New data shows the painful economic impact of the federal carbon tax on municipalities.

Municipalities in Alberta paid out more than $37 million in federal carbon taxes in 2023, based on a recent survey commissioned by Alberta Municipal Affairs, with data provided to the Canadian Energy Centre.

About $760,000 of that came from the City of Grande Prairie. In a statement, Mayor Jackie Clayton said “if the carbon tax were removed, City property taxes could be reduced by 0.6 per cent, providing direct financial relief to residents and businesses in Grande Prairie.”

Conducted in October, the survey asked municipal districts, towns and cities in Alberta to disclose the amount of carbon tax paid out for the heating and electrifying of municipal assets and fuel for fleet vehicles.

With these funds, Alberta municipalities could have hired 7,789 high school students at $15 per hour last year with the amount paid to Ottawa.

The cost on municipalities includes:

Lloydminster: $422,248

Calgary: $12,300,000 (estimate)

Medicine Hat: $876,237

Lethbridge: $1,398,000 (estimate)

Grande Prairie: $757,562

Crowsnest Pass: $71,100

Red Deer: $1,495,945

Bonnyville: $19,484

Hinton: $66,829

Several municipalities also noted substantial indirect costs from the carbon tax, including higher rates from vendors that serve the municipality – like gravel truck drivers and road repair providers – passing increased fuel prices onto local governments.

The rising price for materials and goods like traffic lights, steel, lumber and cement, due to higher transportation costs are also hitting the bottom line for local governments.

The City of Grande Prairie paid out $89 million in goods and services in 2023, and the indirect costs of the carbon tax “have had an inflationary impact on those expenses” in addition to the direct costs of the tax.

In her press conference announcing Alberta’s challenge to the federal carbon tax on Oct. 29, 2024, Premier Danielle Smith addressed the pressures the carbon tax places on municipal bottom lines.

“In 2023 alone, the City of Calgary could have hired an additional 112 police officers or firefighters for the amount they sent to Ottawa for the carbon tax,” she said.

In a statement issued on Oct. 7, 2024, Ontario Conservative MP Ryan Williams, shadow minister for international trade, said this issue is nationwide.

“In Belleville, Ontario, the impact of the carbon tax is particularly notable. The city faces an extra $410,000 annually in costs – a burden that directly translates to an increase of 0.37 per cent on residents’ property tax bills.”

There is no rebate yet provided on retail carbon pricing for towns, cities and counties.

In October, the council in Belleville passed a motion asking the federal government to return in full all carbon taxes paid by municipalities in Canada.

The unaltered reproduction of this content is free of charge with attribution to the Canadian Energy Centre.

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Introduction

Since introducing a carbon tax in 2008, the Province of British Columbia (BC) has attracted significant attention from policymakers due to its large natural resource sector. Energy products account for 38 percent of all provincial exports, with coal and natural gas accounting for 31.5 percent of those exports.

The carbon tax is a policy instrument governments have implemented with the aim of curbing greenhouse gas emissions (GHGs). However, businesses and others have raised concern about the impact of the carbon tax on industry costs and competitiveness. The carbon tax makes producers pay for their emissions. The problem arises when there is no uniform carbon policy across international markets.

The carbon tax affects nearly all taxpayers in BC regardless of who bears the initial cost. As such, businesses in the province need to know about the carbon tax and its impact. This CEC Fact Sheet looks at the potential impact of a federally mandated $170 per tonne carbon tax in 2030 on various industries in the province.¹

Our analysis provides a general overview of the potential impact of the carbon tax on production costs for particular sectors because each business organization is unique. Businesses need to complete their own analyses specific to their own business models and based on their suppliers, competitors, customers, and markets. Studies conducted with different methodologies and assumptions will calculate different estimates of the impact of the carbon tax on business.

Carbon tax legislation and business costs

As part of the 2016 Pan-Canadian Framework on Clean Growth and Climate Change, the Government of Canada passed the Greenhouse Gas Pollution Pricing Act (GGPPA) in December 2018. The GGPPA imposes a carbon pricing system on provinces and territories that either have not implemented their own carbon pricing system or have implemented a system that does not meet the minimum requirements set by the federal government.

Federal and provincial governments both have the constitutional authority to regulate climate change policy, which affects how policy has been developed in BC.² Under the GGPPA, the federal carbon tax began at $20/tonne in 2019 and escalated by $10/tonne per year to $50/tonne in 2022. In December 2020, the federal government released an updated plan with a $15/tonne per year increase in the carbon price to reach $95/tonne in 2025 and $170/tonne in 2030.

According to Environment and Climate Change Canada (undated), the GGPPA consists of two parts: a regulatory charge on fuels such as gasoline and natural gas (known as the fuel charge) and a performance-based baseline and credit system for large industrial emitters that meet prescribed criteria set out in the GGPPA and its regulations, known as the Output-Based Pricing System (OBPS).

BC’s provincial carbon tax was initially set at $10 per tonne in 2008, but by 2023 the rate had increased to $65 per tonne. BC uses the provincial carbon tax (for fuel emissions) and, starting in April 2024, will switch to the BC output-based pricing system (B.C. OBPS) for industrial emissions.

In line with the federal government’s nationwide carbon tax, BC must meet the federally mandated carbon tax and move towards $170 per tonne by 2030.

The carbon tax gives rise to both direct and indirect business costs. Energy-intensive industries will incur more of the former, and other industries more of the latter. Direct
impacts are the cost that the carbon tax will impose on carbon-emitting sectors and the cost of fuel or energy used directly in production. Indirect costs are the carbon tax-induced costs the business will incur through input or production processes subject to the carbon tax in the prior production stage.

Industries such as food services and restaurants or retail stores that are not subject to the tax directly may still experience significant cost increases if the sector relies on inputs that use energy-intensive production processes.

Estimated impact of the carbon tax on industry production costs in BC

The production of goods and services in any sector necessitates business input costs, including capital, goods, services, energy, and wages and salaries. Industries that have a high usage of petroleum products will generally experience a slightly higher cost increase due to their higher usage.

The forestry and logging industry in the province will see its cost increase by 6.1 percent on average. The most significant increase in production costs will be incurred by support activities for oil and gas extraction, which witnesses a cost increase of 9.5 percent. The fishing, hunting and trapping industry will see its costs increase by 5.2 percent.

Non-metallic mineral mining and quarrying, which relies on fuels such as gasoline, diesel, and fuel oils to produce goods, will experience a 5.5 percent increase in its production inputs from the $170 per tonne carbon tax (see Figure 1).

For the utilities sector, on average, production costs will increase by about 4.6 percent. BC’s electric power generation, transmission, and distribution sector will see a cost increase of almost 4.8 percent due to the carbon tax. Construction sector costs will increase by 4.2 percent (see Figure 2).

In the manufacturing sector, the cement and concrete products sub-sector will see the highest cost increase of all industries from the carbon tax at 15.6 percent. This increase is  predominantly due to the industry’s high use of energy inputs, including coke and coal, which account for 6.9 percent of total inputs.

Other energy-intensive industries, such as aluminum manufacturing, and chemicals, pesticides, and fertilizers, will see their costs increase by between 5 percent and 7 percent. The paper products industry will witness a cost increase of 4.7 percent. Food manufacturing costs will increase by 3.4 percent under the $170/tonne carbon tax (see Table 1).

In BC’s service sector, the transportation and warehousing sub-sector, which relies heavily on refined petroleum products, will see the highest cost increases from the $170 per tonne carbon tax, at 7.4 percent. The accommodation and food services industry will see costs rise by 3.9 percent and the wholesale and retail trade industry will see its cost increase by 4.7 percent (see Figure 3).

Conclusion

This Fact Sheet has analyzed the impact of the carbon tax across various industries in British Columbia. It shows that introducing the $170 per tonne carbon tax will increase business costs for the province’s key industries.

The design of BC’s output-based pricing system is intended to mitigate this impact by targeting energy-intensive and trade-exposed (EITE) industries and setting individual facility or industry emission limits for them.

Each business must determine how the carbon tax will apply to its specific business environment and its impact on stakeholders, employees, customers, and owners. Nevertheless, there is no doubt that key industries in British Columbia will face additional costs associated with the $170 per tonne carbon tax and those charges will affect industry cost competitiveness.

1. In this Fact Sheet, we use customized data from Stokes Economics to examine the impact of the carbon tax on industry production costs. The CEC retained Stokes Economics to estimate the additional costs industries will incur from the carbon tax. The estimated impact on industry costs from carbon taxes presented in this analysis focuses solely on pricing fuel emissions subject to the provincial carbon tax.
2. Federal and provincial governments in Canada share jurisdiction on environmental regulations in accordance with Canada’s Constitution Act, 1867, which did not assign jurisdiction over the environment to either the provincial or federal governments.

Appendix

About the estimates: Impact of the carbon tax on production costs

Stokes Economics provided macroeconomic cost projections of the impact of the carbon tax on various industries. Stokes Economics uses a provincial macroeconomic modelling system known as “PROVMODS” to estimate the impacts of the carbon tax on industry costs. The estimated impact on industry costs from carbon taxes presented in this analysis focuses solely on pricing fuel emissions subject to provincial and federal carbon taxes either directly through a fuel charge or indirectly through a cap-and-trade system.

To quantify the impact of carbon pricing, the model uses a “base case” forecast that includes the carbon price beginning at $50 per tonne in 2022 and escalating to $170 per tonne by 2030. Next, the model creates an alternate scenario where the carbon tax is immediately repealed in 2023 and remains cancelled in all future years. The two scenarios are compared for industry costs and other economic impacts. As various aspects of the carbon pricing system must be accounted for, the selected model is multi-faceted in its features and capabilities.

Limitations

This analysis focuses solely on the cost implications associated with the fuel charge component of the carbon tax. With the implementation of BC OBPS in 2024, large industrial emitters subject to the output-based pricing system (OBPS) may incur additional costs if their facility doesn’t meet emission standards set under that program. These potential costs are not  included in the results presented in this analysis. Also, the analysis doesn’t include the impact of clean fuel standards.

