New study finds federal carbon levy barely impacted gas prices and inflation

A new study has found that carbon pricing, including the federal government’s carbon levy-and-rebate system, had only a minor impact on inflation over the past five years. According to research by University of Calgary economists Trevor Tombe and Jennifer Winter, climate policies played a minimal role in rising consumer prices, contributing just 0.5 percent to inflation since 2019.

This accounts for roughly 1/38th of the total 19 percent increase in consumer prices during that period, with an even smaller effect on food costs, the study revealed. The research, published by the Institute for Research on Public Policy, relied on Statistics Canada data and government figures on energy use and emissions to assess the impact of carbon pricing.

Global economic disruptions, including surging energy costs and supply chain breakdowns during the COVID-19 pandemic, were the main drivers of inflation, the authors stated. Their analysis indicated that while emissions pricing does have an effect on costs, its influence is overshadowed by other economic forces. The Bank of Canada has similarly estimated that carbon pricing contributed only 0.15 percentage points to annual inflation.

The study’s findings come amid ongoing political debate, as the opposition Conservatives continue to push for a “carbon tax election” to oust Prime Minister Justin Trudeau’s Liberal government. Conservative Leader Pierre Poilievre has repeatedly blamed the federal carbon pricing scheme for driving up inflation, vowing to eliminate it if elected.

In recent months, Poilievre has claimed that planned increases in the federal carbon price will cause an economic “nuclear winter” by 2030, when “inflation would run rampant and people would not be able to leave their homes or drive anywhere.”

Experts use the term “nuclear winter” to describe the global devastation that would follow a major nuclear war, with some projections predicting billions of people would die.

During parliamentary debates, Poilievre has accused the government of worsening the affordability crisis, pointing to rising food prices as evidence. “Before he starves more people, why can we not have a carbon-tax election and axe the tax?” Poilievre said in Parliament on Oct. 30.

Tombe and Winter’s study included figures from Statistics Canada showing that carbon pricing contributed to a “0.42 per cent increase for food and non-alcoholic drinks” in 2023. The federal fuel charge, which currently adds almost “18 cents per litre to the cost of gasoline,” was also factored into their analysis.

Speaking to the Star, Tombe acknowledged that “exaggerated claims by politicians are not new,” and that voters should be mindful of rhetorical stretches. But he said both the Liberals and Conservatives are guilty of exaggerating, with the Tories inflating the costs of carbon pricing and the government downplaying impacts on affordability.

“The costs of carbon pricing are measurable. They’re real, but they’re small,” Tombe said, noting the Bank of Canada has also pegged the policy’s contribution to annual inflation at “0.15 percentage points.”

“We shouldn’t be under the illusion that if we eliminate the carbon tax that the affordability challenges that we’re facing will disappear. That’s simply not the case,” he said.

Since 2019, the federal government has required all provinces and territories to have pricing systems to discourage greenhouse gas emissions that cause climate change, and to reward businesses and consumers for reducing them. Each jurisdiction can design its own system or adopt a made-in-Ottawa scheme that includes a system for industrial carbon pricing and a “fuel charge” on consumer fuels like gasoline. This federal fuel charge, which applies in Ontario, comes with quarterly rebates that are set to deliver “$1,120 to a household of four in the province in the current fiscal year.”

The federal government also sets a minimum level for the carbon price in all jurisdictions, which sits at “$80 per tonne this year and is set to increase annually until it hits $170 per tonne in 2030.”

The rebates for the federal fuel charge are also set to increase each year.

Tombe and Winter said these rebates offset the cost increases from carbon pricing for most households.

“This means that many families, particularly those with lower incomes, are shielded from the negative financial impact of emissions pricing and some may end up with a net financial gain,” their report said.

The Liberals and Conservatives have clashed over this claim, which the government has made for years. The argument intensified after the independent Parliamentary Budget Officer concluded most households ultimately lose money because of national carbon pricing when the broader economic impacts of the policy on employment and income are taken into account.

In their study, Tombe and Winter said their analysis does not consider “broader economic burdens or environmental benefits” of climate policies, noting that action to reduce emissions inevitably comes with costs.

“That said, considering only the costs of climate action presents an incomplete picture,” they wrote. “There are tangible benefits to climate action that should not be overlooked,” including lowering damages and cost of adaptation to a changing world.

The Canadian Climate Institute has estimated that national carbon pricing is set to drive much of the country’s projected emissions reductions over the next five years, although the consumer “fuel charge” is expected to be responsible for a smaller chunk of those cuts — “eight to 14 per cent” — compared with industrial pricing systems.

Sources - 

https://url.ca.m.mimecastprotect.com/s/aKOiCoVzxZiBPWv8U1fDIp-hXN?domain=irpp.org/

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/fcrates/fuel-charge-rates.html#fcrts

https://openparliament.ca/debates/2024/10/30/pierre-poilievre-25/