Carbon pricing accounts for 0.15 percentage points of inflation, BoC governor says

Canada's price on carbon only contributes 0.15 percentage points to inflation, Bank of Canada Governor Tiff Macklem reiterated on Thursday.

Macklem first cited the figure to the Standing Committee on Finance in February, but repeated it while speaking to the Calgary Chamber of Commerce on Sept. 7, amid claims by the Conservatives that the federal carbon pricing plan is a significant driver behind Canada's high inflation rate.

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"The carbon tax goes up periodically and when we forecast inflation, we know what the carbon tax is going to do, so yeah, we build that into our forecast just the way we build in other fiscal decisions," Macklem said on Thursday.

"The contribution that's making to inflation one year to the next is relatively small. If you want me to put a number on it, it's in the range of 0.15 per cent, so quite small."

The federal carbon price rose on April 1 by $15 per tonne, to $65: the most recent in a 12-year timeline to lift the price to $170 by 2030.

Carbon pricing is based on the idea that higher fuel costs will result in lower usage and an overall decrease in emissions. To counterbalance the impact of those higher costs, the federal government issues rebates to Canadians in the form of the climate action incentive payment.

According to a 2022 report by Parliamentary Budget Officer Yves Giroux, raising the carbon price to $170 per tonne by 2030 will eliminate an additional 96 million tonnes of emissions – equivalent to the emissions of 21 million passenger cars – compared to the current rate of $50 per tonne.

That amount would account for more than 40 per cent of the emissions Canada is seeking to eliminate by 2030 to hit its reduction targets.

However, Conservative Party leader Pierre Poilievre and other members of the official opposition have repeatedly slammed the carbon price for making fuel, groceries and other goods noticeably more expensive for Canadians.

"Carbon tax increases are increasing inflation and raising the cost of basic necessities," Tracy Gray, Kelowna—Lake Country Conservative MP, said in the House of Commons on June 21.

"After eight years, the Liberals refuse to see the light on how their inflationary carbon tax has made life unaffordable for many families while doing nothing for the environment."

Poilievre has repeated the claim during campaign-style stops across the country, including one in a Vancouver grocery store on July 14.

When pressed by a reporter to cite evidence that the carbon price raises the cost of living, Poilievre pointed to the Bank of Canada's data – without mentioning the 0.15 per cent figure itself.

"We know very simply when you raise the cost of the gas and diesel that our farmers use to produce the food and that our truckers use to ship the food, you raise the price of the food itself. Somebody has to pay that price," he said. "It is magical thinking to suggest that you can raise energy prices on businesses farmers and workers without raising inflation."

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According to Jim Stanford, economist and director of the Centre for Future Work, there's no magic involved. In a report originally published by the think tank in Canadian Dimension magazine on May 8, Stanford laid out arguments he said proved there is no significant correlation between the carbon price and rising inflation.

Stanford pointed out that the global price of oil tripled between the beginning of 2021 and spring 2022, from US $40 to $120 per barrel – equivalent to a hypothetical increase in the carbon price to CAD $300 per tonne.

"By that measure, the jump in the price of oil – driven by a combination of geopolitics and speculation on world oil futures markets – increased fossil fuel prices by 30 times as much as the $10 carbon price increase in the same period," he said.

He said almost all industrial countries have experienced a surge in inflation since the onset of the pandemic, whether they have carbon pricing or not. For example, the U.S., Australia, Turkey, and other OECD countries without carbon pricing systems all experienced high inflation, while Japan and Korea – which both have carbon prices – experienced inflation rates lower than Canada's.

He also weighed the cost for Canadians of carbon pricing against the cost of climate disasters.

"Climate change is already having many negative impacts on the economy, including on inflation," he wrote. "The impact of climate disasters – droughts, floods, and more – on food prices has been widely acknowledged."

And while Poilievre cited Macklem's own admission that the carbon price bumps inflation by 0.15 percentage points, he did not mention something else the central bank's governor said in the same Standing Committee on Finance meeting where he shared the figure in February.

"I think the initial run-up in inflation was mostly driven by global factors," Macklem told the committee. "There were much higher energy prices… global supply chains were really gummed up, and we saw a big surge in demand globally for goods. All that drove goods price inflation up very rapidly."

And then, there was omicron, and the last major wave of COVID-19 infections in Canada.

"Last year at this time we were just coming out of omicron and the economy has never really looked back," he said. "Nobody could tell us how many waves of this there were going to be. Fortunately, that was the last major wave. The economy reopened. Businesses were not able to keep up with the demand and you saw domestic prices increase quite rapidly."

- With files from The Canadian Press