The model relies on relative aggregate industry data that masks heterogeneity across firms in the industry. The model assumes that the carbon tax is an input cost and not a fixed cost in production, and that the average cost is equal to the marginal cost, reflecting the long-run absence of economies or diseconomies of scale. The estimates do not consider input  substitution among factors of production (energy, land, labour, and capital). Moreover, the study does not consider how the revenue from the carbon tax will be recycled to various industries through cuts in other taxes or taxes on input production. This analysis does not assume changes in production technology or fuel switching in industrial production processes due to the carbon fuel charge. The model ignores different manufacturing processes used in various industries. Different manufacturing processes can lead to a different industry fuel mix and energy use.

Notes

This CEC Fact Sheet was compiled by Ven Venkatachalam and Lennie Kaplan at the Canadian Energy Centre: www.canadianenergycentre.ca. The authors and the Canadian Energy Centre would like to thank and acknowledge the assistance of Stokes Economics and one anonymous reviewer in reviewing the data and research for this Fact Sheet.

References (All links live as of August 11, 2023)

British Columbia (2023), Exports, Issue 23-05 (May) <https://tinyurl.com/5dv32yjh>; British Columbia (Undated), British Columbia’s Carbon Tax <https://tinyurl.com/5xbsdz9u>; Environment and Climate Change Canada (Undated), Carbon Pollution Pricing Systems across Canada <https://tinyurl.com/25xmew2n>.

Creative Commons Copyright

Research and data from the Canadian Energy Centre (CEC) is available for public usage under creative commons copyright terms with attribution to the CEC. Attribution and specific restrictions on usage including non-commercial use only and no changes to material should follow guidelines enunciated by Creative Commons here: Attribution-NonCommercial-NoDerivs CC BY-NC-ND.

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Executive Summary

The carbon tax is a policy instrument intended to curb greenhouse gas emissions (GHGs). However, there has been concern over the impact of the carbon tax on industry costs and competitiveness. The carbon tax makes producers pay for their emissions. The problem arises when there is no uniform carbon policy across international markets.

Differences between countries in their approach to lowering carbon emissions will impose higher costs on industries in some jurisdictions or see industries relocate to lower-cost regions such as the United States (possibly leading to “carbon leakage”).

This study analyzes the impact of the carbon tax in Ontario. The analysis shows that introducing the $170 per tonne carbon tax will increase industry business costs. Companies in the province could see their profits fall as their business costs increase. Businesses will also find it difficult to pass on the cost increases associated with a carbon tax to customers.

In Ontario, goods-producing industries such as mining, utilities, iron and steel, manufacturing, motor vehicles, and chemical manufacturing, which generally have higher energy input requirements than other industries will bear the highest impact of the carbon tax.

Companies in fabricated metal and plastic and in rubber products will face a significant impact from the carbon tax due to their high exposure to trade competition from similar industries in other jurisdictions that have less stringent rules.

Introduction

Ontario is a significant contributor to Canada’s GDP. In 2021, Ontario’s nominal GDP was approximately $957 billion, about 38 per cent of Canada’s total GDP (see Figure 1). Of all the provinces, Ontario creates the largest share of Canada’s GDP. Ontario’s many industries contribute significantly to the Canadian economy. Consequently, industries, consumers, and policymakers across Ontario are paying increasing attention to the implementation of carbon taxes.

In 2018, Canada’s federal government implemented a nationwide carbon tax as one tool to reduce carbon emissions. The carbon tax is now affecting and will continue to affect nearly all Canadian taxpayers, regardless of who bears the initial cost of the tax. As such, businesses in all provinces need to be informed about the carbon tax and participate in conversations about its impact.

Source: Statistics Canada, Table 36-10-0402-02

As debate continues among Ontario’s policymakers about the costs and benefits of the carbon tax, this study looks at the potential impact of a $170 per tonne carbon tax on various industries in the province.¹ The analysis provides a general overview of the potential impact of the carbon tax on production costs for a particular sector; because each business organization is unique, businesses need to complete analyses specific to their business models and based on their suppliers, competitors, customers, and markets. Studies conducted with different methodologies and assumptions will calculate different estimates of the impact of the carbon tax on business.

The CEC is undertaking this carbon tax impact study because such information will be helpful for all industry stakeholders. Many organizations and authors have studied the impact of the carbon tax on households (Ammar et al., 2022) and businesses (McKitrick and Aliakbari, 2021). The current study contributes to the discourse by calculating the impact of the carbon tax on industry costs.

The rest of the paper is organized as follows. Section 2 provides a brief overview of carbon tax legislation in Canada and Ontario. Section 3 examines the impact of the carbon tax on business costs. Section 4 provides information on the province’s sectoral share of industry GDP and carbon emissions. Section 5 examines the impact of the carbon tax across various Ontario business sectors. Section 6 combines the carbon tax impact on production costs, industry profits, and trade exposure to identify industries that may face the most competitive pressures due to the implementation of the tax. The paper concludes by summarizing the implications of the carbon tax on the competitiveness of several different sectors.

1. In this Research Brief, we use customized data from Stokes Economics to examine the impact of the carbon tax on industry production costs. The CEC retained Stokes Economics to estimate the additional costs industries will incur from the carbon tax. The estimated impact on industry costs from carbon taxes presented in this analysis focuses solely on pricing fuel emissions subject to federal carbon tax

Carbon Tax Legislation

As part of the 2016 Pan-Canadian Framework on Clean Growth and Climate Change, the government of Canada passed the Greenhouse Gas Pollution Pricing Act (GGPPA) in December 2018. The GGPPA imposes a carbon pricing system on provinces and territories that either have not implemented their own carbon pricing system or have implemented a system that does not meet the minimum requirements set by the federal government.

According to the government of Canada (Undated), the GGPPA consists of two parts: a regulatory charge on fuels such as gasoline and natural gas (known as the fuel charge) and a performance-based baseline and credit system for large industrial emitters that meet prescribed criteria set out in the GGPPA and its regulations, known as the Output-Based Pricing System (OBPS).

Federal and provincial governments have the constitutional authority to regulate climate change policy, which affects how policy has been developed in Ontario.² Ontario uses the federal carbon tax (for fuel emissions) and the Emission Performance Standards (for industrial emissions) as its policy instruments to regulate greenhouse gas (GHG) emissions.

Under the GGPPA, the federal carbon tax began at $20/tonne in 2019 and escalated by $10 per year to $50/tonne in 2022. In December 2020, the federal government released an updated plan with a $15/tonne per year increase in the carbon price, which is to reach $95/tonne in 2025 and $170/tonne in 2030.

2. Federal and provincial governments in Canada share jurisdiction on environmental regulations in accordance with the Canadian Constitution Act, 1867, which did not assign jurisdiction over the environment to either the provincial or federal governments. Environmental laws are diffuse and can be addressed under federal or provincial legislative power depending upon the nature and scope of the issue. Federal environmental initiatives can be regulated through Parliament using the various laws it has at its disposal. Provincial environmental legislation is supported under the power granted to provinces to regulate land and business through  provincial property and civil rights, and in provincial power delegated to municipalities (Becklumb, 2019: 2).

Carbon Taxes and Businesses Costs

One of the main ways in which the federal government’s carbon tax will influence a company’s operations is through increased energy costs for businesses. The carbon tax makes gasoline and natural gas and electricity generation more expensive.

Industry cost impacts from a direct fuel charge are primarily determined by the amount and type of fuel businesses use in their production processes. As such, to interpret the cost impacts accurately, it is essential to understand the energy mix used in each specific industrial production process.

The carbon tax is a tax on the factors of production (i.e., labour, capital, and intermediate inputs). Intermediate inputs are goods and services (such as energy) used in producing goods and services.

The carbon tax will raise the intermediate input cost and thereby increase production or business costs.

Intermediate input costs play an essential role in most businesses, affecting the final price at which goods and services will be sold to customers, which in turn has an effect on the business’s profitability.

Electricity use (one intermediate input) is an essential consideration in calculating the costs of industrial production. Its cost impact will vary based on the mix of energy sources used to generate electricity in a particular region. This distinction is evident when comparing the cost impacts across industries. Provinces that use a higher share of coal, natural gas, or refined petroleum products (RPPs) to generate electricity will face a relatively higher cost impact.

Ontario’s input costs will be lower than for some other provinces as it generates a higher share of its electric power from nuclear. In 2022, Ontario generated 151,352 (GWh) of electricity, 59 per cent of which came from nuclear energy (see Figure 2).

Source: Canada Energy Regulator (Undated)

The carbon tax will give rise to both direct and indirect business costs. Energy-intensive industries will incur more of the former and other industries more of the latter. Direct impacts are the cost that the carbon tax will impose on carbon-emitting sectors and the cost of fuel or energy used directly in production.

Indirect costs are the carbon tax-induced costs the business will incur through input or production processes subject to the carbon tax in the prior production stage. Industries such as food services and restaurants, financial services, or retail stores that are not subject to the tax directly may still experience significant cost increases if the sector relies on inputs that use energy-intensive production processes.

Carbon taxes have two effects on industries. First, the carbon tax is applied to refineries, utility companies, and other intermediaries that supply electricity, fuel, and other energy that industries use. The tax then translates into higher fuel prices, which in turn increases input costs for other industries. Second, because the carbon tax increases those input prices, there is a long run reduction in industrial output.

The carbon tax can affect the profitability³ of companies because increased production costs cannot always be passed on to consumers. Further, the carbon tax will particularly affect industries that are trade exposed.⁴ A producer that tries to raise prices will be less competitive in export markets and may well lose market share to imports in domestic market.

As corporate tax incidence studies have shown, in a small open economy like Ontario, much of the tax on business costs can be passed back to labour and capital, especially labour bearing much of the cost of the tax (McKenzie and Ferede, 2017).

The carbon tax effect is most pronounced in two types of trade-exposed industries: those that are sensitive to import competition and those that export most of their products. Trade-exposed industries face a unique challenge: the prices of the goods the industries produce are set in the global markets.

