Timothy Johnson - 200450452 JSGS 802 Assignment #2

March 28, 2022

Strategic Allocation of Prairie Resilience Carbon Revenue

ISSUE
Saskatchewan has agreed to implement a carbon tax consistent with the federal carbon tax plan.

BACKGROUND
General Information: The Federal Carbon “backstop” tax under the Greenhouse Gas Pollution
Pricing Act (GGPPA) has two basic parts: a regulatory fuel charge and the Output-Based Pricing
System (OBPS) which is a credit trading system for industry.1
Saskatchewan’s provincial Prairie Resilience climate strategy is supported by its own legislation
and regulations, notably the Management and Reduction of Greenhouse Gases Act (MRGGA).
Guiding Principles: The purpose of putting a price on carbon is to incentivize behaviours that
will reduce carbon emissions and equivalents (CO2e). These emissions can be understood as a
negative externality of the market. A carbon tax is one of the policy instruments that make up
The Pan-Canadian Carbon Policy Architecture.2 The carbon tax is meant to be revenue neutral,
with its monies being used to serve the communities from which it was collected.
ANALYSIS
Four Scenarios3: Four scenarios regarding possible revenues generated by the integration of the
Federal Carbon Tax into the Prairie Resilience framework are examined. The scenarios are
generated using two variables: 1) annual cost of carbon per tonne, and 2) total provincial
emissions projections. Each scenario begins in 2023 at $50 per tonne and 75 million tonnes of
CO2e (Mt CO2e) and ends in 2030-31.

Annual revenue estimates were calculated by multiplying the year’s price per tonne of CO2e by
the estimated annual Mt CO2e. Scenario 1 (S1) uses a stagnated carbon price of $50 per tonne
with emissions lowered to 63 Mt CO2e by 2030. The CAGR of -2% for carbon emissions during
this time (75 to 63), means that on an average annual basis, the carbon emissions will decrease
by 1,500,000 tonnes between 2022-23 to 2030-31. Using the same methodology, Scenario 2 (S2)
also uses a $50 stagnant carbon price but has a more ambitious emissions goal of 50 Mt CO2e by
2030. Scenarios 3 (S3) and 4 (S4) use the current federal carbon pricing system that sees carbon
increase in cost by $15 per year until it’s $170 per tonne in 2030. S3 and S4 use the Mt CO2e
annual emissions targets of 63 and 50 respectively.

1
“Saskatchewan and pollution pricing,” Environment and Climate Change Canada, last modified February 21, 2019.
2
Saskatchewan Chamber of Commerce, “Building the Low Carbon Economy,” n.d., 13.
3
All calculations and charts for this proposal can be found here.
Timothy Johnson - 200450452 JSGS 802 Assignment #2
March 28, 2022

It could be argued that the most likely scenarios are those using the federal carbon pricing (S3
and S4). If that premise is accepted, then S3 and S4 warrant greater attention. As indicated in the
above graph, carbon tax revenues will be $10.7 billion and $8.5 billion by 2030 if Saskatchewan
can hit 63 or 50 Mt CO2e, respectively.

Emissions Per Sector: The 2014 emissions-per-sector data provided by the Ministry of Finance
is used for the analysis and following recommendations, therefore each sector’s percentage of
total emissions is the same across scenarios and years.4 In certain cases, like electricity,
Saskatchewan has a stated and specific target reduction number- 7.11 Mt CO2e5. Meaning that
the electricity sector’s percentage of total emissions will likely be lower than is shown in this
analysis and accordingly, this proposal should be seen as a strategic template where models
could be made more accurate.

As evidenced above, Oil and Gas, Agriculture, Electricity, and Transportation demand attention
in any future scenario involving a carbon tax. Using Federal pricing, Oil and Gas is set to
generate over $2 billion by 2026-27, whether emissions are lowered to 63 or 50 Mt CO2e. The
following recommendations prioritize these four sectors. Managing the additional $3.75 billion
in 2023 is still the primary concern.

Problem 1: How to integrate the federal Climate Action Incentive payments (CAIP) and Federal
OBPS with Prairie Resilience. CAIP currently covers the fuel charges included in the final price
of liquid fuels and impacts consumer costs for energy and electricity. 90% of this revenue is
returned to Saskatchewan residents through quarterly6 income taxes rebates, with the remaining

4
A more accurate annual accounting of transmission totals per sector would greatly improve the strategic efficacy.
5
Saskatchewan, “Climate Resilience in Saskatchewan,” 2021, 15.
6
Canada will begin issuing quarterly instead of annual payments in 2022-2023.
Timothy Johnson - 200450452 JSGS 802 Assignment #2
March 28, 2022

10% directed to small businesses, schools, municipalities, and Indigenous groups.7 The graph
below shows the findings of a 2019 Parliamentary Budget Officer study on the distribution of net
carbon costs paid and returned through CAIP rebates in 2019-2020.8 The four lowest households
groups received more than they paid in carbon tax, only the highest income households ended up
paying.9

