MGEB02H3F - The Economic Effects of New Federal Carbon Tax Rebates

This essay provides an economic analysis of the new federal carbon tax rebates implemented in Canada. It summarizes the policy, identifies its effects using microeconomic principles, and determines who benefits and who loses. The analysis shows that while the carbon tax aims to reduce emissions, the rebates can stimulate aggregate demand by increasing disposable income. The essay concludes that the rebates can improve the standard of living for Canadian households, although the benefit is uniform across income levels. The document is available on Desklib, a platform offering study tools and resources for students.

Running head: EFFECT OF NEW FEDERAL CARBON TAX REBATES
Effect of new federal carbon tax rebates
Name of the Student
Name of the University
Author’s Note

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EFFECT OF NEW FEDERAL CARBON TAX REBATES
Introduction
The essay provides an overview on the impact of new federal carbon tax rebates. Carbon
tax is a kind of carbon pricing that relates to the tax levied on carbon content of fuels. Carbon tax
provides both economic and social benefits. It refers to the tax that enhances revenue without
considerably altering economy while promoting objectives of the climate change policy. The
revenue attained through tax is not often used for compensating carbon emission on which tax is
levied. The main objective of carbon tax is to reduce harmful levels of carbon dioxide emissions
and its adverse impact on environment and health of humans.
Discussion
Some economists are of the view that carbon tax is the most effectual way of reducing
greenhouse gas emission. Extreme climatic events such as wildfires, storms and flood provide
proof that Canada has been grappling with the impact of this climate change. Due to this, the
federal government slapped carbon tax on fuels in order to reduce carbon intensive consumption,
facilitate to curb pollution and reduce emission (Boadway, 2013). The federal government of
Canada has announced to impose carbon pricing as well as rebate system on the four provinces
of this country. As per Finance Canada, the households of this nation will attain more back from
rebate than they pay in the carbon tax. For instance, in Ontario, the households might receive
around $300 cheques in the next year although average family pays only $244 additional energy
costs. The net effect of carbon tax rebates might be progressive as higher – income households
apt to consume more energy, thereby pay extra in carbon taxes than they attain in rebates
(theenergymix, 2018). On the contrary, low- income households might attain more in the rebates
than they give in taxes. Moreover, the people might save even more and find ways to decline
their energy use. Thus, net financial benefit to the households would increase over time

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EFFECT OF NEW FEDERAL CARBON TAX REBATES
AD AD1
AS
Real GDP
Price
P1
P2
Y1 Y2
(theglobeandmail, 2018). The federal carbon tax rebate will also provide huge support to
specifically affected industry such as- hospitals, schools, indigenous societies. In fact, the
electricity generation within the remote communities as well as aviation fuel in few territories
might attain exemption from carbon tax. This approach adopted by the federal government will
stimulate the economy as disposable income increases owing to tax rebate exceeding higher
energy costs for most of the Canadians (Nystrom & Luckow, 2014). In other words, this will
motivate Canadians to enhance their energy efficiency to lower carbon options. Furthermore,
majority of Canadian households will be better off if carbon tax rebate phased above certain
income.
The imposition of carbon tax rebate by the federal government of Canada also leads to
increase in aggregate demand of the economy. Aggregate demand depicts the total amount of
products and services that the players in an economy buys and consume. These players involve-
individuals, households, non- profit entities, corporations and federal government. Moreover,
rise in aggregate demand leads to increase in price- level and real GDP. This is depicted in the
diagram shown below-

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EFFECT OF NEW FEDERAL CARBON TAX REBATES
Figure 1: Shift in aggregate demand due to carbon tax rebate
Source: (Broda & Parker, 2014)
The above diagram reflects that increase in disposable income of Canadian household
due to carbon tax rebate leads ti increase in aggregate demand of the economy. As a result, the
initial aggregate demand AD shifts rightward to AD1. Due to this, the price level increases from
P1 to P2 and real GDP increases from Y1 to Y2.
Conclusion
From the above discussion, it can be concluded that the households residing in Canada
would be better off due to new federal carbon tax rebates. The rebate will improve the standard
of living of Canadian households since they can save more money from this rebate. However, the
federal government designs rebate like social program and hence each households in given
province attains similar benefit irrespective of their income.

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EFFECT OF NEW FEDERAL CARBON TAX REBATES
References
Boadway, R. (2013). Taxes and Transfers in Canada: The Federal Dimension. Tax Is Not a
Four-Letter Word: A Different Take on Taxes in Canada, 39-54.
Broda, C., & Parker, J. A. (2014). The economic stimulus payments of 2008 and the aggregate
demand for consumption. Journal of Monetary Economics, 68, S20-S36.
Nystrom, S., & Luckow, P. (2014). The economic, climate, fiscal, power, and demographic
impact of a national fee-and-dividend carbon tax. Regional Economic Models, Inc. and
Synapse, Inc. for Citizens’ Climate Lobby, 36.
www.theenergymix.com. Federal Carbon Tax Rebates Would Put Money in Canadian Voters’
Pockets, New Analysis Shows. (2018). Retrieved from
<https://theenergymix.com/2018/09/24/federal-carbon-tax-rebates-would-put-money-in-
canadian-voters-pockets-new-analysis-shows/> [accessed on 4th December 2018].
www.theglobeandmail.com. Most families will get rebates from new carbon tax, Trudeau says.
(2018). Retrieved from <https://www.theglobeandmail.com/politics/article-most-
families-will-get-rebates-from-new-carbon-tax-trudeau-says/> [accessed on 4th December
2018].