Without the ability to pass some portion of their increased production costs on to buyers, trade-exposed industries must pay that portion of the cost themselves, thereby affecting their profitability. As all of Canada is subject to carbon pricing through the fuel charge or a cap-and-trade system, cost competitiveness concerns lie solely with similar companies operating in jurisdictions that have access to other international trading partners.

3. The term “profit” means the operating surplus generated through the production of goods and services in the industry and includes pre-tax profits and the value of depreciation.
4. Trade exposure indicates the capacity of the company to transfer the carbon cost imposed on it to its customers. Only the company knows its capacity to transfer its costs to the customer. “Trade exposure” is a theoretical concept; the higher a sector’s trade exposure, the more difficult it will be for the company to transfer the cost. The trade exposure ratio is: (Exports + Imports) / (Domestic production + Imports).

Ontario’s Economy and its Sources of Energy-Related Emissions

The first step in analyzing the impact of the carbon tax is to examine the provincial economy and calculate its sectoral share of provincial gross domestic product (GDP) and its sources of GHGs.

Table 1 shows the GDP share of various sectors in Ontario’s economy. Manufacturing comprises 11.0 per cent of Ontario’s GDP; the construction sector 7.9 per cent; finance, insurance, and real estate 22.6 per cent; and agriculture 1.1 per cent (see Table 1).

Source: Statistics Canada, Table 36-10-0400-01

Ontario’s total GHG emissions were 150.6 megatonnes (MT) of carbon dioxide equivalent (CO2e) in 2021, 22 per cent of Canada’s 670.4 MT of CO2e emissions that year.

As Table 2 shows, greenhouse gas emissions in the province are primarily concentrated in a few types of economic activities. The transportation sector accounts for 34.8 per cent of all GHG emissions; industrial activity, including manufacturing, accounts for 24.8 per cent of the province’s GHG emissions.

Source: Environment and Climate Change Canada (2023)

Estimated Impact of the Carbon Tax on Industry Production Costs

Primary sector

The production of goods and services necessitates businesses input costs which include capital, goods, services, energy, wages, and salaries. In Ontario’s agriculture sector, 6.7 per cent of production costs are for energy; in the forestry sector, energy accounts for 7.7 per cent of production costs.

Both sectors use a combination of diesel, biodiesel, and gasoline to supply their energy inputs. Fuels used in farming activities are mainly exempt from the carbon tax, so increased costs for the sector arise when other industries’ costs are pushed onto the sector as happens with inter-industry demand and supply linkages. As a result of those cost increases, the primary sector in Ontario will
its production cost increase by 4.3 per cent.

Forestry and logging in the province will see a cost increase of 5.0 per cent on average. Support activities for mining are energy-intensive, with its energy inputs exceeding 5.0 per cent. Its heavy use of refined petroleum will see the industry experiencing a 4.4 per cent cost increase due to the carbon tax (see Figure 3).

Source: Derived from custom data provided by Stokes Economics

Utilities and construction sector

On average, production costs will increase by more than 10.0 per cent in the utilities industry. Ontario’s electric power generation, transmission, and distribution sector will see a cost increase of almost 11.8 per cent due to the carbon tax. (Electric power generation uses natural gas in the generation mix, which accounts for 5.8 per cent of the industry’s inputs) (see Figure 4).

Source: Derived from custom data provided by Stokes Economics

Manufacturing sector

At 62 per cent, iron and steel manufacturing will see the highest cost increase of all industries from the carbon tax (see Table 3). This increase is predominantly due to the industry’s high use of energy inputs, which include coke and coal, and account for 8.6 per cent of total inputs in the industry.⁵

Another energy-intensive industry is basic chemicals, pesticides and fertilizers, and other agricultural chemical products. It will see costs rise 29.5 per cent due to the carbon tax (see Table 3), mainly due to its use of natural gas, which accounts for 13 per cent of this industry’s inputs, though its use of electricity also affects the tax it will pay.

While most iron and steel manufacturing occurs in Ontario (accounting for just over 70 per cent the sector’s contribution to Canada’s GDP), iron and steel products (at just 2.5 per cent) and basic chemicals, pesticides and fertilizers, and other agricultural chemical products (at 1.7 per cent) make up a small portion of the total manufacturing industry in the province.

The larger manufacturing sub-industries, which include food products, other chemical products, machinery, motor vehicles, and motor vehicle parts, will see their costs increase from just under 3 to nearly 7 per cent from the carbon fuel tax. Food manufacturing costs will increase by 3.2 per cent under a carbon tax charge (see Table 3) owing to the sub-sector’s energy input share of 1.6 per cent.

Motor vehicle manufacturing has a relatively low energy input share (0.3 per cent) but will be hit by costs passed on from other inputs such as iron and steel. The industry will see its costs increase by 2.7 per cent. On the other hand, motor vehicle parts costs will increase by 5.9 per cent. Overall, production costs for the manufacturing sector as a whole will increase by more than 3.9 per cent (see Table 3).

5. Investment that would reduce the industry’s reliance on coke and coal products in the steel-making process at facilities in the province could lessen emissions and in turn reduce the carbon taxes it will otherwise have to pay. However, the upfront capital costs of those investments would also have to be factored in.

Source: Derived from custom data provided by Stokes Economics

Service sector

In Ontario’s service sector, the transportation and warehousing sub-sector, which relies heavily on refined petroleum products, will see the highest cost increases from the $170 per tonne carbon tax (6.3 per cent). The accommodation and food industry will see costs rise by 3.2 per cent, and the retail industry will see costs increase by 3.9 per cent (see Figure 5).

Source: Derived from custom data provided by Stokes Economics

The Cost of the Carbon Tax on the Competitiveness of Ontario’s Manufacturing Sector

The carbon tax will affect the profitability of many industries in the manufacturing sector. Transportation equipment (comprising 16 per cent of manufacturing GDP), basic chemical manufacturing (10 per cent of manufacturing GDP), computer and electronic product manufacturing (4 per cent of manufacturing GDP), and paper manufacturing (2 per cent of manufacturing GDP) are the province’s most significant manufacturing industries, together accounting for around 30 per cent of the sector’s output.

Figure 6 combines the impact of the carbon tax on production costs, industry profits, and trade exposure in order to identify industries that will face the most competitive pressures from the implementation of the tax. The carbon tax will have the most significant impact on those industries in the manufacturing sector that have a high trade exposure and a low-profit margin.⁶

Industries with low-profit margins in manufacturing sector, such as motor vehicle, will face a significant impact from the carbon tax. Similarly, as Figure 6 indicates, the impact of the carbon tax will be very evident in manufacturing sectors with high or very high trade exposure such as fabricated metals, plastic and rubber products, basic chemicals, computers and electronics, and transportation equipment.

The increased business costs arising from the $170 per tonne carbon tax will significantly affect the manufacturing industry, particularly sub-sectors with lower profit margins and high trade exposure. Industries with lower profit margins will find it challenging to absorb the cost increase brought on by the carbon tax. Profit margin is critical to a free market economy. The margin must be high enough compared to similar businesses to attract investors. If profit margins are not high enough, companies will leave the sector.

6. Profit margin is the ratio of the industry’s profit (gross operating surplus and gross mixed income) to gross output (total production). Gross output measures sales or revenue from production for most industries. However, it is measured as sales or revenue less the cost of goods sold for margin industries like retail and wholesale trade. For example, if an industry has a profit margin of 5 per cent, this means that for every $100 the product is sold for, the industry makes $5.00 profit.

Source: Derived from custom data provided by Stokes Economics

Conclusion

This study has analyzed the impact of the carbon tax across various industries in Ontario. Our study shows that introducing the $170 per tonne carbon tax will increase business costs for the province’s industries. Companies in Ontario could see their profits fall. Businesses will also find it difficult to pass on the cost increase associated with a carbon tax to customers.

The design of the output-based pricing system is intended to mitigate this impact by targeting energy-intensive and trade-exposed industries and setting individual facility or industry emission limits for them. Nonetheless, as this Research Brief has shown, there is no doubt that industries in Ontario will face additional costs associated with the $170 per tonne carbon tax, which will affect industry cost competitiveness.

Each business must determine how the carbon tax will apply to its specific business environment and its impact on stakeholders, employees, customers, and owners. For all of them, however, there is likely to be some impact from the imposition of a $170 per tonne carbon tax.

Appendix

About the estimates: Impact of the carbon tax on production costs

Stokes Economics provided macroeconomic cost projections of the impact of the carbon tax on various industries. Stokes Economics uses a provincial macroeconomic modelling system known as “PROVMODS” to estimate the impacts of the carbon tax on industry costs. The estimated impact on industry costs from carbon taxes presented in this analysis focuses solely on pricing fuel emissions subject to provincial and federal carbon taxes either directly through a fuel charge, or indirectly through a cap-and-trade system.

To quantify the impact of carbon pricing, the model uses a “base case” forecast that includes the carbon price beginning at $50 per tonne in 2022 and escalating to $170 per tonne by 2030. Next, the model creates an alternate scenario where the carbon tax is immediately repealed in 2023 and remains cancelled in all future years. The two scenarios are compared for industry costs and other economic impacts. As various aspects of the carbon pricing system must be accounted for, the selected model is multi-faceted in its features and capabilities.

Limitations

This analysis focuses solely on the cost implications associated with the fuel charge component of the carbon tax. Large industrial emitters subject to the output-based pricing system (OBPS) may incur additional costs if their facility doesn’t meet emission standards set under that program. These potential costs are not included in the results presented in this analysis. Also, the analysis doesn’t include the impact of clean fuel standards.

The model relies on the relative aggregate industry data that masks heterogeneity across firms in the industry. The model assumes that the carbon tax is an input cost and not a fixed cost in production, and that the average cost is equal to the marginal cost reflecting the long-run absence of economies or diseconomies of scale. The estimates do not consider input substitution among factors of production (energy, land, labour, and capital). Moreover, the study does not consider how the revenue from the carbon tax will be recycled to various industries through cuts in other taxes or taxes on input production. This analysis does not assume changes in production technology or fuel switching in industrial production processes due to the carbon fuel charge. The model ignores different manufacturing processes used in various industries. Different manufacturing processes can lead to a different industry fuel mix and energy use.

