Canada's competitiveness problems go beyond carbon tax

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Appeared in the Edmonton Sun, August 17, 2018
Canada's competitiveness problems go beyond carbon tax

The federal government’s recent move to ease its carbon tax regime for big emitters is promising—the government is finally acknowledging Canada’s competiveness problem. However, these recent changes are not enough to keep up with sweeping policy reforms south of the border. Washington has eschewed carbon pricing and implemented investment-friendly policies while Ottawa adds costs and regulations, likely chasing away investment dollars in many key industries.

Initially, the government proposed taxing companies for emissions exceeding 70 per cent of the average pollution intensity (amount of pollution generated per unit of activity) for any given industrial sector (cement, for example). Under the new changes, the tax only applies to emissions that exceed 80 per cent of the average for any industrial sector and 90 per cent in a small number of sectors (iron and steel manufacturing, for example).

Simply put, the government is lowering the percentage of emissions it will tax large emitters, and offering larger exemptions for energy-intensive companies due to competitiveness concerns. Crucially, however, these changes don’t reduce the rate of the carbon tax—rather, they just increase the carve-outs for specific industries.

While Ottawa’s latest move addresses some competitiveness concerns for select industries, it’s not nearly enough, particularly true given that our largest competitor for business investment and entrepreneurs, the United States, has rejected a national carbon tax.

The Trump administration has also enacted sweeping business tax reforms and reduced personal income tax rates while Canadian governments moved in the opposite direction. Most Canadian provinces and the federal government have increased personal income tax rates on professionals, entrepreneurs and business owners. The top personal income tax rate now exceeds 50 per cent in seven provinces, with the remaining three provinces within a hair of 50 per cent.

On the regulation and red tape front, Washington has rescinded or scaled back many regulations that impeded resource development. For example, it’s eased vehicle emissions standards, rolled back controls on power-plant emissions and repealed a regulation on hydraulic fracturing (or fracking) on federal lands.

Meanwhile, our federal government adds more red tape and makes its regulatory processes for the approval of major energy projects more complex and uncertain, which will further discourage investment in Canada. In particular, Bill C-69, currently under House review, includes a large number of subjective criteria—namely the social impact of energy investment and its “gender” implications—which most observers conclude will increase uncertainty and further politicize the regulatory process.

But don’t take our word for it. Look at the data.

Foreign direct investment (FDI) in Canada was $31.5 billion in 2017, down 56.0 per cent since 2013 when it totalled $71.5 billion. And since 2014, total business investment (adjusted for inflation and excluding residential housing) has declined by almost 17 per cent. Moreover, as shown in a recent Fraser Institute analysis of business investment within industrialized countries, Canada ranks second last among 17 advanced countries for its level of business investment.

Again, recent adjustments to the federal government’s carbon tax system will not solve Canada’s competitiveness concerns. Now that Ottawa has acknowledged we have a competitiveness problem, it should take action and enact comprehensive tax and regulatory reforms to make our investment climate more attractive. For the benefit of Canadians and our overall economy.