Canada’s Gasoline Tax-Mix

Key Take-Aways

1. Canadians typically drive an average of 16,000km annually. In 2023, they consumed 43 billion litres of gasoline on the road and paid an estimated $20 billion in gasoline taxes to the various government tiers.
2. As of 2023, 30% of the gasoline price paid at the pump would be accounted as tax
3. The contribution of provincial fuel taxes to gasoline taxes has seen a dramatic decline over the 3-decades of the data especially since 2019.
4. As of 2023, the carbon tax averaged across Canada made up 26% of the gasoline taxes
5. By 2030, 52% of the gasoline tax paid by Canadians will be due to the carbon tax.

INTRODUCTION

The issue of carbon price has attracted a lot of attention lately. From April 1st, 2024, the carbon price changed from $65/tCO2eq to $80/tCO2eq on its onward march towards $170/tCO2eq by 2030. The import of the change is that gasoline price would increase by 3.3cents/Ltr due to the carbon price. Some have argued that the increase barely registers a dent in the overall price structure for gasoline relative to the benefits of having a carbon price such as:

1.??? The most efficient mechanism to address pollution.

2.??? The fact that Canadians receive carbon tax rebates.

However, some have lampooned the tax and its manner of implementation. In their eyes, the carbon tax does the following:

1. adds unnecessarily to an already existing potpourri of policy to combat emissions.
2. contributes to the cost-of-living crisis by raising the cost of producing and transporting agricultural products and
3. Canadians don’t receive as much in rebates as they pay in the carbon tax across the economy.

…Uhmm…There is a running debate about this, with each side supported by its own “study” and “evidence.”

So, I became interested, as I tend to do when energy issues intersect with data.

The carbon tax has been singled out in the current debates. However, I invite you to look beyond the carbon tax with me.

RETAIL FUEL PRICING

The retail gasoline price is formed by incorporating crude oil costs, margins, distribution costs, and taxes, as illustrated in Figure 1.

The price seen by the customer who drives up to the gas pump is the cumulative of crude oil price, refinery margin, retail margin, distribution costs and taxes.

I will re-express the above in a formula:

The tax component includes the federal excise taxes, provincial fuel tax, the Goods and Services Tax (GST), the Provincial Sales Taxes (PST) where applicable, and, more recently, the carbon tax.

It is interesting to note, though, that while the Federal Government of Canada does not regulate retail prices, the provinces of Prince Edward Island, Newfoundland and Labrador, Nova Scotia, New Brunswick and Quebec have chosen to regulate. The table below shows the characteristics of the regulatory regimes in the provinces where gasoline is regulated.

The chart is extracted from the Canada Energy Regulator website.

Irrespective of whether the fuel price is market-driven or regulated (as per the four Atlantic provinces), the retail pricing structure above applies.

LIFE AND TAXES

Movement is a sign of life; Canadians typically drive an average of 16,000km annually. While on the road, they consumed 43 billion litres of gasoline in 2023 and paid an estimated $20 billion in gasoline taxes to the various tiers of government. There are several types of taxes levied on gasoline:

Excise Tax: Levied by the federal government at $0.10/Ltr since 1995.

Sales Tax: Charged on an ad-valorem basis. There is the federal General Sales Tax (GST) at 5%, and Provincial sales taxes do not apply to fuels such as gasoline or diesel, except where they have the harmonized sales tax (HST) and in Quebec (QST).

Provincial Fuel taxes: These are charged at different levels by the provinces usually at a fixed rate in cents/litre.

Provincial Clean Fuels Adjuster: This is a charge on fuels based on the compliance costs borne by refiners in adhering to federal clean fuel standards.

Federal and Provincial carbon levies (carbon tax): This is the centre of attraction. It is the price of carbon included in the retail fuel price.

Other taxes can be applied at municipal level such as:

1. the $0.055/Ltr dedicated tax on clear gasoline and diesel purchased inside the Victoria regional transit service area in British Columbia
2. the $0.185/Ltr dedicated tax on clear gasoline and diesel procured inside the jurisdiction of the
3. an extra provincial fuel tax for gasoline procured in the Area of jurisdiction of the Autorité régionale de transport métropolitain (ARTM) in Quebec.