CEC Research Briefs

Canadian Energy Centre (CEC) Research Briefs are contextual explanations of data as they relate to Canadian energy. They are statistical analyses released periodically to provide context on energy issues for investors, policymakers, and the public. The source of profiled data depends on the specific issue.

About the authors

This CEC Research Brief was compiled by Ven Venkatachalam, Chief Research Analyst, Canadian Energy Centre, and Lennie Kaplan, Executive Director of Research, Canadian Energy Centre. The authors and the Canadian Energy Centre would like to thank and acknowledge the assistance of Stokes Economics and two anonymous reviewers in reviewing the data and research for this Research Brief

References (All links live as of July 16, 2023)

Ammar, Nasreddine, Philip Bagnoli, Krista Duncan, and Tim Scholz (2022). A Distributional Analysis of Federal Carbon Pricing under A Healthy Environment and A Healthy Economy. Canada, Parliamentary Budget Officer (PBO). https://distribution-a617274656661637473.pbo-dpb.ca/6399abff7887b53208a1e97cfb397801ea9f4e729c15dfb85998d1eb359ea5c7

Becklumb, Penny (2019). Federal and Provincial Jurisdiction to Regulate Environmental Issues. Background Paper. Canada, Library of Parliament, Economics, Resources and International Affairs Division. https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201386E

Canada Energy Regulator (Undated). Macro Indicators. Canada’s Energy Future Data Appendices. Government of Canada. https://apps.rec-cer.gc.ca/ftrppndc/dflt.aspx?GoCTemplateCulture

Environment and Climate Change Canada (2023). National Inventory Report 1990-2021: Greenhouse Gas Sources and Sinks in Canada. Government of Canada. https://publications.gc.ca/site/eng/9.506002/publication.html

Canada (Undated). Carbon Pollution Pricing Systems across Canada. Government of Canada. https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work.html

McKenzie, Kenneth J., and Ergete Ferede (2017). The Incidence of the Corporate Income Tax on Wages: Evidence from Canadian Provinces. SPP Technical Paper 10, 7. University of Calgary, School of Public Policy. https://www.policyschool.ca/wp-content/uploads/2017/04/Incidence-CIT-on-Wages-McKenzie-Ferede.pdf

McKitrick, Ross, and Elmira Aliakbari (2021). Estimated Impacts of a $170 Carbon Tax in Canada. Revised Edition. Fraser Institute. https://www.fraserinstitute.org/studies/estimated-impacts-of-a-170-carbon-tax-in-canada

Environmental Registry of Ontario (2022). Emissions Performance Standards (EPS) Program Regulatory Amendments for the 2023-2030 Period. ERO number 019-5769. Government of Ontario https://ero.ontario.ca/notice/019-5769 Statistics Canada (2023). Table 36-10-0400-01: Gross Domestic Product (GDP) at Basic Prices, by Industry, Provinces and Territories, Percentage Share. Statistics Canada. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610040001

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Research and data from the Canadian Energy Centre (CEC) is available for public usage under creative commons copyright terms with attribution to the CEC. Attribution and specific restrictions on usage including non-commercial use only and no changes to material should follow guidelines enunciated by Creative Commons here: Attribution-NonCommercial-NoDerivs CC BY-NC-ND.

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Executive Summary

The carbon tax is a significant instrument for curbing greenhouse gas emissions (GHGs). However, there have been concerns expressed regarding the impact of the carbon tax on industry costs and competitiveness. The carbon tax makes producers pay for their emissions. The problem arises when there is no uniform carbon policy across international markets.

Differences between countries in the approach to lowering carbon emissions will impose higher costs on industries, possibly leading to “carbon leakages” or seeing industries relocate to lower-cost regions, such as the United States.

This study analyzes the impact of the carbon tax on key industries across the Atlantic provinces. The analysis shows that the $170 per tonne carbon tax by 2030 will increase business costs for industries in Atlantic Canada. Companies in the region could see their profits fall. Businesses will also find it difficult to pass on the cost increases associated with the carbon tax to customers.

In Atlantic Canada, goods-producing industries such as mining, utilities, and the manufacturing sector, which generally have higher energy input requirements, will witness the highest impacts from the carbon tax.

In Newfoundland and Labrador, oil and gas extraction sector support activities are the most energy-intensive industry, with energy exceeding 18 per cent as an input. The heavy usage of natural gas in the province results in the industry experiencing a 24 per cent cost increase from the $170 per tonne per tonne carbon tax.

In Prince Edward Island, the agriculture sector will witness cost increases from inter-industry demand and supply linkages as other industries’ costs are pushed onto the agriculture sector. As a result, the industry will see its production costs increase by over 4 per cent. Production costs for the manufacturing sector will increase by more than 2 per cent.

In Nova Scotia, the electric power generation industry will see the highest cost increases in the country due to its reliance on coal as an electric power generating input. The cost to produce electric power will increase by 109 per cent due to the carbon tax. The possibility of Nova Scotia transitioning from coal-based electric power generation to other alternative sources, such as natural gas, would reduce the impacts of the rising carbon tax. The manufacturing sector in Nova Scotia is heavily trade exposed. Non-metallic mineral product manufacturing (excluding cement and concrete) use refined petroleum products (RPPs) as a significant input, resulting in a 9 per cent cost increase due to the $170 per tonne carbon tax.

In New Brunswick, the utilities sector will see the highest production cost increase at 42.1 per cent. For the other primary sectors, which include industries such as forestry and logging, production costs will increase by more than 5 per cent.

Introduction

The idea and implementation of carbon taxes is receiving increasing attention from industries, consumers, and policymakers across Canada.

In 2018, Canada’s federal government implemented a nationwide carbon tax as one of its tools to reduce carbon emissions. The carbon tax will affect nearly all Canadian taxpayers regardless of who will bear the costs initially. As such, businesses nationwide need to be informed and participate in conversations about the impact of the carbon tax.

As the debate continues among policymakers in Canada about the costs and benefits of the carbon tax, this study looks at the potential impact of a $170 per tonne carbon tax on various industries in the Atlantic provinces.¹ The analysis provides a general overview of the potential impact of the carbon tax on production costs for a particular sector; because each business organization is unique, businesses need to complete their own analyses, specific to their business models and based on their suppliers, competitors, customers, and markets. Studies conducted with different methodologies and assumptions will calculate different estimates of the impact of the carbon tax on business.

The authors are undertaking this carbon tax impact study because such information will be helpful for all industry stakeholders when they are assessing the effects of a carbon tax. Many organizations and authors have studied the impact of the carbon tax on households (Ammar et al., 2022) and businesses (McKitrick and Aliakbari, 2021). The current study contributes to the discourse by calculating the impact of the carbon tax on industry.

The rest of the paper is organized as follows. Section 2 provides a brief overview of carbon tax legislation in Canada and the Atlantic provinces. Section 3 examines the impact of the carbon tax on business costs. Section 4 provides information on the sectoral share of GDP for various industries and on carbon emissions in the Atlantic region. Section 5 examines the impact of the carbon tax on various industries in the Atlantic provinces. The paper concludes by summarizing the implications of the carbon tax on the competitiveness of several different sectors.

1. In this Canadian Energy Centre (CEC) Research Brief, we use the data provided by Stokes Economics to examine the impact of the carbon tax on industry production costs. The CEC retained Stokes Economics to estimate the additional costs industries will incur from the carbon tax. The estimated impact on industry costs from carbon taxes presented in this analysis focuses solely on pricing fuel emissions subject to provincial and federal carbon taxes either directly through a fuel charge or indirectly through a cap-and-trade system.

Carbon Tax Legislation

As part of the 2016 Pan-Canadian Framework on Clean Growth and Climate Change, the Government of Canada passed the Greenhouse Gas Pollution Pricing Act (GGPPA) in December 2018. The GGPPA imposes a carbon pricing system on provinces and territories that either have not implemented their own carbon pricing system or have implemented a system that does not meet the minimum requirements set by the federal government.

According to the government of Canada (n.d.), the GGPPA consists of two parts: a regulatory charge on fuels such as gasoline and natural gas (known as the fuel charges) and a performance-based baseline and credit system for large industrial emitters that meet prescribed criteria set out in the GGPPA and its regulations (known as the Output-Based Pricing System (OBPS).

Federal and provincial governments have the constitutional authority to regulate climate policy, which affects how such policy has been developed in the Atlantic provinces.² Provincial governments in the Atlantic region have used different policy instruments to regulate greenhouse gas (GHG) emissions, including cap-and-trade emission trading regimes and the carbon tax (see Table 1).

Under the GGPPA, the federal carbon tax began at $20/tonne in 2019 and escalated by $10 a year to $50/tonne in 2022. In December 2020, the federal government released an updated plan that called for a $15/tonne per year increase in the carbon price, reaching $95/tonne in 2025 and $170/tonne in 2030.

2. Federal and provincial governments in Canada share jurisdiction on environmental regulations in accordance with the Canadian Constitution Act, 1867, which did not assign jurisdiction over the environment to either the provincial or federal governments. Hence, environmental laws are diffused and can be addressed under federal or provincial legislative power depending upon the nature and scope of the issue. Federal initiatives on the environment can be regulated through parliamentary powers using various laws. Provincial environmental legislation is supported under the power granted to the provinces to regulate land and business through provincial property and civil rights laws and provincial power over municipal government (Becklumb, 2019).

Source: Canada (n.d.)

Carbon Taxes and Business Costs

The main way in which the federal government’s carbon tax will influence the national economy is through increased energy costs for businesses. The carbon tax makes gasoline and natural gas more expensive–and electricity generation when a firm relies on it.

Industry cost impacts from a direct fuel charge are primarily determined by the amount and type of fuel a company’s production process uses. As such, it is essential to understand the energy mix that an industrial production process uses in order to accurately interpret the cost impacts. The carbon tax, which is a tax on the factors of production, will raise the intermediate input cost and increase the production cost or business cost of almost everything we use or buy.³ Intermediate input costs play an essential role in business, affecting the final price at which goods and services will be sold to customers and, thus, a business’s profitability.