Recommendation: Continue reallocation of revenue via quarterly income tax rebate method.
Tool package/rationale: Using a rebate payment based on claimed household income, this
intervention addresses income distribution.
Advantages and disadvantages: The administration for re-payments through CRA is already in
place. It is progressive, vertically equitable, and revenue neutral. Saskatchewan then controls
remaining the 10% of revenue to reinvest in electricity and energy innovation. SaskPower and
SaskEnergy are currently lowering their CO2e emissions every year under federal taxing.
The psychological connection to paying more for carbon is not very explicit; supporters of a
“pay less at the pumps” policy will be disappointed.
Allocation: Federal carbon tax revenue was $659 million in 2021-22 at 40$/tonne10, this amount
was generated by taxing 16,475,000 tonnes of carbon. An estimated $823,750,000 of revenue in
2022-2023 is therefore reasonable- presuming similar CO2e emissions.

Problem 2: Saskatchewan has the highest national GHG emission intensity at 876 tonnes of
CO2e per million dollars in GDP. Industrial Emitters11 will receive substantial taxation at $50
per Mt CO2e.
Recommendation/tool package: First, enforce emission ceilings using industry benchmarks to
calculate compliance exemptions delivered via tax deductions. If for example, the goal is to hit
50 Mt CO2e by 2030 across all emitters, then the overall benchmark ceiling across all sectors for
2026-27 would be 61.5 Mt CO2e. By aggregating sectors, specific benchmark ceilings would
correspond with the percentage of the total emissions ‘allowed’ for that sector. Compliance with
ceilings would then be rewarded with tax deductions. Use Saskatchewan’s Output Based
Performance System (SOBPS) for monitoring, reporting, enforcement, etc. Second, allocate
partial revenue toward refundable/tradeable surplus credits for industrial emitters with one credit
equalling the cost of one tonne ($50 in 2023).
Rationale: This would reduce negative externality CO2e emissions and mitigate carbon leakage.
7
“Climate action incentive payment,” Canada Revenue Agency, last modified March 14, 2022.
8
In this study the rates stagnated at $50 after 2022-23.
9
Brett Dolter, “Carbon pricing is here to stay in Sask. So how should the province use the money?” CBC News, April
12, 2021.
10
Parliamentary Budget Office, “Reviewing the Fiscal and Distributional Analysis of the Federal Carbon Pricing
System,” 2020.
11
Definitions of “Industrial Emitters”: oil and gas, mining, manufacturing, waste and others, buildings.
Timothy Johnson - 200450452 JSGS 802 Assignment #2
March 28, 2022

Advantages and disadvantages: Setting ceilings using attainable targets still incentivizes
emission reduction without crippling industry. Deductions and credits are an easy way to ensure
revenue neutrality and help prevent carbon leakage. Certain emitters may feel singled out as
ceilings get lower over time.
Allocation: The amount allocated for these five sectors in 2023 is 1,687,500,000.00 (44% of 75
Mt CO2e at $50), half being accounted for by exemption deductions and half used for
refundable/tradeable credits.

Problem 3: Agricultural emitters will incur substantial taxation under a carbon tax.
Recommendation/tool package: Pursue deduction options surrounding carbon capture offsets
and provide credits to offset costs of adopting emission reduction technologies.
Rationale: Continuing to tax carbon will reduce the negative externality of carbon emissions..
Advantages and disadvantages: Empowering producers to incorporate innovative practices will
secure Saskatchewan’s future agricultural GDP by reducing its GHG intensity. This will also
reduce risk of carbon leakage. Some carbon leakage may be unavoidable.
Allocation: The reallocated revenue is $825,000,000 in 2023 with $618,750,000.00 (75%) going
to offset deduction opportunities and $206,250,000.00 (25%) towards green energy initiatives.

Problem 4: Transportation emissions will generate significant carbon tax revenues.

Tool package/recommendation: Prairie Resilience incorporates a green transportation
investment package that includes $100,000,000 in tax deductions for electric vehicle
manufacturers, $100,000,000 in corporate tax deductions to support innovation in green fuels
(low-carbon and zero emission fuels including hydrogen), $50,000,000 refundable credits for full
reimbursement to all public transit users (universal free public transit). An additional
213,250,000 towards non-refundable credits invested in transportation sector innovation.
Rationale/allocation: This will reduces the negative externalities of carbon pollutants in
transportation This approach is consistent with federal initiatives such as the Hydrogen Strategy
for Canada. The total expenditure allocation for transportation tax instruments is 413,750,000.

CONCLUSION
Carbon will continue to be taxed in major economies in the coming years. The aforementioned
recommendations reallocate tax revenues to the most affected sectors. The strategy presented is
revenue neutral and offers a path forward for Saskatchewan’s economy beginning in 2023 under
a carbon tax regime.