Carbon pricing has only a 'tiny' impact on inflation: economists

TORONTO – The federal Conservative Party has spent years saying the carbon tax is fuelling inflation — but a new analysis has found these emissions-pricing policies only contributed about 0.5 per cent to the more than 19 per cent increase in consumer prices since 2019.

“Carbon pricing [is] an important policy, and there are measurable costs; just the costs pale in comparison to all the other factors that have created the affordability challenge that many Canadians are feeling,” report author Trevor Tombe told Canada’s National Observer in a phone interview.

Most of the price increases were driven by global factors, like surging energy prices and supply chain disruptions, write economists Jennifer Winter and Tombe in their paper, published Dec. 12 by the Institute for Research on Public Policy (IRPP). Tombe also pointed to high fertilizer costs after Russia invaded Ukraine as an important driver of food prices.

“A tiny, tiny fraction of the affordability challenge is related to the pricing side,” Tombe said.

“And that's saying nothing about the rebates,” he added. 

Provinces like Alberta that don’t have their own consumer carbon price use the federal system and residents receive their rebates of hundreds of dollars from the federal government.

“For many, many Canadians, especially low income Canadians, where the affordability challenge matters the most, the rebate is far larger than the costs they face from carbon pricing,” Tombe said.

Carbon pricing has been a hot topic in Ottawa as Conservative Leader Pierre Poilievre repeatedly calls for a “carbon tax election” and has consistently tied the climate policy to inflation and affordability challenges. This fall, Poilievre said a scheduled increase of the carbon price would cause a “nuclear winter” for the economy and that “inflation would run rampant.”

Tombe said the paper is looking to respond to some “extreme claims” being made in the public conversation on carbon pricing. They set out to unpack data from previous analyses and, largely, Statistics Canada, to help Canadians better understand what's really driving affordability challenges. It was commissioned by the Affordability Action Council. 

The analysis also looks at how the industrial carbon pricing system affects affordability and found it reduces the impact on food and clothing prices, rent, furniture purchases, recreation, household operations and more.

“Indirect costs, especially those related to food prices, are significantly lower due to this industrial policy,” Tombe and Winter write.

The paper noted many households are facing affordability challenges due to factors beyond climate policies, such as the slow pace of income growth. Addressing income alongside climate policies would “provide a more comprehensive solution” to affordability challenges, it suggests.

“We have to recognize that households are struggling,” Rachel Samson, vice president of research at the IRPP, told Canada’s National Observer in a phone interview. 

“Affordability has two parts, the income that you're getting, as well as the prices that you're facing. And what the authors note is that there hasn't been enough focus on the income,” Samson explained. 

“Yes, prices have increased, but income growth has not kept pace with those price increases, and so, that's where they think governments might want to pay more attention.”

Addressing this issue alongside climate policy would provide a more comprehensive solution to the affordability challenges many Canadians face. 

While the regional differences of provinces and territories mean federal policy can have varying impacts, “in no province do we find that carbon pricing is a material driver of the affordability challenge,” Tombe said.

Natasha Bulowski is a Local Journalism Initiative reporter with Canada's National Observer. Title image: Carbon emission tax concept, iStock ID 2149618181.