Electricity use is an essential consideration in calculating the cost of industrial production as its cost impact will vary based on how electricity is generated in a particular region. The Atlantic provinces use renewable natural gas and coal-powered electricity (see Figure 1) for most of their energy needs.

The distinction among the provinces is evident when comparing the cost impact across industries. Provinces such as Nova Scotia that use a higher share of coal, natural gas, or refined petroleum products to generate electricity will experience a relatively higher cost impact. In comparison, Newfoundland and Labrador will have lower input costs as that province generates more electric power created by renewable sources such as hydroelectric facilities.

3. The four primary business input costs in producing goods and services are goods, services, energy, and wages and salaries. These input costs are called intermediate product costs. Intermediate products include goods and services other than fixed assets that are used as inputs into the production process. Intermediate products are a variable input in the production function and include both purchased goods and service inputs, including energy expenditures.

Source: Canada Energy Regulator (n.d.)

The carbon tax will give rise to direct and indirect business costs. Energy-intensive industries will incur more of the former, and other industries more of the latter. Direct impacts are the cost that the carbon tax will impose on carbon-emitting sectors and the cost of fuel or energy used directly in production.

Indirect costs are the carbon tax-induced cost the business will incur through input or production processes subject to the carbon tax in the prior production stage. Industries such as food services or restaurants, financial services, or retail stores that are not subject to the tax directly may still experience significant cost increases if the sector relies on inputs that use energy-intensive production processes.

Carbon taxes have two effects on industries. First, the carbon tax is applied to refineries, utility companies, and other intermediaries that supply electricity, fuel, and other energy that industries use. The tax then translates into higher fuel prices, which increases input costs. Second, there is an output effect, which measures the long-run reduction in industrial output caused by increased output prices due to the carbon tax.

The carbon tax will also affect the profitability⁴ of companies if they choose not to pass increased production costs on to consumers. A carbon tax also affects industries that are trade exposed.⁵

The carbon tax effect is more pronounced in industries that export most of their products. Industries that rely on exports face a unique challenge: the prices of the goods they produce are set in the global marketplace.

Without the ability to pass some portion of the increased cost of production on to buyers, trade-exposed industries must pay that portion of the cost themselves, which will affect the company’s profitability.

4. The term “profit” here refers to the gross operating surplus and gross mixed income. It refers to the income of corporations, governments, households and non-profit institutions serving households accruing to the capital factor of production from producing goods and services.
5. Trade exposed industries may or may not have the capacity to transfer the carbon cost imposed on the firm to its customers. Only the company knows its capacity to transfer its costs to the customer. “Trade exposure” is a theoretical concept; the higher a sector’s trade exposure the more difficult it will be for the company to transfer its costs to customers, including the cost of carbon. The trade exposure ratio is: (Exports + Imports) / (Domestic production + Imports)

Atlantic Canada’s Economy and Sources of Energy-Related Emissions

The first step in analyzing the impact of the carbon tax is to examine the economies of each province in Atlantic Canada and calculate its share of gross domestic product (GDP) and its sources of greenhouse gas emissions (GHGs).

Table 2 shows the sectoral GDP share across the four provinces in Atlantic Canada. There are some similarities among sectors in the provinces, namely, finance, insurance, information, and professional services. Notably, the oil and gas sector represent 32.9 per cent of GDP in Newfoundland and Labrador, the highest among the Atlantic provinces.

Manufacturing comprises 12.0 per cent of GDP in Prince Edward Island (PEI), 10.9 per cent in New Brunswick (NB), 7.3 per cent in Nova Scotia (NS) and 3.4 per cent in Newfoundland and Labrador (NL).

The agriculture sector’s share of GDP ranges from 1.9 per cent in NL to 6.2 per cent in PEI. The construction sector’s share ranges from 6.4 to 7.8 per cent across the Atlantic provinces.

Source: Statistics Canada, Table 36-10-0400-01

The total GHG emissions in the Atlantic provinces was 36.4 megatonnes (MT) of carbon dioxide equivalent (CO2e) in 2021, less than 6 per cent of Canada’s 670.4 MT of CO2e GHG emissions that year.

Greenhouse gas emissions in the Atlantic provinces are primarily concentrated in a few types of economic activities, as Figure 2 shows. The transportation sector accounts for 33.3 per cent of all GHG emissions, while electric power generation accounts for 26.2 per cent. Industrial activity, including oil and gas and manufacturing, accounts for 21.6 per cent. The agriculture sector accounts for less than 4 per cent of GHG emissions in the Atlantic provinces.

Source: Environment and Climate Change Canada (2023)

Estimated Impact of the Carbon Tax on Industry Production Costs

Newfoundland and Labrador

In Newfoundland and Labrador, on average, the support activities for the oil and gas extraction sector will see the highest cost increase following the imposition of the carbon tax. Support activities for oil and gas extraction are the most energy-intensive of the primary industries, with energy exceeding 18 per cent as an input. That industry’s heavy use of natural gas liquids (NGLs) will result in the industry experiencing a 24.9 per cent cost increase from the carbon tax (see Figure 3).

On average, production costs will increase by more than 9 per cent in the utilities industry. The forestry industry will see its cost increase by more than 5 per cent. Agriculture and manufacturing industries will see a more than 3 per cent production cost increase.

Source: Derived from custom data provided by Stokes Economics

The carbon tax will also affect the profitability of industries in Newfoundland and Labrador, as Figure 4 illustrates. Figure 4 combines the carbon tax impact on production costs, industry profits, and trade exposure to identify industries that may face the most competitive cost pressures due to the implementation of the carbon tax.

The carbon tax will significantly impact industries, such as manufacturing in Newfoundland and Labrador, with very high trade exposure and low-profit margins. The rise in business costs due to carbon tax significantly affectsindustries with lower profit margins.⁶ Industries such as forestry and manufacturing, with low-profit margins, will incur significant impacts from the carbon tax. Profit margins must be high enough compared to similar businesses to attract investors. If profit margins are not high enough; companies will exit the sector.

6. Profit margin is the industry’s profit (gross operating surplus and gross mixed income) ratio to gross output (total production). Gross output measures sales or revenue from production for most industries. However, it is measured as sales or revenue less the cost of goods sold for margin industries like retail and wholesale trade. For example, if an industry has a profit margin of 5 per cent, this means that for every $100 the product is sold for, the industry makes five dollars of profit.

Source: Derived from custom data provided by Stokes Economics

Prince Edward Island

In PEI, agriculture has an energy input share of 7 per cent of production and relies on diesel, biodiesel, and gasoline for its energy inputs. Fuels used in farming activities are mainly exempt from the carbon tax, so the cost increase for the sector arises from inter-industry demand and supply linkages as other industries’ costs are pushed onto the agriculture sector. As a result, the industry will see its production cost increase by over 4 per cent (see Figure 5).

Production costs for manufacturing will increase by more than 3 per cent. Food manufacturing and basic chemicals will see slightly higher cost increases of 2 per cent and 9 per cent, resulting from higher energy input shares and more carbon-intensive inputs.

Source: Derived from custom data provided by Stokes Economics

Industries in PEI that are trade-exposed will face competitive pressures. Food manufacturing (40 per cent of manufacturing GDP), other chemicals (17 per cent of manufacturing GDP), and aerospace parts (14 per cent of manufacturing GDP) are the province’s most significant manufacturing industries and have significant trade exposure (see Figure 6).

As Figure 6 shows, the impact of the carbon tax will be more obvious in sectors such as food manufacturing and aerospace, industries with low-profit margins.

Source: Derived from custom data provided by Stokes Economics

Nova Scotia

In Nova Scotia, the utilities sector (electric power generation) will see the highest cost increases in the country from the $170 per tonne carbon tax due to its reliance on coal as an input for generating electric power.

The production costs in the utilities sector will increase by more than 90 per cent. Other industries will see significant cost increases, including oil and gas and mining support activities. This latter sector relies on refined petroleum products, which will lead to double-digit percentage increases in production costs. The transportation sector will bear a cost increase of more almost 9 per cent (see Figure 7).

Source: Derived from custom data provided by Stokes Economics

The manufacturing sector in Nova Scotia is heavily trade-exposed (see Figure 8). Non-metallic mineral product manufacturing (excluding cement and concrete) uses refined petroleum products as a significant input, resulting in a 9 per cent cost increase due to the $170 per tonne carbon tax. Paper manufacturing is another energy-intensive industry and will see a similar cost rise. However, this increase is due to the amount of electricity the industry uses. The rising cost of generating electricity, discussed above, will feed into other industries.

While cement and concrete product manufacturing is not the most energy-intensive industry in the province, it relies on other energy inputs, including the direct use of coal products. While these products account for only two per cent of inputs, their high carbon content makes the industry very sensitive to the escalating carbon tax, resulting in a 17.7 per cent increase by 2030. The more significant manufacturing industries in the province, such as plastic and rubber products, aerospace, and shipbuilding, are less energy intensive, bringing down the cost increase for the manufacturing industry to 5 per cent.

As Figure 8 shows, the increase in business costs due to carbon tax will significantly impact industries with low-profit margins. Companies in fabricated metal, rubber products and food manufacturing will have the most significant impact from the carbon tax due to their low-profit margins and high trade exposure.

Source: Derived from custom data provided by Stokes Economics

New Brunswick

In New Brunswick, on average, the utilities sector will see the highest production cost increase in the province at 42.1 per cent (see Figure 9). This cost increase can be attributed to the fact that the sector is the most energy-intensive in the province; energy accounts for 27 per cent of its total production costs.

Figure 9 shows the significant impact of the $170 per tonne carbon tax on the transportation and warehousing sector; the tax will increase production costs for it by about 7 per cent. For the other primary sectors, which include industries such as forestry and logging, production costs will increase by more than 5 per cent. The forestry sector’s often remote working conditions mean refined petroleum products, which are easy to store and transport, account for most of the industry’s total energy input share.

