The ‘carbon tax’ isn’t causing inflation. No matter what politicians say

Ever since Prime Minister Justin Trudeau removed home-heating oil from the federal carbon levy at the end of October, Canadians have been hearing about it almost daily. The scheme — popularly known as the carbon tax, though it isn’t technically a tax — may be facing its greatest battle. Conservatives across the country have redoubled their “Axe the tax” campaign, with B.C. United Leader Kevin Falcon (who supported carbon pricing until now) joining the throng on Oct. 31. Even Premier David Eby has complained British Columbians who heat their homes with oil deserve the same break some other provinces now get.

The reason they aren’t getting it is B.C. has its own provincial price on carbon. Both the price and the rebate are synchronized with the federal levy, making them virtually identical — except when the federal government tweaks its version. That means British Columbians are excluded from the heating oil carve-out and the additional heat pump incentive Trudeau attached to it. Eby, who fully supports carbon pricing, wants Ottawa to extend the offer to B.C. 

It all gets complicated in a hurry. Conservatives have countered that complexity with a much simpler picture, dumbed down for maximum political punch. In their telling, the “carbon tax” massively raises inflation while failing to lower emissions. 

That’s easy to comprehend. It’s also patently false. And you don’t need a degree in economics to see why — we can break it down here in a few paragraphs.

How carbon pricing works

Before getting into what carbon pricing doesn’t do (explode affordability), let’s start with what it does.

The first thing to know is that most Canadians — 80 per cent, according to the Parliamentary Budget Office — get more money back from the rebate than the price on carbon costs them. The size of the rebate varies according to where you live and how much you earn, but on average, a B.C. family of four earning under $90,000 per year will get roughly $900 back. This will rise in lockstep with the price, currently at $65 per tonne of carbon and rising $15 each year through 2030, where it will max out at $170 per tonne. 

Crucially, your rebate isn’t affected by how much you spend on things like gasoline. That family of four will get their $900 even if they find ways to lower their fuel costs (say, by driving a smaller car, using more transit or switching to a heat pump). Therein lies the incentive to use less fossil fuel: the less you spend on carbon, the more of the rebate you pocket.

Every good lie is based on a kernel of truth, and there’s one place that carbon pricing critics have a point: the impact on gasoline, diesel and home heating is something we’re starting to feel.

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“The war against carbon pricing is a campaign of mass distraction.”

The current price on carbon is now adding some 14 cents to a litre of gasoline, or $7 to a 50-litre fill; by 2030, it will almost triple. Many Canadians commute to work, which means they feel it every day. 

The same is true for home heating, albeit to a lesser extent. The carbon price currently adds more than 12 cents per cubic metre of gas, which translates to about $24 per month extra on your home heating bill. The people who get hit hardest are that tiny proportion of Canadians who heat their homes with oil. This is by far the most expensive way to heat your home — $2,800 per year on average, three times the cost of a natural gas furnace and about nine times more than a heat pump. 

That’s why the Liberals carved out the exemption for oil-heated homes that kicked off this whole mess. It’s also why they offered some owners of oil-heated homes heat pumps for free, or close to it. 

Still, it’s true: transportation and home heating are bills we pay regularly, and places where we can feel the price of carbon. This is especially so for those 84,000 homes in British Columbia that are heated with oil; Eby’s right that it would only be fair for the federal government to offer those homeowners the same carbon-price exemption and heat-pump subsidy they now get in other provinces. There’s also a strong argument for farmers, First Nations and other rural communities receiving a break, given their outsize expenditures on gasoline and diesel.

At the end of the day, though, carbon pricing does require sticks as well as carrots. The engineers of the carbon price and other climate policies (like the phaseout of coal power) have bent over backwards to minimize the pain of the energy transition, but they can’t anaesthetize us completely. 

That’s not to say the affordability crisis afflicting Canadians isn’t real and incredibly painful. It is both of those things.

It’s also almost entirely unrelated to the price on carbon.

What’s really causing inflation

Here’s where the kernel of truth in Conservative claims shrinks to a dust mote.

Inflation peaked last year at over eight per cent, and today is lingering at just over three per cent. The carbon price’s contribution to that has been around 0.15 per cent. That’s not nothing, but it’s pretty close.

If your goal was to identify the root causes of inflation, you’d look for a bigger culprit. And if that search was genuine, you would conclude that the single biggest source of today’s inflation is none other than carbon pricing’s target: fossil fuel itself.

