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There’s now a Bank of Canada number for carbon tax’s impact on inflation. It’s small

Conservatives argue the Liberal government's climate measure drives up the cost on everything. The inflation-watching head of the central bank offered some perspective on this.

Making everything more expensive? Only by a fraction of a percentage point

a bespectacled man gestures with his fingers as he speaks into a microphone.

There's some, and one could stress some, point to the Conservative Party's steady drumbeat.

It's inescapably true that the federal carbon tax makes life for Canadians more expensive — before the "climate action incentive" rebate — and Bank of Canada governor Tiff Macklem reiterated this on a visit to Calgary on Thursday.

He brought further clarity to the highly charged political discourse by putting a number on it.

That number: 0.15 percentage points of the inflation increase can be attributed to the carbon tax.

Pierre Poilievre's Conservatives have made much sport of arguing the Trudeau Liberals' tool to fight climate change has severely affected the affordability of fuel, groceries and other goods. While the Opposition party has never put a number on it, the figure has never appeared to be as rhetorically small as Macklem put it.

In questions following a luncheon address to the Calgary Chamber of Commerce, the central bank head said his team's inflation-watching takes into consideration the Trudeau government decision to annually hike its price on carbon by $15 per tonne.

"So each year it's 0.15 (per cent), but that's a relatively small effect on year-over-year inflation," Macklem told reporters.

A thin slice of the pie

Consider that impact this way: with year-over-year inflation lately hovering around three per cent, this means the carbon tax causes one-twentieth of price increases. When inflation peaked at just above eight per cent last year, the carbon tax would have been responsible for one-54th of it.

There's a big qualifier to this arithmetic. Macklem's arithmetic only covers the direct impact of the carbon tax, meaning how it juices the price of gasoline, natural gas and other fossil fuels.

"It does not include second-round effects," he clarified.

And it's these knock-on effects that Poilievre has honed in on in his protests of the carbon tax.

"We know very simply when you raise the cost of the gas 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," the Conservative leader said at a July event at a Vancouver grocery store.

A man in blue blazer gestures at a lectern, surrounded by a grocery produce section.

Normally one to deal in data rather than estimates, Macklem didn't offer a more universal figure on the carbon tax, with the direct fuel markup added to the indirect costs those increases have on goods.

For that, we'll go to Trevor Tombe, the University of Calgary economist who's well-versed enough in this matter that he can harness Statistics Canada data to figure out these indirect costs.

According to his calculations, these knock-ons do add to the impact of inflation, but they certainly don't double or triple the blow. In Ontario, the direct and indirect effects inflate prices by 0.207 per cent a year. In Alberta, it's 0.1875 per cent.

In other words, we can rightly blame Trudeau's carbon tax for about one-fifteenth of Ontario's current inflation, or one-sixteenth of Alberta's. "Relatively small," is how Macklem put it.

Tombe said there is fairness in critiques of the carbon tax, because the accumulation of gradual increases in the tax is making things more expensive, and will continue to do so as the per-tonne rate rises to $170 by 2030, when it will make up a significant chunk of Canadians' gasoline bills.

"It's perfectly correct for opponents of the carbon tax to point out that eliminating it would drop prices," the economist says.

"It's equally correct for supporters of it to note that it's not a driver of inflation."

These impact measurements do not account for the fixed-price rebate the Trudeau government makes to households every quarter, the climate action incentive payment meant to offset the carbon tax's added costs on vehicle fuel and home heating.

On the one hand, that provides a buffer to the inflationary burden that the levy creates; on the other, more money stuffed into Canadians' bank accounts could itself put upward pressure on the increased demand that drives inflation.

The spending side

Which raises the other government intervention that affects inflation and which Poilievre routinely highlights — government spending. Macklem had no figure for the amount of inflation that can be attributed indirectly to the money Ottawa and the provinces plug into the economy through social programs and other initiatives.

But it remains, he said, another factor the Bank of Canada pays attention to as it watches inflation and sets rates, and across all government levels it's growing at about two per cent per year.

"It's contributing to the growth of demand in the economy," the bank governor said. "In that sense, it's not helping to slow the economy. It's not helping to relieve those inflationary pressures."

Some bank economists criticize the federal government as over-stimulators of inflation. But in a week in which Finance Minister Chrystia Freeland and several premiers controversially weighed in on the Bank's interest-rate decisions, Macklem was careful not to direct commentary in the other direction.

Credit belongs to : www.cbc.ca

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