After three years, Ottawa is addressing one of the biggest inequalities in its carbon pricing system by giving rebates to farmers.
Prairie grain farmers, in particular, have long complained about the additional carbon pricing costs they have incurred by burning natural gas to dry their crops. Expenses can run into the thousands of dollars for larger producers in particularly wet years.
Ottawa’s new system, outlined in December’s fall economic statement, fails to meet farmers’ demands for a full exemption for the use of natural gas. But it does bring some relief, while also creating an economic incentive to move to a future that is less dependent on fossil fuels.
Politically, the change addresses a policy gap: Ottawa has touted rebates on carbon pricing to households and shielded heavy industry exposed to exports, but left farmers alone to deal with rising carbon charges. carbon from the consumption of natural gas. “This is an important part of making the system fair,” said Nicholas Rivers, Canada Research Chair in Climate and Energy Policy at the University of Ottawa.
However, there will most certainly be farms that pay more in carbon royalties than they receive in rebates, since eligibility extends to all types of farming.
Farms with high natural gas bills from grain drying are eligible for rebates in the form of refundable tax credits. But the same goes for other farms that have not incurred such bills, including greenhouse operators who have already exempted 80% of their natural gas consumption from carbon charges. Farmers are already exempt from carbon pricing for gasoline and diesel used in their operations.
Indeed, Ottawa has created a slightly modified version of the household rebate program, which provides for annual – soon to be quarterly – payments that are unrelated to an individual’s fossil fuel consumption. Farmers, like other Canadians, are eligible for these payments, but the money is intended as compensation for household energy use, not for additional expenses incurred by farms.
Households that use relatively little fossil fuels (and therefore lower carbon burdens) end up with money in their pockets. Conversely, households whose consumption is relatively high end up paying more in carbon royalties than they receive in rebates. It is this dynamic that prompts a reduction in the use of fossil fuels, either through conservation or by moving to less carbon intensive infrastructure.
Now there is a similar dynamic for farms. Reimbursements are based, for the most part, on expenses used to calculate farm income for tax purposes. The amount of expenses a farm can claim will be reduced if its operations extend beyond provinces where federal carbon pricing applies (Ontario, Manitoba, Saskatchewan or Alberta). But most types of farm expenses will be included.
Farmers can claim a flat rate for every $ 1,000 of these expenses. For 2021, this rate is $ 1.47, to drop to $ 1.73 in 2022. Thus, a farm with eligible expenses of $ 1,000,000 could benefit from a refundable tax credit of $ 1,470 for the 2021 tax year and $ 1,730 in 2022.
In a statement, Finance Minister Chrystia Freeland’s press secretary Adrienne Vaupshas said the new program would help farmers reduce their emissions. “We are committed to helping Canada’s agriculture and agri-food sector meet its emissions targets and seize new economic opportunities,” she wrote.
The Canadian Federation of Agriculture said it welcomes the rebates’ arrival, but noted that the amounts budgeted for payments to farmers are lower than the carbon royalties the agricultural sector pays to government. “Farmers are feeling it on the bottom line, and that’s always the problem with the carbon tax,” said Todd Lewis, FCA vice president and president of the Agricultural Producers Association of Saskatchewan.
Mr Lewis, a grain farmer, said some elements of the reimbursement design made sense, including the decision to base payments on farm expenses.
Professor Rivers said Ottawa has done a good job designing a reimbursement system that provides a financial incentive to reduce greenhouse gas emissions in the agricultural sector. He also welcomed the choice to use declared expenses for income tax purposes, saying it was administratively straightforward.
However, there are distortions resulting from the diverse nature of the agricultural sector. Some producers, such as grain producers, need to burn large amounts of natural gas (at least in the short term) as part of their operations. Others won’t, which means they’re likely to end up with cash in their pockets even without action to reduce their emissions. “It’s probably a godsend for a potato farmer,” said Professor Rivers.
Other distortions result from Ottawa’s political choices, notably the current exemption for greenhouse growers. Under this exemption, carbon charges are reduced by 80% for eligible greenhouse operators. This substantial exemption remains intact – and greenhouse operators are also eligible for refundable tax credits under the new refund program.
David Sawyer, senior economist at the Canadian Institute for Climate Choices, said greenhouse operators would likely be overcompensated under the rebate system and the exemption should be removed.
Mr. Lewis of the FCA said there are other gaps that put grain producers at a disadvantage. The basis for amounts claimed on taxable expenses ends up excluding the cost of rail shipments, which are deducted from gross income before calculating expenses and net income. In contrast, the cost of transporting crops by truck – more common in the eastern provinces – is classified as an expense in calculating taxable income.
More generally, said Lewis, the introduction of carbon rebates marks a major change in tone from the early days of the carbon pricing debate, when Ottawa lectured farmers on the need to cut emissions. . Now, he added, the federal government has recognized both the challenges farmers face and the contributions the sector can make to reducing national greenhouse gas emissions.
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