According to a study (https://www.taxpayer.com/media/20.pdf) by the Canadian Taxpayers Federation prepared in 2000, gas taxes during the twelve-month period prior to March 2000, accounted for an average of 50% of the pump price paid by Canadian motorists. This was seven years before Canada's first carbon tax was applied to gasoline. You can find details of this history here, here and here.

There has been ample time since then, so let’s see how taxes on gasoline have evolved over time.

GASOLINE PRICES ACROSS CANADA

The cost to fill up your gasoline tank depends on when and where you fill up and these differences are driven by:

1. The cost of transportation,
2. level of taxes (federal, provincial, municipal)
3. level of competition, and
4. quantity of fuel a station can dispense.

I had written a two-part piece - Part 1 and Part 2 - on the gasoline pricing within Canada.

The methodology below details the steps to track tax changes.

Methodology

1. I obtain the monthly average retail prices for regular gasoline by geography from @StatCan. The prices are recorded from January 1990 to Dec. 2023 and the eighteen locations covered by StatCan are shown in table 1.
2. I obtained the prices for Western Texas Intermediate (WTI) and Western Canada Select (WCS) from the Alberta Energy Regulator (AER) . However, I have used the WTI as reference oil price only because its time series goes back to January 1990.
3. Monthly exchange rate data from January 1990 to Dec. 2023 is obtained from the Bank of England (for some reason, I was only able to get the monthly exchange rate series from the Bank of Canada as far back as January 2017)
4. Historical excise rates, GST, and provincial fuel taxes are obtained from different government sources.
5. I then work backwards to obtain the GST and HST in $/Lt paid on the retail price of gasoline for each of the 18 locations.
6. Starting with the retail gasoline price for each of the 18 locations, I net out the crude oil cost (WTI converted to C$/Ltr), and the different taxes as applicable to each location covered in my data set.
7. The result is the “margin” which comprises the refinery margin, distribution costs and retailer’s margin. Without more information I am unable to disaggregate this margin into its components.
8. The contribution of each component netted out from step 6 is determined as a percentage of the retail price. The margin from step 7 is also expressed as a percentage of the retail price.

Following steps 1 – 8 will allow us to see how much taxes contributed to retail gasoline prices over the last 33 years.

…and oh, before I forget, the table of geographies represented in the Statistics Canada | Statistique Canada tables.

Now to some outcomes…

RESULTS…

Let’s examine the results of our analysis.

Components of Retail Gasoline Price

Fig. 3 shows the average retail gasoline price across the 18 locations in our data set, plotted against the price composition. Between 1990 and 1998, the retail price of gasoline averaged $0.57/Ltr (the gasoline price is the dark line read off the right-hand axis). During this time, the tax payouts as a percentage of the retail price rose from 31% in 1990 to 48% in 1998.

As the retail price of gasoline rose from a trough of $0.57/Ltr in 1998 to a peak of $1.18/Ltr in 2008, taxes as a percentage of price declined to 27% in 2008. From 2008 to 2023, the tax portion of the gasoline price varied between 28% and 40%, but never averaged 50% of retail prices seen in 1998. This is very clearly seen in Fig. 4 below.

As of 2023, 30% of the gasoline price paid at the pump was accounted as tax. What is also noticeable from Fig. 4 is that the proportion of gas tax moves in the opposite direction to the price of gasoline.

Crude Contribution and Margins

The other two components - crude oil cost and margins – have also changed. In 1990, margins (which includes retailer’s, refiner’s, and distribution costs) made up 38% of the $0.57/Ltr gasoline price. This shrank to 18% in 2008, when gasoline price peaked at $1.18/Ltr while crude cost accounted for 55% of the gasoline price. However, margins rose to peak at 31% in 2015, when gasoline price averaged $1.08/Ltr and have been somewhat stable around the 30%-ish mark for nearly a decade now. This can be seen in Fig. 5

It is also interesting to see that the margins have remained within a window of 20% to 30% of retail price since 1992. Crude oil, meanwhile, has contributed an average of 40% to the gasoline retail price since 2015.

Tax Components of Retail Gasoline Price

Zooming in on the tax components of the gasoline price enables us to see the drivers. Fig. 6 illustrates that, on average, over the 18 locations, the excise tax contribution to gasoline taxes declined from 47% in 1990 to 20% in 2023.