Food manufacturing (comprising 24 per cent of manufacturing GDP), paper products (18 per cent of manufacturing GDP), wood products (12 per cent of manufacturing GDP), and petroleum and coal products (18 per cent of manufacturing GDP) are the province’s most significant manufacturing industries, together accounting for around 70 per cent of sectoral output. The production costs for the trade-exposed manufacturing sector will increase by more than 5 per cent under the $170 per tonne carbon tax. The paper products sector is much more energy intensive. It primarily uses electricity for its energy requirements but also uses petroleum products such as natural gas and other energy as inputs. The result is an increase in business costs of more than 5 per cent.

Source: Derived from custom data provided by Stokes Economics

As Figure 10 shows, the increase in business costs from the $170 per tonne carbon tax will significantly impact the manufacturing industry with lower profit margins and high trade exposure. Industries with lower profit margins will find it challenging to absorb the cost increase associated with the carbon tax

Source: Derived from custom data provided by Stokes Economics

Conclusion

Undoubtedly, reducing GHG emissions is a crucial goal for policymakers, and pricing carbon can be one strategy to reduce carbon emissions. The carbon tax makes producers pay for their emissions. The problem arises when there is no uniform carbon policy across international markets.

This difference between countries in the approach to lowering carbon emissions will impose higher costs on industries, possibly leading to “carbon leakages,” or industries relocating to lower-cost regions such as the United States.

The design of output-based pricing systems is intended to mitigate this impact by targeting energy-intensive and trade-exposed industries and setting individual facility or industry emission limits. Nonetheless, as this Research Brief has shown, there is no doubt that Canadian industries will face additional costs associated with the $170 per tonne carbon tax, affecting cost competitiveness in Canada and leading to some carbon leakage.

This study analyzed the impact of the carbon tax on various industries across the Atlantic provinces. Our study shows that introducing the $170 per tonne carbon tax will increase business costs for industries in Atlantic Canada. Companies in that region could see their profits fall. Businesses will also find it difficult to pass on the cost increase associated with a carbon tax to customers.

Each business must determine how the carbon tax will apply to their specific business environment and its impact on stakeholders, employees, customers, and owners. For all of them, however, there is likely to be at least some impact from the imposition of a $170 per tonne carbon tax.

Appendix

About the estimates: Impact of the carbon tax on production costs

Stokes Economics provided macroeconomic cost projections of the impact of the carbon tax on various industries. Stokes Economics uses a provincial macroeconomic modelling system known as “PROVMODS” to estimate the impacts of the carbon tax on industry costs. The estimated impact on industry costs from carbon taxes presented in this analysis focuses solely on pricing fuel emissions subject to provincial and federal carbon taxes either directly through a fuel charge or indirectly through a cap-and-trade system.

To quantify the impact of carbon pricing, the model uses a “base case” forecast that includes the carbon price beginning at $50 per tonne in 2022 and escalating to $170 per tonne by 2030. Next, the model creates an alternate scenario where the carbon tax is immediately repealed in 2023 and remains cancelled in all future years. The two scenarios are compared for industry costs and other economic impacts. As various aspects of the carbon pricing system must be accounted for, the selected model is multi-faceted in its features and capabilities.

Limitations

This analysis focuses solely on the cost implications associated with the fuel charge component of the carbon tax. Large industrial emitters subject to the output-based pricing system (OBPS) may incur additional costs if their facility doesn’t meet emission standards set under that program. These potential costs are not included in the results presented in this analysis. Also, the analysis doesn’t include the impact of clean fuel standards.

The model relies on the relative aggregate industry data that masks heterogeneity across firms in the industry. The
model assumes that the carbon tax is an input cost and not a fixed cost in production, and the average cost is equal to the marginal cost, reflecting the long-run absence of economies or diseconomies of scale. The estimates do not consider input substitution among factors of production (energy, land, labour, and capital). Moreover, the study does not consider how the revenue from the carbon tax will be recycled to the various industry through cuts in other taxes or taxes on input production. This analysis does not assume changes in production technology or fuel switching in industrial production processes due to the carbon fuel charge. The model ignores different manufacturing processes used in various industries. Different manufacturing processes can lead to a different industry fuel mix and energy use.

CEC Research Briefs

Canadian Energy Centre (CEC) Research Briefs are contextual explanations of data as they relate to Canadian energy. They are statistical analyses released periodically to provide context on energy issues for investors, policymakers, and the public. The source of profiled data depends on the specific issue.

About the authors

This CEC Research Brief was compiled by Ven Venkatachalam, Chief Research Analyst, Canadian Energy Centre and Lennie Kaplan, Executive Director of Research, Canadian Energy Centre. The authors and the Canadian Energy Centre would like to thank and acknowledge the assistance of Stokes Economics and two anonymous reviewers in reviewing the data and research for this Research Brief

References (All links live as of June 21, 2023)

Ammar, Nasreddine, Philip Bagnoli, Krista Duncan, and Tim Scholz (2022). A Distributional Analysis of Federal Carbon Pricing under A Healthy Environment and A Healthy Economy. Canada, Parliamentary Budget Officer (PBO). https://distribution-a617274656661637473.pbo-dpb.ca/6399abff7887b53208a1e97cfb397801ea9f4e729c15dfb85998d1eb359ea5c7

Becklumb, Penny (2019). Federal and Provincial Jurisdiction to Regulate Environmental Issues. Background Paper. Library of Parliament, Economics, Resources and International Affairs Division. https://lop.parl.ca/sites/PublicWebsite/default/en_CA/ResearchPublications/201386E

Canada Energy Regulator (n.d.). Macro Indicators. Canada’s Energy Future Data Appendices. Government of Canada. https://apps.rec-cer.gc.ca/ftrppndc/dflt.aspx?GoCTemplateCulture

Environment and Climate Change Canada (2023). Greenhouse Gas Sources and Sinks in Canada. National Inventory Report 1990-2021. Government of Canada. https://publications.gc.ca/site/eng/9.506002/publication.html

Canada (n.d.). Carbon Pollution Pricing Systems across Canada. Government of Canada. https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work.html

McKitrick, Ross, and Elmira Aliakbari (2021). Estimated Impacts of a $170 Carbon Tax in Canada. Revised Edition. Fraser Institute. https://www.fraserinstitute.org/studies/estimated-impacts-of-a-170-carbon-tax-in-canada

Statistics Canada (2023). Table 36-10-0400-01: Gross domestic product (GDP) at basic prices, by industry, provinces and territories, percentage share. https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3610040001

Creative Commons Copyright

Research and data from the Canadian Energy Centre (CEC) is available for public usage under creative commons copyright terms with attribution to the CEC. Attribution and specific restrictions on usage including non-commercial use only and no changes to material should follow guidelines enunciated by Creative Commons here: Attribution-NonCommercial-NoDerivs CC BY-NC-ND.

To sign up to receive the latest Canadian Energy Centre research to your inbox email: research@canadianenergycentre.ca

Download the PDF here

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Executive Summary

In December 2020, the federal government announced that the carbon tax would be increased to $170 per tonne by 2030, an increase of $130 per tonne from $40 in 2021, or 325 per cent higher. The 325 per cent increase in the federal carbon price between now and 2030 will have a significant impact on the gasoline prices that Canadians will pay at the pump.

This is important because in 2019 there were over 25.4 million automobile registrations. Depending on the province and type of vehicle, the increase in the carbon tax on a fill-up will be between 297 and 350 per cent. Between 2021 and 2030, gasoline costs associated with the carbon tax are expected to rise from 8.8 cents per litre to 39.6 cents per litre, an increase of 350 per cent over those nine years.¹

The impact of the carbon tax on fill-up costs: 7 per cent of the fill-up in 2021; 24 per cent in 2030

In 2021, the carbon tax is estimated to comprise nearly 7 per cent of annual fuel costs. Estimates indicate that in 2030, the carbon tax will comprise nearly one-quarter (24 per cent) of fuel costs, assuming remaining components of the gasoline cost structure stay the same.

Carbon tax fuel costs for Canada’s top five vehicles in 2021 and 2030

The top five vehicles sold in Canada in 2019 were the Ford F-Series, Dodge Ram, Toyota RAV4, Honda Civic, and Honda CR-V.

Below are the estimated annual gasoline fuel costs for these vehicles in 2021. The carbon tax portion is between $161 and $257, or about 7 per cent of the fill-up costs:

• Ford F-150: $3,931 in annual fuel costs, with the federal carbon tax comprising $257 of that cost.
• Dodge Ram 1500: $3,931 in annual fuel costs, with the federal carbon tax comprising $257 of that cost.
• Toyota RAV4: $2,654 in annual fuel costs, with the federal carbon tax comprising $174 of that cost.
• Honda Civic: $2,453 in annual fuel costs, with the federal carbon tax comprising $161 of that cost.
• Honda CR-V: $2,587 in annual fuel costs, with the federal carbon tax comprising $169 of that cost.

Below are the estimated annual fuel costs for these vehicles in 2030. The carbon tax portion is between $723 and $1,158, or about 24 per cent of the fill-up costs, assuming that the remaining components of the gasoline cost structure stay the same:

• Ford 150: $4,832 in annual fuel costs, with the federal carbon tax comprising $1,158 of that cost, an increase of $901, or 350 per cent, from 2021.
• Dodge Ram 1500: $4,832 in annual fuel costs, with the federal carbon tax comprising $1,158 of that cost, an increase of $901, or 350 per cent, from 2021.
• Toyota RAV4: $3,263 in annual fuel costs, with the federal carbon tax comprising $782 of that cost, an increase of $608, or 350 per cent, from 2021.
• Honda Civic: $3,015 in annual fuel costs, with the federal carbon tax comprising $723 of that cost, an increase of $562, or 350 per cent, from 2021.
• Honda CR-V: $3,180 in annual fuel costs, with the federal carbon tax comprising $762 of that cost, an increase of $593, or 350 per cent, from 2021.

1. In this review of the effect of carbon taxes on gasoline price, we avoid speculating on possible carbon tax rebates to consumers. Such developments are dependent on the whim of government policymakers and such policy may or may not be implemented nine years in the future.

