Canada to soften carbon tax as firms fret about U.S. competition

OTTAWA, Aug 1 (Reuters) - Canada is planning to scale back plans to impose a carbon tax on major emitters of greenhouse gases after businesses complained it would make them less competitive with the United States, officials said on Wednesday.

The move underlines the challenges facing Canada as it tries to deal with Washington under U.S. President Donald Trump, who has slashed domestic corporate taxes and imposed tariffs on Canadian steel and aluminum.

The Liberal government of Prime Minister Justin Trudeau - which came to power in 2015 vowing to tackle climate change - had initially proposed a levy on 30 percent of industries’ emissions in any of Canada’s 10 provinces that did not introduce a carbon pricing system of their own.

Firms complained this would make them less competitive, given the United States has no such carbon tax.

The levy has now been cut to 20 percent for most sectors and 10 percent for vulnerable sectors such as iron, steel and cement. The initial charge of C$20 a tonne will start in January 2020 and rise to C$50 by 2022.

“This really ensures our industries remain competitive but also that we are able to meet our emissions reductions targets,” said Caroline Theriault, a spokeswoman for Environment Minister Catherine McKenna.

The news was first reported by the Globe and Mail newspaper.

The move is significant because the new right-wing government in the province of Ontario - the heartland of Canadian industry - intends to scrap an existing carbon pricing system. This means heavy emitters in Ontario will need to pay the new federal tax.

Theriault, speaking by phone, said Ottawa had consulted broadly with industry and would continue those talks before issuing a full set of draft proposals later this year.

Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association, said if the carbon tax was too high, firms would relocate their production to places without rules on emissions - a phenomenon known as carbon leakage.

“These are ... costs that we would incur in Canada but our competing plants in the United States would not,” he said by phone, noting that 93 percent of Canadian auto production was exported to the United States.

“We are a prime candidate for carbon leakage ... you just pack up your business and go to someplace that doesn’t have a carbon tax and you continue to produce vehicles.” (Reporting by David Ljunggren)