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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 / local Journalism Initiative / Canada’s National Observer
Comments
"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."
On its face, Tombe's conclusion is counter-intuitive. Some explanation would be helpful to readers.
In fact, this section is missing key context. The application of industrial carbon pricing does not reduce consumer costs. How could it?
Of course, industrial carbon pricing must increase consumer costs, because producers in the large-emitter category pass on their carbon costs along the supply chain to the final consumer.
What Tombe and Winter refer to is in fact the NON-application of industrial carbon pricing. Large industrial emitters pay the fuel charge on a (small) fraction of their emissions via a mechanism called "output-based allocations". Thereby, large industrial emitters pay less in fuel charges than they otherwise (and properly) should, which reduces the impact on consumers.
Consequently, the increase in costs to consumers due to industrial carbon pricing is less than it would be if large industrial emitters were required to pay for ALL their emissions.
Tombe and Winter: "To mitigate concerns over domestic emissions pricing affecting domestic and international competitiveness, large industrial emitters are granted 'output-based allocations,' akin to the lump-sum rebates received by individuals. While these allocations don’t eliminate the incentive for businesses to reduce emissions, they do moderate the influence of emissions pricing on input costs and, subsequently, prices faced by households."
As Tombe and Winter correctly identify, Canada's output-based pricing system (OBPS) represents a subsidy to industry. To the extent that large industrial emitters pay the fuel charge only on a small fraction of their emissions, the climate policy is diluted. I.e., weaker. Industry's effective price per tonne of carbon emitted is much lower than the price consumers pay. The purpose of the OBPS and its provincial counterparts is not to expose heavy emitters to the carbon price, but to shield them from it, so they can remain competitive in global markets.
Tombe and Winter: "Winter et al. (2023) explores this factor by assessing the cost increments at each supply chain stage, considering both the direct effects of emissions pricing on specific sectors and the cascading impacts on all sectors involved in providing inputs. They find that, with a $65 per tonne carbon tax, indirect household costs range between $270 annually in Newfoundland and Labrador and $641 in Saskatchewan. Absent the SUBSIDIES given to large industrial emitters within Canada, these costs would have doubled."
"Federal watchdog warns Canada's 2030 emissions target may not be achievable' (CBC, Apr 26, 2022)
"There's a patchwork of OBPS policies across the country, the commissioner said, and some provinces have implemented 'weak' or 'non-existent' systems that have let many big polluters off the hook.
"He said the federal government must insist on minimal national standards so that the provinces with their own OBPS policies … collect a sufficient amount of taxes from these emitters. As it stands, the cost to industries varies widely between provinces, DeMarco said.
"The commissioner said the current weakness of the industrial system is undermining the 'polluter pays' principle of carbon pricing."
"Biggest industrial emitters don't pay fair share for pollution, critics say" (CP, April 14 2022)
"Most big emitters pay the carbon price on anything they emit above 80% of what the average emissions are in their industry. … Industries that face more foreign competition, such as cement, lime and some fertilizers, have an even higher limit, 90 or 95% of the average.
"Facilities pay the carbon price only on emissions above that limit. If they're below that limit they get federal credits they can sell to other facilities that want to offset their emissions to avoid paying the carbon price.
"… In Manitoba, Saskatchewan, Ontario, and New Brunswick, big emitters accounted for about 25% of total emissions in 2019, but paid less than 10% of the carbon levies collected. Consumers and small businesses paid the rest.
"… 'The current large emitter programs provide a perverse long-term incentive,' the [2021 Canadian Climate Institute] report said.
"'They are explicitly rewarding the most emissions-intensive facilities in the country to not make the major investments needed to be prepared to compete in a carbon-constrained market.'"
https://www.nationalobserver.com/2022/04/14/news/biggest-industrial-emi…
From Tombe and Winter's Dec 2023 report:
Trevor Tombe and Jennifer Winter, "Don't Blame Carbon Pricing for Affordability Challenges" (Policy Options, Dec 7, 2023)
"… Support to industry also matters. Recent analysis reveals that indirect costs — where carbon taxes levied on fuel cascade through the supply chain and affect the price of goods and services throughout the economy — are significantly lower due to competitiveness protections provided to large emitters.
"In effect, large-emitter carbon pricing systems provide their own kind of 'rebate' to firms in the form of subsidies based on how much they produce. The effect is large. Indirect costs are roughly cut in half as a result.
"For instance, at a carbon price of $65 per tonne, the analysis finds that the average household in Ontario experiences only a $2 increase in monthly grocery costs. In Alberta, it is $5. Without the large emitter systems, these costs would be $9 and $22 per month higher respectively.
"… Importantly, were it not for carbon pricing, Canada would have to adopt other, less efficient policies that would have an even larger drag on growth and therefore larger costs to households — all without the current rebates."
https://policyoptions.irpp.org/magazines/december-2023/carbon-price-aff…
Would/will Mr. PP and his Regressive Conservatives continue subsidizing an industry that has known since the 1970's precisely how it's been inflicting damage on our beautiful planet?