challenges, and direct payments to residents through Ontario’s carbon tax credit.

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