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Carbon-tax backstop leaves small businesses at pointy end of pricing-adjustment stick: CFIB

It's yet another Ottawa policy that's not fair to SMEs, who won't be able to pass costs on to customers: Opinion

By Ted Mallett

Published in the Financial Post on March 4, 2019.

“We are all in this together” is one of the main talking points governments use in crafting policy responses to fears about global warming. It’s especially so for Canadian governments because there is not much a small country can do that would have measurable effects on the world’s atmosphere. Canadian carbon policy is only meaningful if each country is doing its part.

There are many approaches to reducing the use of carbon fuels — a major contributor to GHGs — ranging from regulatory limits, bans and incentives to re-pricing mechanisms, and in true Canadian fashion our governments are using them all. The approach is anything but consistent nationally, but at least the provincial approaches have been relatively even-handed in how they balance costs and incentives. The federal carbon backstop plan, however, soon to appear in Ontario, Saskatchewan, Manitoba and New Brunswick, is anything but.

The federal government has promised revenue neutrality in its plan, but only in how it applies to itself. Varying segments of the economy will see very different net results. The feds tell us that households will be net beneficiaries on average because the incentives they get back each year at tax time will exceed the extra fuel charges they begin paying in April. Large businesses will pay a little more under a complex, separately administered output-based pricing system (OBPS), but only after receiving exemptions on about 80 per cent on the fuels they currently use.

Small- and mid-size enterprises not covered by the OBPS, though, will be left with the pointy end of the adjustment — facing higher costs with little in the way of benefits or incentives returned. They will be charged on every litre or cubic metre of fuel used and be expected to contribute to the incentive payments to households, all while having to compete with larger enterprises or sell their products in export markets.

Within the SME sector, there will be particular problem spots, especially for those in the agriculture, transportation and energy-intensive manufacturing sectors. Even though the government casually assumes that all businesses will pass on all these extra costs through higher prices, many of these businesses will not be able to do so because of the nature of their products or competition from outside the country. In fact, more than half of CFIB’s members in those four provinces tell us they will not be able to pass on any of the additional costs in the short to medium term. It is a problem the government acknowledged for large businesses — one the OBPS was expressly designed to minimize — but which small firms are expected to handle unaided.

Considering that SME firms will be paying almost half of total fuel levies (their share expected to be roughly $2.5 billion annually by 2023), the $385 million to be sent back to them in a yet-to-be-specified way barely moves the needle. In contrast, households — expected to pay $2.8 billion per year by 2023 in fuel charges — will collect $5.1 billion, or 90 per cent of the ‘revenue-neutral” incentive payments. It’s hardly a commitment to “everyone doing their part.”

The carbon issue is divisive and a challenge to businesses and households alike having to adjust use of carbon fuels built into their structures and lifestyles. Small firms have had to weather a number of policy challenges recently from the federal government, from the needlessly accusatory stance on small business taxation to increases in payroll costs on employment insurance and the Canada Pension Plan. The carbon backstop plan is another policy that doesn’t pass the fairness test for small business. If we are truly “all in this together” in the fight against climate change, then passing close to half of the total bill to one group, while exempting or insulating everyone else seems like the wrong approach. The federal government should send this plan back the drawing board.

Ted Mallett is chief economist of the Canadian Federation of Independent Business.

March 4, 2019

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