Canadians can expect to feel the absence of the consumer carbon price at the pumps immediately but it may take longer to notice a difference in the price of other goods, a new report released Wednesday suggests.
The analysis by Desjardins Economics comes less than a week after Prime Minister Mark Carney and his new Liberal cabinet ordered that the consumer levy be set to zero on April 1.
The carbon price came with a quarterly rebate to offset the cost of inflation; the final rebate will come in April.
How it will impact Canadians’ finances
The report suggests that move will push overall inflation down over the next year as a result of Ottawa’s decision to kill the consumer price on carbon pollution.
That could give the Bank of Canada a bit of breathing room on lowering interest rates and supporting the Canadian economy through the trade war with the United States.
A large part of that is because of gas prices.
Randall Bartlett, deputy chief economist at Desjardins, said the change means motorists in provinces using federal carbon pricing should notice a drop of almost 18 cents in the price of a litre of gasoline, or about $9 less to fill a 50 L tank.
If the planned hike in the carbon price had gone through, gas prices would have gone up another three cents, instead of down.
“In those jurisdictions, it is going to be very visible and meaningful savings for Canadian households,” said Bartlett.
Desjardins’ analysis also predicts the price of natural gas will fall 12.8 per cent between March and April.
The federal consumer carbon price is active in all provinces and territories but British Columbia, Quebec and Northwest Territories, which had equivalent systems of their own. B.C. announced plans to kill its provincial consumer carbon price in the wake of Carney’s announcement.
The consumer levy is charged on the purchase of more than two dozen input fuels including gasoline, natural gas, propane and coal. The amount of the charge is based on the greenhouse gas emissions of each when burned, sitting at $85 per tonne currently.
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The carbon tax and Canada’s inflation rate
Desjardins forecasts that Canadians will see inflation cool more gradually at the grocery store as lower transportation costs tied to the end of consumer price on pollution filter down to the cost of food.
RSM economist Tu Nguyen said just as the consumer carbon price took time to ramp up, it may take a while for Canadians to see the impact of its absence in the prices they pay.
Gasoline prices, for example, depend not only on government tax policy but on prices set globally, which are also affected by shifting levels of demand and interruptions to production.
“Those factors are likely to have a bigger impact overall on gas prices than the carbon tax,” Nguyen said.
The Desjardins report projects that, in the absence of federal consumer carbon pricing, inflation in April will be 0.7 per cent lower than it would have been otherwise.
That’s expected to bring the annual inflation rate down to 2.1% for the month. February’s inflation figures, released Tuesday, showed a surprise jump in inflation to 2.6%, driven largely by the end of Ottawa’s temporary sales tax break.
Bank of Canada Gov. Tiff Macklem also estimated a 0.7% drop in inflation due to the elimination of consumer carbon pricing when he spoke to the House of Commons finance committee in May 2024.
A tariff war could still lead to higher prices
Bartlett said inflation should continue easing off at the same rate for roughly a year, and that could “offset” upward pressure on inflation caused by Canada’s retaliatory tariffs in response to U.S. levies and a weaker Canadian dollar driving import prices higher.
Nguyen said she thinks the coming price spike from the tariff battle will “outweigh” the impact of ending the consumer carbon tax. She said she sees prices on perishable goods at the grocery store rising first, followed by appliances and other durable goods in the months after.
Desjardins had projected that, with consumer carbon pricing in place, inflation would rise to more than 3% by the end of 2025. It’s now forecasting inflation of around 2.5% at the end of the year.
After the Bank of Canada’s interest rate cut last week, Macklem suggested that while monetary policy could “smooth” the impacts of the trade war, the central bank remains focused on keeping inflation in check.
A lower inflation rate in the near-term tied due to the end of consumer carbon pricing could give the Bank of Canada a bit more freedom to respond to the economic hits while worrying a bit less about inflation, Bartlett said.
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Read more economic news:
- Why is gas so expensive in Canada?
- Inflation’s surprise jump could push Bank of Canada to pause rate cuts
- Why Canada is ending the consumer price on carbon
- What is the Canada Carbon Rebate?
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