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Opinion: Carney’s Industrial Carbon Tax imposes real costs on Canadians

The economic cost is more than $1,100 per person, while employment is 50,000 lower than it would be under the 2025 policy status quo

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

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In case anyone had forgotten, though the Carney government did suspend the consumer carbon tax, it still plans to hike the ICT until it reaches $170 per tonne by 2030. When this plan was first announced in 2022 as part of the Emissions Reduction Plan, it included no cost analysis. I’ve since worked with my colleagues at the Fraser Institute to produce a new study on the costs of the increases planned from now through 2030. It’s an extension of earlier work on the costs of the entire Emissions Reduction Plan, but it accounts for a couple of recent changes.

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The first is that the consumer carbon tax has been set to zero and the annual carbon rebates have also ended; the second, that the situation in Alberta is changing because of the Ottawa-Alberta “Memorandum of Understanding” (MOU) signed last year.

Alberta already has its own 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 can choose between paying the TIER charge or buying credits generated in a separate market by firms engaged in abatement-related projects. Because of a market surplus in recent years, the credit price has been far below the federal carbon charge. Were this to continue, Alberta firms could merrily ignore the rising ICT. But the understanding with Ottawa contains language signalling that Alberta will have to bring its TIER prices into line with the ICT.

Although the language is vague and the compliance timeline is not specified, it’s reasonable to suppose Alberta will have to give up the right to have a separate lower carbon price in exchange for … well, 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.

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The study marks the debut of the “Fraser Model,” a computable general-equilibrium model of the Canadian economy that I began developing several years ago both to address the need for more independent quantitative analysis of economic policy and to 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 its 2025 level and Alberta maintains its own pricing system. They show that the ICT increase will lead to a reduction in real GDP of 1.3 per cent nationally and 2.0 per cent in Alberta, which translates into a loss of real GDP per worker of about 1.1 per cent nationally and 1.6 per cent in Alberta. In 2019 dollars, that’s about $1,160 nationally and $1,730 in Alberta. 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 about 50,000.

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The model indicates that the bulk of the costs fall on capital. As of 2030, real after-tax labour income only declines 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). Although worker paycheques are shielded from the worst policy impacts, the long-term effect is to further weaken the incentive to invest in Canada, which will drive down capital formation at a time when our productivity has already been stalled for a decade.

Greenhouse gas emissions do 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 not only costless but a great driver of growth, profits and prosperity. That is not true. The costs are very 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.

Ross McKitrick is a professor of economics at the University of Guelph and a senior fellow at the Fraser Institute.

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