Source: Authors’ calculations from Canada Revenue Agency, 2021.

Introduction

In December 2020, the federal government announced that the carbon tax would be increased to $170 per tonne by 2030, an increase of $130 per tonne from $40 in 2021, or 325 per cent higher. The carbon tax applies to 21 types of fuel and combustible waste that emit CO2, including gasoline that Canadians purchase at the retail level (Canada Revenue Agency, 2021).

The 325 per cent increase in the federal carbon price between now and 2030 will have a significant impact on the gasoline prices that Canadians will pay at the pump.

This is important because in 2019, there were over 25.4 million automobile registrations (Statistics Canada, 2021b). Canadians are likely to notice the effects of the carbon tax increase most acutely in the summer, when their family vacation often takes the form of a driving holiday.

This CEC Research Brief examines the impact that the 325 per cent increase in the carbon tax will have on the annual fuel bill for the five most popular vehicles that Canadian motorists own. Depending on the province and type of vehicle, the increase in the carbon tax on a fill-up will be between 298 per cent and 350 per cent. The estimated fuel cost arising from the carbon tax are for gasoline-only vehicles.

Impact of the Carbon Tax on Retail Gasoline Prices

As of April 1, 2021, the carbon tax on gasoline is 8.8 cents per litre, based on the application of the $40 per tonne carbon tax, and is estimated to reach 39.6 cents per litre by 2030, based on the application of the $170 per tonne carbon tax (see Figure 1a) (Global News, 2020). Between 2021 and 2030, the gasoline cost associated with the carbon tax is expected to rise from 8.8 cents per litre to 39.6 cents per litre, an increase of 350 per cent over the next nine years (see Figure 1b).²

2. The discrepancy in the percentage increase in the carbon tax between 2021 and 2030 (up by 325 per cent nationally and 298 per cent in B.C.) and the gasoline fuel costs associated with the carbon tax (up 350 per cent nationally and in Ontario, and up 297 per cent in B.C.) are due to differences in the effective carbon tax rates and gasoline fuel charges affected by the carbon tax for those provinces that fall under the federal regime (Ontario) and those that have their own provincial regime (B.C.). There will also be disparities in effective gasoline fuel costs among provinces that fall under the federal carbon tax regime and provinces that have unique provincial cap-and-trade regimes, such as Quebec and Nova Scotia.

Source: Authors’ calculations from Canada Revenue Agency, 2021.

Source: Authors’ calculations from Canada Revenue Agency, 2021.

The effect on retail gasoline prices in Canada

As of May 2021, the retail price for regular unleaded gasoline in the 18 metropolitan areas surveyed by Statistics Canada averaged 134.4 cents per litre (see Figure 1c). This price includes 8.8 cents per litre to cover the $40 per tonne carbon tax in 2021.

Assuming that there will be no change in the remaining cost structure for regular unleaded gasoline to 2030 (which is highly unlikely given expected increases in crude oil prices, costs to refine, transport, and sell gasoline at retail outlets, and fuel and excise taxes), the cost for a litre of regular unleaded gasoline at the retail level in Canada is expected to rise to an average of 165.2 cents by 2030 (see Figure 1c) (Statistics Canada, 2021a). Approximately 39.6 cents per litre (about one quarter, or 24 per cent) of this overall cost will be due to the application of the $170 per tonne carbon tax on gasoline by 2030.

Source: Authors’ calculations from Canada Revenue Agency, 2021.

The Impact of the Carbon Tax on Fill-up Costs for the Five Most Popular Vehicles in Canada: Comparing 2021 with 2030

Below is a list of the top five vehicles in Canada based on new vehicle sales figures for 2019, obtained from Auto Trader (2020). They are:

1. Ford F-Series (145,064 new vehicle sales)
2. Dodge Ram (96,673 new vehicle sales)
3. Toyota RAV4 (65,248 new vehicle sales)
4. Honda Civic (60,139 new vehicle sales)
5. Honda CR-V (55,859 new vehicle sales)

2021 carbon tax costs: 7 per cent of a fill-up

For the five most popular vehicles that Canadians drive based on 2019 sales figures, the carbon tax is estimated to comprise nearly 7 per cent of annual fuel costs in 2021, assuming that drivers use regular unleaded gasoline³ (see Figures 2a and 2b).

• Ford F-150:

° Annual fuel costs in 2021 are estimated at $3,931, with the federal carbon tax comprising $257 of that total.
° A single fill-up of the Ford F-150 gas tank in 2021 costs an estimated $149, with the carbon tax comprising $10 of that total

• Dodge Ram 1500:

° Annual fuel costs in 2021 are estimated at $3,931, with the federal carbon tax comprising $257 of that total.
° A single fill-up of the Ram 1500 gas tank in 2021 costs an estimated $134, with the carbon tax comprising $9 of that total.

• Toyota RAV4:

° Annual fuel costs in 2021 are estimated at $2,654, with the federal carbon tax comprising $174 of that total.
° A single fill-up of the RAV4 gas tank in 2021 costs an estimated $74, with the carbon tax comprising $5 of that total.

• Honda Civic:

° Annual fuel costs in 2021 are estimated at $2,453, with the federal carbon tax comprising $161 of that total.
° A single fill-up of the Civic gas tank in 2021 costs an estimated $63, with the carbon tax comprising $4 of that total.

• Honda CR-V:

° Annual fuel costs in 2021 are estimated at $2,587, with the federal carbon tax comprising $169 of that total.
° A single fill-up of the Honda CR-V gas tank in 2021 costs an estimated $71, with the carbon tax comprising $5 of that total.

3. Natural Resources Canada’s (NRCan’s) annual Fuel Consumption Guide provides information on fuel consumption (litres per 100 kilometres and annual litres of gasoline consumed) based on an annual driving distance of 25,000 kilometres for a variety of light duty vehicles, including cars, trucks, and SUVs. For the five most popular vehicles sold in Canada in 2019 and key fuel consumption statistics and assumptions, see Appendix A.

Source: Authors’ calculations from Canada Revenue Agency, 2021.

2030 carbon tax costs: 24 per cent of a fill-up

With the federal price of carbon set to increase to $170 per tonne by 2030, the impact on gasoline prices that year is expected to be quite dramatic. For the five most popular vehicles that Canadians drive, based on 2019 sales figures, the carbon tax is estimated to comprise nearly one-quarter (24 per cent) of one-time and annual fuel costs in 2030, assuming that drivers use regular unleaded gasoline. This is compared to a carbon tax cost of nearly 7 per cent in 2021 and assumes that the remaining components of the gasoline cost structure stay the same (see Figures 2a and 2b).

• Ford F-150:

° Annual fuel costs in 2030 are estimated at $4,832, with the federal carbon tax comprising $1,158 of that total, an increase of $901, or 350 per cent, from 2021.
° A single fill-up of the Ford F-150 gas tank in 2030 will cost an estimated $183, with the carbon tax comprising $44 of that total, an increase of $34, or 350 per cent, from 2021.

• Dodge Ram 1500:

° Annual fuel costs in 2030 are estimated at $4,832, with the federal carbon tax comprising $1,158 of that total, an increase of $901, or 350 per cent, from 2021.
° A single fill-up of the Ram 1500 gas tank in 2030 will cost an estimated $165, with the carbon tax comprising $40 of that total, an increase of $31, or 350 per cent, from 2021.

• Toyota RAV4:

° Annual fuel costs in 2030 are estimated at $3,263, with the federal carbon tax comprising $782 of that total, an increase of $608, or 350 per cent, from 2021.
° A single fill-up of the RAV4 gas tank in 2030 will cost an estimated $91, with the carbon tax comprising $22 of that total, an increase of $17, or 350 per cent, from 2021.

• Honda Civic:

° Annual fuel costs in 2030 are estimated at $3,015, with the federal carbon tax comprising $723 of that total, an increase of $562, or 350 per cent, from 2021.
° A single fill-up of the Civic gas tank in 2030 will cost an estimated $78, with the carbon tax comprising $19 of that total, an increase of $15, or 350 per cent, from 2021.

• Honda CR-V:

° Annual fuel costs in 2030 are estimated at $3,180, with the federal carbon tax comprising $762 of that total, an increase of $593, or 350 per cent, from 2021.
° A single fill-up of the Honda CR-V gas tank in 2030 will cost an estimated $88, with the carbon tax comprising $21 of that total, an increase of $16, or 350 per cent, from 2021.

Source: Authors’ calculations from Natural Resources Canada, 2021.

2021 carbon tax costs in British Columbia: 6 per cent of a fill-up

For the five most popular vehicles that Canadians drive, based on 2019 sales figures, British Columbia’s provincial carbon tax is estimated to comprise over 6 per cent of one-time and annual fuel costs in that province in 2021, assuming that drivers choose regular unleaded gasoline.⁴

• Ford F-150:

° Annual fuel costs in 2021 in B.C. are estimated at $4,548, with the provincial carbon tax comprising $291 of that total.
° A single fill-up of the Ford F-150 gas tank in 2021 in B.C. costs an estimated $172 with the carbon tax comprising $11 of that total.

• Dodge Ram 1500:

° Annual fuel costs in 2021 are estimated at $4,548, with the provincial carbon tax comprising $291 of that total.
° A single fill-up of Ram 1500 gas tank in 2021 in B.C. costs an estimated $155, with the carbon tax comprising $10 of that total.

• Toyota RAV4:

° Annual fuel costs in 2021 in B.C. are estimated at $3,071, with the provincial carbon tax comprising $197 of that total.
° A single fill-up of the RAV4 gas tank in 2021 in B.C. costs an estimated $86, with the carbon tax comprising $5 of that total.

• Honda Civic:

° Annual fuel costs in 2021 in B.C. are estimated at $2,838, with the provincial carbon tax comprising $182 of that total.
° A single fill-up of the Civic gas tank in 2021 in B.C. costs an estimated $73, with the carbon tax comprising $5 of that total.

