A new report from think tank Fraser Institute conflicts with the Trudeau government’s claim that Canada will be better off with its carbon tax policies. Instead, the report says we will face serious economic consequences if the carbon tax rises to the proposed $170 per tonne by 2030.
Researchers estimated that employment and Gross Domestic Product (GDP) will be significantly lower by 2030 due to the carbon tax, with Canada’s total economic loss amounting to $44.1 billion.
“Real GDP could decline by about 2.1 per cent compared to the case without the tax, and the economy will lose approximately 202,000 jobs,” states the report. “Also real household consumption will decline in every province even after taking account of the rebates, which highlights the challenge the federal government will face in achieving their goal that most Canadians will be made better off by the plan.”
“It is noteworthy that increases in energy costs fall disproportionately more heavily on lower-income households.”
In December 2020, Trudeau announced the carbon tax will increase by $15 a year until it reaches $170 paper tonne in 2030. The government claims that the hike is required to meet the greenhouse gas reduction target in the Paris climate agreement.
Researchers also say that Trudeau’s plan to issue rebates to Canadians will increase the federal deficit. The carbon tax, by punishing consumption and economic activity, will shrink the tax base and offset any carbon tax revenues.
“If the federal government aims to refund most of the proceeds of carbon charges to households while keeping other spending and tax rates unchanged, the net effect will be an increase in the government deficit,” the report says.
In this study, the Fraser Institute presents an analysis using a large empirical model of the Canadian economy that indicates that the tax will have substantial negative impacts, including a 2.1 per cent decline in GDP and the net loss of over 200,000 jobs, even after taking account of jobs created by new government spending and household rebates of the carbon charges. The drop in GDP works out to about $1,800 in current dollars per employed person.
The analytic method they use here is called Computable General Equilibrium (CGE) modeling and is one of the standard approaches for assessing this type of policy. In previous policy debates, the federal government provided multiple independent analyses using several CGE models developed within federal ministries or in the academic sector and, for comparison, provided estimates using other analytical methods that were again developed internally or in the private sector. The Fraser Institute compares their findings and show that their macroeconomic cost estimate is almost identical to the average of six previous studies when scaled to an equivalent reduction in carbon-dioxide emissions.
In their analysis of the policy they do not attempt to account for the effects of the Output-Based Pricing System for energy-intensive and trade-exposed sectors, since it is scheduled to be phased out by 2030. They take partial account of the effects of the Clean Fuels Standard, on the assumption that compliance will be aided by a credits-trading system that will limit the actual effect on fuels.
CGE models do not attempt to estimate temporary unemployment arising from a policy shock. Instead they compute “before and after” snapshots assuming that the labour market clears each time. In order for labour supply and demand to balance after introducing the carbon tax it is necessary that real wages decline. They find that real household incomes in the model decline by 2.8 per cent nationally, but the carbon tax rebates offset much of that loss so real household consumption only declines by 1.3 per cent. They also observe that real consumption goes down in every province. The federal government intends for the majority of Canadians to be made better off by the policy, but this may end up being difficult to achieve in practice.
The Fraser Institute deflates the nominal value of the carbon tax to $140 to account for inflation. They estimate that a carbon tax of this magnitude will result in a 26 per cent reduction in carbon-dioxide emissions. This will not be sufficient to reach the Paris target. They estimate that a constant-dollar carbon tax of $240 per tonne would be required to get 2030 emissions down to the Paris target, and it would need to increase continually thereafter to keep emissions constant in the context of a growing population.
A key finding of this analysis is that introducing the carbon tax will cause rather pronounced reductions in revenues elsewhere in the tax system, such that the government will not be able to refund household carbon-tax payments to the extent it has promised without going into deficit. The net increase in government revenue will only cover about 20 per cent of the carbon taxes on final demand. If the government intends to rebate 90 per cent of the revenue and use 10 per cent to increase spending elsewhere, it will add about $24 billion annually to the consolidated government deficit.
You can find all these facts and more at CarbonTaxImpacts.ca