The federal government is confirming that it approved two loopholes in the Higgs government's new carbon tax.

A spokesperson for federal Environment and Climate Change Minister Jonathan Wilkinson says he had accepted the two elements: an offset for residential natural gas, and a plan to keep the tax at the pumps at two cents per litre indefinitely.

"We have always said that provinces and territories would have the flexibility to design their own system provided it has met the federal benchmark," Moira Kelly, a spokesperson for Wilkinson, told CBC News.

"New Brunswick's proposed fuel charge system meets that benchmark."

Ottawa's standards for carbon pricing, which provinces must meet if they don't want the federal price imposed on them, includes applying the carbon tax to natural gas for home heating.

Last week's provincial budget speech says $9 million in carbon tax revenue "will be invested in a funding mechanism to ensure competitiveness of the natural gas distribution system."

That amount is what the province will collect as carbon tax on natural gas. The money will go to Liberty Utilities, which holds the franchise to distribute natural gas in New Brunswick, to offset the impact of the tax on customers.

"Natural gas had to be included [in the tax] as well," provincial Environment Minister Jeff Carr said last week. "The federal government required it so we included it and that's the way that we will do it.

"We will rebate it through Liberty and it will go back to their customers in some way, shape or form. Those negotiations are happening now."

Erase impact

Gilles Volpé, the New Brunswick vice-president for Liberty Utilities, which took over New Brunswick distribution from Enbridge Gas New Brunswick last year, said the company was still working on the mechanism for the offset.

It will likely show up on customer bills as a credit and "it should be equal to what customers are paying" in carbon tax, he said.

Volpé said the offset was necessary because the federal carbon backstop, which Liberty has been charging since last April, applied to furnace oil and propane but the provincial tax will not. That risked making gas less competitive without some kind of offset, he said.

Carr says he hopes the $9 million will completely erase the impact of the tax on residential gas customers.

The other aspect of the provincial tax that goes against Ottawa's stated goals is the plan to keep the net carbon tax at the gas pumps at two cents per litre, year after year.

The provincial rate will be 6.6 cents per litre of unleaded gas when it takes effect April 1, an amount that complies with the federal requirement to tax fossil fuels at the equivalent of $30 per ton.

Environment Minister Jeff Carr said by offsetting the tax on natural gas, he hopes to completely erase the impact of the tax on residential gas customers. (CBC)

But the Progressive Conservative government is reducing the provincial excise tax by 4.6 cents per litre at the same time, meaning the net tax will be two cents, as of Apr. 1.

Ottawa's benchmark requires the price to keep increasing annually on April 1 so that consumers pay more and more every year, a growing incentive to consume less gasoline.

While the Higgs government will technically comply with that, Carr says it will also lower the excise tax on gasoline every year by an equivalent amount, so the net tax on consumers stays at the same level of two cents indefinitely.

Kelly said that was also approved by Ottawa.

Bills pass quickly

Two bills, one to create the carbon tax and the other to lower the gas tax, were passed in just minutes by the legislature last Friday during an accelerated procedural blitz prompted by the COVID-19 outbreak.

The federal-provincial agreement allows the lower provincial tax to replace the federal backstop, which would have jumped to 6.6 cents a litre April 1 if it had remained in effect.

Last week's budget showed that $83 million from the tax will go into the province's general revenues, $36 million will go into a dedicated climate change fund and $9 million will go to Liberty for the natural gas offset.

The $83 million will replace revenue the province is giving up by reducing the gas excise tax.

"Really it's just money in and money out," Carr said. "It's really become an administrative program, except two cents is left to put into the climate change fund."

The two loopholes contradict the basic logic of a carbon tax, which holds that an increasingly stringent price will gradually modify customer behaviour and lower consumption and corresponding emissions.

Green leader David Coon said last week the $9 million going to natural gas should instead be going into the climate fund to help New Brunswickers be more energy efficient and reduce emissions.

"That's what the money needs to be going to, not natural gas," he said.

Unlike many other supporters of aggressive action on climate change, Coon hasn't embraced carbon taxes.

He said many economists who study carbon pricing say the rate would need to be "of a significant size to have an impact on behaviour, and no government is ever going to put in place a carbon tax of that size."

The success of carbon taxes in other countries has been by using the revenue to help residents and businesses find ways to reduce emissions, he said.