• Honda CR-V:

° Annual fuel costs in 2021 in B.C. are estimated at $2,993, with the provincial carbon tax comprising $192 of that total.
° A single fill-up of the Honda CR-V gas tank in 2021 in B.C. costs an estimated $82, with the carbon tax comprising $5 of that total.

4. The discrepancy in the percentage of one-time and annual fuel costs associated with the carbon tax (7 per cent nationally and in Ontario, and 6 per cent in B.C.) are due to a number of factors, including (1) differences in the effective carbon tax rates; (2) differences in the gasoline fuel charge applied to the carbon tax for those provinces that fall under the federal regime (Ontario) and those that have their own provincial regimes (B.C.); and (3) differences in the remaining cost structure for regular unleaded gasoline, such as provincial fuel taxes. The federal carbon tax is not levied in addition to a provincial carbon tax where it exists, as in British Columbia, but to avoid the imposition of a federal carbon tax, provinces must mimic, to some degree, the federal carbon tax.

Source: Authors’ calculations from Canada Revenue Agency, 2021.

2030 carbon tax costs in British Columbia: 21 per cent of a fill-up

With the price of carbon set to increase to $170 per tonne by 2030, the impact on gasoline prices in B.C. by 2030 is expected to be quite dramatic. For the five most popular vehicles that Canadians drive, based on 2019 sales figures, the carbon tax is estimated to comprise over 21 per cent of one-time and annual fuel costs in B.C. by 2030, assuming that drivers choose regular unleaded gasoline. That compares to a carbon tax cost of just over 6 per cent in 2021, and assumes that the remaining components of the gasoline cost structure stay the same.

• Ford F-150:

° Annual fuel costs in 2030 are estimated at $5,414 in B.C., with the provincial carbon tax comprising $1,158 of that total, an increase of $867, or 297 per cent from 2021.
° A single fill-up of the Ford F-150 gas tank in B.C. in 2030 will cost an estimated $205, with the carbon tax comprising $44 of that total, an increase of $33, or 297 per cent from 2021.

• Dodge Ram 1500:

° Annual fuel costs in 2030 are estimated at $5,414 in B.C., with the provincial carbon tax comprising $1,158 of that total, an increase of $867, or 297 per cent from 2021.
° A single fill-up of the Ram 1500 gas tank in B.C. in 2030 will cost an estimated $185, with the carbon tax comprising $40 of that total, an increase of $30, or 297 per cent from 2021.

• Toyota RAV4:

° Annual fuel costs in 2030 are estimated at $3,656 in B.C., with the provincial carbon tax comprising $782 of that total, an increase of $585, or 297 per cent, from 2021.
° A single fill-up of the RAV4 gas tank in 2030 in B.C. will cost an estimated $102, with the carbon tax comprising $22 of that total, an increase of $16, or 297 per cent, from 2021.

• Honda Civic:

° Annual fuel costs in 2030 are estimated at $3,378, with the provincial carbon tax comprising $723 of that total, an increase of $541, or 297 per cent, from 2021.
° A single fill-up of the Civic gas tank in 2030 in B.C. will cost an estimated $87, with the carbon tax comprising $19 of that total, an increase of $14, or 297 per cent, from 2021.

• Honda CR-V

° Annual fuel costs in 2030 are estimated at $3,563 in B.C., with the provincial carbon tax comprising $762 of that total, an increase of $571, or 297 per cent, from 2021.
° A single fill-up of the Honda CR-V gas tank in 2030 in B.C. will cost an estimated $98, with the carbon tax comprising $21 of that total, an increase of $16, or 297 per cent, from 2021.

Source: Authors’ calculations from Natural Resources Canada, 2021.

2021 carbon tax costs in Ontario: 7 per cent of a fill-up

For the five most popular vehicles that Canadians drive, based on 2019 sales figures, the federal carbon tax is estimated to comprise nearly 7 per cent of one-time and annual costs in Ontario in 2021, assuming that drivers choose regular unleaded gasoline (see Figures 4a and 4b).

• Ford F-150:

° Annual fuel costs in 2021 in Ontario are estimated at $3,887, with the federal carbon tax comprising $257 of that total.
° A single fill-up of the Ford F-150 gas tank in 2021 in Ontario costs an estimated $148, with the carbon tax comprising $10 of that total.

• Dodge Ram 1500:

° Annual fuel costs in 2021 in Ontario are estimated at $3,887, with the federal carbon tax comprising $257 of that total.
° A single fill-up of the Ram 1500 gas tank in 2021 in Ontario costs an estimated $133, with the carbon tax comprising $9 of that total.

• Toyota RAV4:

° Annual fuel costs in 2021 in Ontario are estimated at $2,625, with the federal carbon tax comprising $174 of that total.
° A single fill-up of the RAV4 gas tank in 2021 in Ontario costs an estimated $73, with the carbon tax comprising $5 of that total.

• Honda Civic:

° Annual fuel costs in 2021 in Ontario are estimated at $2,425, with the federal carbon tax comprising $161 of that total.
° A single fill-up of the Civic gas tank in 2021 in Ontario costs an estimated $62, with the carbon tax comprising $4 of that total.

• Honda CR-V:

° Annual fuel costs in 2021 in Ontario are estimated at $2,558, with the federal carbon tax comprising $169 of that total.
° A single fill-up of the Honda CR-V gas tank in 2021 in Ontario costs an estimated $70, with the carbon tax comprising $5 of that total.

Source: Authors’ calculations from Canada Revenue Agency, 2021.

2030 carbon tax costs in Ontario: 24 per cent of a fill-up

With the price of carbon set to increase to $170 per tonne by 2030, the impact on gasoline prices in Ontario by 2030 is expected to be quite dramatic. For the five most popular vehicles that Canadians drive, based on 2019 sales figures, it is estimated that the carbon tax will comprise over 24 per cent of one-time and annual costs in Ontario by 2030, assuming that drivers choose regular unleaded gasoline. This compares to a carbon tax cost of about 7 per cent in 2021, and assumes that the remaining components of the gasoline cost structure stay the same (see Figures 4a and 4b).

• Ford F-150:

° Annual fuel costs in 2030 are estimated at $4,788 in Ontario, with the federal carbon tax comprising $1,158 of that cost, an increase of $901, or 350 per cent from 2021.
° A single fill-up of the Ford F-150 gas tank in Ontario in 2030 will cost an estimated $182, with the carbon tax comprising $44 of that cost, an increase of $34, or 350 per cent from 2021.

• Dodge Ram 1500:

° Annual fuel costs in 2030 are estimated at $4,788 in Ontario, with the federal carbon tax comprising $1,158 of that cost, an increase of $901, or 350 per cent from 2021.
° A single fill-up of the Ram 1500 gas tank in Ontario in 2030 will cost an estimated $164, with the carbon tax comprising $40 of that cost, an increase of $31, or 350 per cent from 2021.

• Toyota RAV4:

° Annual fuel costs in 2030 are estimated at $3,233 in Ontario, with the federal carbon tax comprising $782 of that cost, an increase of $608, or 350 per cent, from 2021.
° A single fill-up of the RAV4 gas tank in 2030 in Ontario will cost an estimated $90, with the carbon tax comprising $22 of that cost, an increase of $17, or 350 per cent, from 2021.

• Honda Civic:

° Annual fuel costs in 2030 are estimated at $2,988, with the federal carbon tax comprising $723 of that cost, an increase of $562, or 350 per cent, from 2021.
° A single fill-up of the Civic gas tank in 2030 in Ontario will cost an estimated $77, with the carbon tax comprising $19 of that cost, an increase of $15, or 350 per cent, from 2021.

• Honda CR-V:

° Annual fuel costs in 2030 are estimated at $3,151 in Ontario, with the federal carbon tax comprising $762 of that cost, an increase of $593, or 350 per cent, from 2021.
° A single fill-up of the Honda CR-V gas tank in 2030 in Ontario will cost an estimated $87, with the carbon tax comprising $21 of that cost, an increase of $16, or 350 per cent, from 2021.

Source: Authors’ calculations from Canada Revenue Agency, 2021.

Conclusion

The increase in the carbon tax from $40 per tonne ($45 per tonne in B.C.) in 2021 to $170 per tonne in 2030 is expected to have a dramatic impact across the country on the operating costs of the most popular vehicles that Canadians drive, as the specific cases of B.C. and Ontario illustrate.

In 2021, between 6 and 7 cents of every dollar of regular unleaded gasoline sold in Canada is associated with the application of the carbon tax. By 2030, between 21 and 24 cents of every dollar of regular unleaded gasoline sold in this country will be associated with the application of the carbon tax. This represents an increase of 297 to 350 per cent, depending on whether the vehicle is operated in Ontario, in B.C., or elsewhere in Canada.

Appendix

Source: Natural Resources Canada, 2021.

References

Auto Trader (2020). Top 10 Best Selling Cars in Canada in 2019. <https://bit.ly/3wGjm0g>.

Canada Revenue Agency (2021). Fuel Charge Rates. <https://bit.ly/36CXJDz>.

Connolly, Amanda (2020). The carbon tax is going up. Here’s how much more you could pay at the pumps. Global News. <https://bit.ly/3zbOSVZ>.

Natural Resources Canada (2021). 2021 Fuel Consumption Guide. <https://bit.ly/2T8JeEq>.

Statistics Canada (2021a). Table 18-10-0001-01: Monthly average retail prices for gasoline and fuel oil, by geography. <https://bit.ly/3B4ryLd>.

Statistics Canada (2021b). Vehicle registrations, by type of vehicle. <https://bit.ly/3i7pZnj>.

CEC Research Briefs

Canadian Energy Centre (CEC) Research Briefs are contextual explanations of data as they relate to Canadian energy. They are statistical analyses released periodically to provide context on energy issues for investors, policymakers, and the public. The source of profiled data depends on the specific issue.

About the authors

This CEC Research Brief was compiled by Lennie Kaplan, Chief Research Analyst, and Mark Milke, Executive Director of Research, Canadian Energy Centre.

Acknowledgments

The authors and the Canadian Energy Centre would like to thank and acknowledge the assistance of Dennis Sundgaard and an anonymous reviewer for their reviews of this study.

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