Carbon tax had 'negligible' impact on inflation, new study says

The Liberal government's price on carbon had a minimal impact on the inflation Canadians experienced from 2019 to 2024, says a new study.

The report by University of Calgary economics professors Trevor Tombe and Jennifer Winter looked at how the carbon tax affected consumer prices in Canada between January 2019 and April 2024.

The study said that consumer prices increased by 19.3 per cent over that time. If the "effects of indirect tax changes," such as sales, excise and carbon tax changes, are removed, it said, prices rose by 18.7 per cent. 

"This means that overall consumer prices are only 0.5 per cent higher over this period because of the gradually increasing indirect taxes," said the study, commissioned by the Affordability Action Council. 

The carbon tax began in April 2019 at a cost of $20 a tonne and increased by $10 a year to $50 by 2022, when it began rising by $15 a year. In April 2024, it increased to $80 a tonne.

"While emissions pricing is the biggest change within taxes on goods and services, such taxes are themselves responsible for a negligible amount of total price changes," the study said.

The study said that most of the price increases over that time were driven by global factors, such as surging energy prices and the disruption of supply chains caused by the pandemic.

"The rising global price of oil has had a far greater impact on overall costs than domestic emissions pricing policies," the study's authors said.

The report said that when Canada's consumer price index indicated in June, 2022 that prices were rising by 8.1 per cent year over year, the rise in energy prices was responsible for 2.6 of that 8.1 per cent increase.

When the price of oil came down from its peak of $120 a barrel in June 2022 to $70 a barrel a year later, inflation settled at 2.8 per cent.

"While emissions pricing does influence costs, its role in driving inflation is relatively small compared to other economic pressures," the study said.

The carbon rebate and inflation

The federal carbon price, or backstop, does not apply in Quebec, British Columbia and the Northwest Territories because they have their own carbon pricing systems that meet the federal standard.

In provinces using the federal backstop, the price on carbon is applied to emitting fuels through fuel charge rates that vary from fuel to fuel based on the amount of CO2-equivalent emissions they generate when burned.

Ninety per cent of government revenues from the carbon tax are returned to households through Canada Carbon Rebate payments issued every quarter.

The other 10 per cent of carbon tax revenue is directed to programs that help businesses, schools, municipalities and other grant recipients reduce their fossil fuel consumption.

The Office of the Parliamentary Budget Officer (PBO) has found that most households — particularly those at the lower end of the income scale — end up profiting when what they pay through the carbon price is offset by what they receive in rebates.

The new study lines up with the PBO's analysis. It says that the "rebates generally compensate" for fuel rate charges.

"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," the report said.