The GST contribution to overall gasoline taxes has remained relatively stable between 13% and 19%, though note that its contribution increased to 21% in 2007. The PST component has steadily increased from 1997 when it contributed 2% to the overall gasoline tax to 13% in 2023. The PST contribution has remained stable at around 13% for the last decade.

The contribution of provincial fuel taxes to gasoline taxes has seen a dramatic decline over the 3-decades of the data and especially since 2019. In 1990, provincial fuel taxes across Canada contributed 53% to the gasoline tax, which declined to 46% in 2008, then 43% in 2015 and as of 2023, provincial fuel taxes made up 24% of the gasoline tax.

This decline in the contribution of excise tax, and provincial fuel tax noted above formed the basis of the argument put forward by Luc Godbout and Micha?l Robert-Angers that the government should index the tax to CPI.

…And then there was Carbon Price

Pay attention to the green shade in the upper right-hand corner of Fig. 6 and see how it has incrementally become more important in the “tax-mix.” In 2008, the carbon tax comprised 0.71% of the overall gasoline tax of $0.32/Ltr. It remained stable at around 2.2% on average between 2011 and 2018, and then in 2019, it leapt to 9% and didn’t stop. No surprise there. Every jurisdiction in Canada since 2019, has had a price on carbon pollution. By 2023, the carbon tax averaged across Canada comprised 26% of the taxes paid on gasoline at the pump.

…Keeping it Real

So “government take” (ie the proportion of gasoline price that is accounted as tax) from retail gasoline price has declined from its high of 48% in 1998 to 30% - its average level in the last fifteen years. Remember the shrinking orange band from Fig. 3 and the trend in Fig. 4? But what has been the import in dollar terms especially if we stripped out the effect of inflation? That is the question answered by Fig. 7. This chart shows the total tax (in $/Ltr) in both nominal and real terms.

In nominal terms, total tax tripled over 3-decades. In other words, the increase from $0.18/Ltr in 1990 to $0.50/Ltr in 2023 represents a 177% increase. In real terms however, which removes inflationary effects, total tax receipts have increased by 35% from $0.37/Ltr in 1990 to $0.50/Ltr in 2023. Similarly, gasoline price in real terms has increased by ~40% from $1.19/Ltr in 1990 to $1.65/Ltr (2023). Over the 3-decades, the total tax receipts from gasoline have mostly kept pace with gasoline price.

IN SUMMARY …

1. The portion of total taxes in retail gasoline price increased from 30% in 1990 to a peak of ~ 50% in 1998, from where it declined to a trough of 27% in 2008. In the fifteen years since then, the tax portion of gasoline price has not exceeded 40% (based on annual averages).
2. The decline in the “government take” 1998 – 2008 arose because many of the tax components are fixed. With increasing gasoline prices, the tax constitutes a smaller portion of the price, while with decreasing oil prices the tax makes up a larger portion of the price. In more recent times however, the combination of time-adjusting carbon taxes, and gasoline price dependent GST/HST have meant that the proportion of gasoline price paid as taxes, while varying has reverted around a mean of 30%.
3. When examined in real terms, the price of gasoline has increased from $1.19/Ltr in 1990 to $1.65/Ltr (2023), while the total taxes on gasoline increased from 0.37/Ltr (1990) to 0.50/Ltr (2023) - an average $0.46/Ltr.
4. Having said that, provincial fuel taxes (not to be confused with sales tax), historically made up a sizeable chunk of the taxes on gasoline. From 1990 to 2004, it accounted for between 40% and 53% of the total tax on gasoline.
5. However the carbon tax has progressively eaten into this share, such that as of 2023 the carbon tax made up 26% of the total tax on gasoline while the provincial fuel tax had shrunk to 24% of the gasoline tax collected.
6. Given that the carbon tax is designed to increase in a pre-determined fashion, we can expect that its share of the total tax on gasoline is bound to increase if there are no upward adjustments in the other tax components – especially the provincial fuel tax.
7. According to this Canadian Taxpayer’s Federation report (https:/www.taxpayer.com/media/Gas-Tax-Honesty-Report-2023.pdf), in 2030, Canadians, on average, will pay $0.97/Ltr of gasoline in taxes alone, of which $0.512/Ltr will be the carbon tax.

In other words, in 6-short years, 52% of the gasoline tax paid by Canadians will be due to the carbon tax… Phew, that’s the shape of things to come!