This comes from two sources: first, the war in Ukraine, which sent the cost of oil and gas through the roof. Second, the rise in extreme weather, which has begun hammering global harvests of staples like wheat and rice.

Let’s look at each in turn.

When Russia invaded Ukraine in February 2022, it shut off oil and gas exports to Europe. The resulting fossil fuel crunch ricocheted through global markets. That was the year gas prices exploded in Canada (like everywhere), with our national average peaking in June 2022 over $2 per litre. By no coincidence, that was when inflation peaked too, at 8.1 per cent. This happened to countries all over the world, regardless of whether they had a carbon levy. Estimates vary on how much the Ukraine war raised the global cost of living; Barron’s estimate of two per cent in 2022 (more than 10 times the carbon levy) is about average.

By no coincidence, 2022 was also the year oil companies, Canada’s included, logged the highest profits in their industry’s history, doubling their previous year’s income. Oddly, we never heard Conservative leaders complain about this, nor suggest taxing some portion of that windfall to ease the extraordinary pain it caused Canadians at the pumps and beyond. 

Then there’s extreme weather and agriculture. It wasn’t just Lytton, B.C., that burned in 2021: the Canadian Prairies suffered one of their worst droughts in history that year, causing a 39-per-cent drop in our national wheat production. In the U.S., that same drought caused an 11-per-cent rise in the cost of fresh vegetables and an 8.9-per-cent rise in fruit. That’s why food inflation surpassed the general average, reaching 10 per cent in Canada in 2022. 

In case it needs to be said, fossil fuels are by far the greatest contributor of greenhouse gas emissions driving climate change and its fallout.

But you can’t talk about inflation without acknowledging the devastation of global supply chains wrought by the pandemic. Unlike war and extreme weather, this had nothing to do with fossil fuels; it just happened to strike in tandem with those other two shocks (the term “perfect storm” comes up a lot when you start looking into this). According to the bank of Canada, supply chain bottlenecks accounted for 33-to-37 per cent of inflation at their peak. Thankfully, supply chains are coming back online now. This helps explain why inflation is also less than half what it was in 2022, even though the carbon price keeps going up.

There are too many other contributors to inflation to name here. The point is, these big three absolutely dwarf the impact of the carbon tax. All of them result from global crises. That’s why inflation in just about every developed country on Earth followed precisely the same curve over the past three years, regardless of whether that country has a price on carbon or not.

Because carbon pricing has nothing to do with it.

But does the ‘carbon tax’ lower emissions?

You don’t have to look at inflation to know that climate change is expensive: the cost of last summer’s wildfires in B.C. are estimated at $817 million. Two years ago, the atmospheric rivers of 2021 and extreme weather in general cost upwards of $10 billion. Nationwide, the Canadian Climate Institute estimates climate-induced damages will cost the country $25 billion a year by 2025. Even if you don’t care about the environment, there’s a powerful financial incentive to lower emissions. 

There aren’t many Conservatives in Canada who acknowledge this. Those who do, like Kevin Falcon, insist carbon pricing doesn’t lower emissions anyway, so why bother?

The truth is, there isn’t a ton of data either way, in large part because carbon pricing is so new. B.C. has had a price on carbon since 2008, but it started at $10 per tonne. Even so, one early study found it lowered emissions by five-to-15 per cent. And another study found that Sweden’s carbon pricing scheme (introduced in 1991) has lowered emissions from transportation by almost 11 per cent. 

In Canada, carbon is just now reaching a price you’d expect to impact behaviour. Remember: even if you don’t spend a penny on gasoline, you still get the full rebate — good incentive to drive less or get a smaller car. Canadians drive the least fuel-efficient cars in the world. That’s a choice. We have one of the world’s highest carbon footprints per capita, thanks to our sprawling cities, our fossil-heated homes, some of the cheapest gasoline on Earth (even with the carbon price) and, yes, our cold climate. 

But pricing carbon isn’t the only way to change behaviour and lower emissions. It’s just one of a huge array of climate policies currently deployed at both the provincial and national level. The B.C. NDP and federal Liberals alike have many other policies in play that could benefit from some healthy political competition. 

The war against carbon pricing is a campaign of mass distraction. If Conservatives think they have a better way to lower Canadians’ carbon footprint (a massive boost to public transit? A wartime footing on green housing? Big investments in clean energy?) they’re welcome to share it. Until they do, it’s hard to believe lowering inflation or emissions is really what they’re after.