COMMENTARY: Carney’s Industrial Carbon Tax Comes With Real Cost to Canadians

By Ross McKitrick

It’s always difficult to tell from one week to the next whether the government is concerned that fuel supplies are tight and prices are too high, or fuel is too plentiful and prices are too low. At present, Ottawa seems equally concerned about both, urging a reopening of the Strait of Hormuz to get gasoline costs down just in time for the next round of increases in the Industrial Carbon Tax (ICT).

In case anyone had forgotten, despite having suspended the consumer carbon tax, the Carney government still plans to hike the ICT until it reaches $170 per tonne by 2030. When the plan was announced in 2022 as part of the Emissions Reduction Plan, it included no cost analysis. I’ve worked with my colleagues at the Fraser Institute to produce a new study on the costs of the planned ICT increases between now and 2030. This is an extension of work we did previously on the costs of the whole Emission Reduction Plan, but account for some recent changes.

First, as noted, the consumer carbon tax has been set to zero, and the annual carbon rebates have likewise ended. Second, the situation in Alberta is changing due to the “Memorandum of Understanding” (MOU) signed last year with Ottawa. Alberta has a pricing system called the Technology Innovation and Emissions Reduction or TIER fund. Like the federal ICT, it levies a charge on emitters based on the difference between their emissions and a threshold determined using benchmarks for low-emission intensity performance. Unlike in the federal system, firms have the option in lieu of paying the TIER charge of buying credits generated in a separate market by firms engaged in abatement-related projects. Due to a market surplus, the credit price has in recent years been far below the federal carbon charge. Were this to continue, Alberta firms could merrily ignore the rising ICT. But the MOU contains language signalling that Alberta will have to bring its TIER prices into line with the ICT.

While the language is vague and the timeline of compliance between now and 2030 is not specified, it’s reasonable to suppose that Alberta will have to give up the right to have a separate lower carbon price in exchange for, uh, whatever they get in return. So our working assumption is that by 2030 Alberta’s TIER price will equal the federal ICT rate, namely $170 per tonne.

The study marks the debut of the Fraser Model, a Computable General Equilibrium (CGE) model of the Canadian economy, which I began developing several years ago to address the need for more independent quantitative analysis of economic policy, and reflect the current state of Canadian energy and climate policy.

The policy simulations compare the economy at 2030 under the proposed ICT increase (and Alberta harmonization) versus a base case where the consumer carbon tax remains at zero, the ICT remains at the 2025 level and Alberta maintains its own pricing system. The ICT increase will lead to a reduction in real GDP of 1.3 per cent federally and 2.0 per cent in Alberta, which translates into a 1.1 per cent loss of real GDP per worker (about $1,160 in 2019 dollars) federally and a 1.6 per cent loss in Alberta (about $1,730). The economy and labour market continue growing but at a slower rate. Compared to the base case, Alberta ends up with about 10,400 fewer jobs and Canada loses about 50,000 jobs, again compared to the base case.

The model indicates that the bulk of the costs as of 2030 fall on the capital side. Real after-tax labour income only declines by 0.6 per cent nationally (0.7 per cent in Alberta) but capital income falls by 8.0 per cent nationally (10.8 per cent in Alberta). This might seem beneficial in the short run since worker paycheques are shielded from the worst policy impacts. But the long-term effect is to further worsen the already weak environment for investment in Canada and to drive down capital formation at a time when our productivity has already been stalled for a decade.

Greenhouse gas emissions fall as a result of the tax. The model estimates a 14.3 per cent reduction relative to the base case which, while impressive, is not enough to get us to our 2030 Paris target. The policy costs the economy about $308 per tonne abated, which is above the carbon tax rate itself because of all the indirect costs associated with price changes and other market impacts.

For far too long, governments have promoted climate policy with the promise that decarbonization is easy and the energy transition is not only costless but a great driver of growth, profits and prosperity. This is untrue. The costs are real—even if the government tries to hide them by not conducting the analysis. We’ve crunched the numbers and believe the public deserves to know what’s being asked of them.

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