Why carbon taxes fell short—and what Canada should do next

The federal government recently scrapped its consumer carbon tax, a political flashpoint. But was it effective at cutting emissions and encouraging greener choices? In a new working paper, UBC Sauder School of Business associate professor Werner Antweiler examines the limits of carbon pricing and explores what policies might work better.

Your paper takes a hard look at carbon pricing. What did you find?

We’ve used carbon pricing to encourage the adoption of electric vehicles, heat pumps and other low-carbon technologies. But emissions, especially from transportation, have remained high and gains in efficiency have mostly been cancelled out by population growth. The reality is, the consumer carbon tax wasn’t strong enough to meet our climate goals. So, scrapping it isn’t quite as damaging as it might seem. It opens the door to rethink climate policy in a way that’s both more effective and politically durable.

Why didn’t carbon pricing work as intended?

Carbon pricing was poorly understood and poorly communicated. Although most of the revenue was returned to households—through rebates or tax cuts in places like B.C.—many people only noticed higher fuel prices and ignored the money coming back. The policy felt like a tax, and that made it unpopular. Ironically, now that it’s gone, many lower-income households will be worse off.

Why aren’t people swayed by the long-term savings from energy-efficient options?

A big reason is consumer myopia. People tend to focus on upfront costs and overlook long-term savings. While electric vehicles and heat pumps cost more initially, they’re cheaper to run. Businesses usually factor in future savings using a standard five per cent discount rate per year. But most consumers heavily undervalue future benefits, treating a dollar saved next year as if it’s only worth 75 or 85 cents today. This makes long-term savings look smaller than they really are.

That kind of thinking limits the effectiveness of carbon pricing. The federal carbon price was supposed to rise from $80 per tonne in 2024 to $170 by 2030, widening the gap between gas and electricity prices. But consumers focus on today’s pump price, not next year’s.

In my paper, I calculated that closing a $10,000 price gap between a gas vehicle and an EV—given how much consumers undervalue future savings—would require a carbon price of about $950 per tonne. That’s not politically realistic. For many, even 18 cents per litre was too much. This resistance makes it really hard to shift behaviour on a large scale.

What tools could work better than a carbon tax?

Flat rebates like B.C.’s $4,000 or the federal $5,000 are useful, but they’re not dependent on how much a vehicle is used. I looked at how people drive, how they value future savings, and what electric and gas-powered vehicles really cost over time.

Rewarding drivers who displace the most emissions—by switching to electric and driving more—is better. One option is to offer subsidies only to people who drove more than a certain amount the previous year. Another is to scale the subsidy to distance driven. These usage-based incentives are more targeted, cost-effective and environmentally impactful.

They can also be revenue-neutral. A small fee on gas vehicle purchases could fund larger EV rebates. What matters most is creating a clear price difference at the point of purchase. As battery prices continue to fall, these kinds of incentives become even more efficient.

What other tools remain?

Two major policies are still in place. The zero-emission vehicle (ZEV) mandate requires automakers to phase out new gas-car sales by 2035—and as EVs get cheaper, this mandate could drive more change than the carbon tax ever did. Low-carbon fuel standards also help reduce emissions from existing gas-powered fleets. Together, these policies can deliver bigger cuts than the scrapped carbon tax.

And EV subsidy schemes can be improved by linking incentives more directly to actual emissions savings. If we focus on smarter, better-designed policies, we can still make meaningful progress, even without a consumer carbon tax.

Featured Researcher

Werner Antweiler, PhD

Associate Professor, Strategy and Business Economics Division