Ottawa's carbon tax plan to shrink economy by $3 billion, hurt loonie in 2018: study
The Conference Board of Canada said the tax could cause a broad slowdown in economic activity as “higher energy prices ripple throughout the economy"

NationalPost.com
Sept. 6, 2017
Jesse Snyder

The introduction of a federal carbon tax could “shrink” Canada’s GDP by as much as $3 billion in 2018 and lead to a slight depreciation of the Canadian dollar, a new report says.

In a study released Tuesday, the Conference Board of Canada said the tax could cause a broad slowdown in economic activity as “higher energy prices ripple throughout the economy.” Prices for natural gas, gasoline, electricity and other goods will rise, collectively raising costs of goods and services.

“The negative effect on growth moves the economy away from its potential and this results in a mild depreciation of the Canadian dollar,” the Board said.

The Conference Board expects that negative repercussions for the Canadian economy to taper off after a few years, however, as more capital is invested in cleaner energy technologies.

“Carbon intensive industries are hit the hardest, consumers take a hit, and then we start to grow our way out of it again,” said Len Coad, a senior researcher at the Conference Board.

The report’s findings come as Ottawa prepares to introduce its carbon tax proposal to Parliament in the fall. The floor price on the tax will start at $10 per tonne in 2018, and will rise another $10 every year for the next four years. Ottawa will set annual mandatory minimums for the carbon price, and will place levies on provinces that don’t meet its targets.

With a carbon tax of $50 per tonne, natural gas prices will rise 20 per cent, according to the report. At a $200 per tonne price, prices would rise 60 per cent. In manufacturing, paper, chemical and petroleum products makers are expected to be hit hardest by rising costs. Paper manufacturer’s costs will rise 30 per cent at $50 per tonne and more than 80 per cent at $200 per tonne.

The Trudeau government has long maintained that Canadians will not have to choose between the environment and the economy, and that tighter climate regulations will not discriminate against carbon-intensive industries.

Most provinces have been open to the government’s mandatory minimums. Alberta, British Columbia and Quebec already impose provincial carbon taxes, though some have resisted the federal minimums after they go above the $50 per tonne threshold. Saskatchewan premier Brad Wall has been highly critical of the proposal.

The Conference Board also assessed how Canada could increase its renewable energy capacity, and the investments required to electrify its grid. It followed up on previous research by the Canadian Academy of Engineering that assessed the possibilities of shifting toward a greener grid from a technical standpoint.

In order to meet its climate targets and successfully shift toward a lower-carbon economy, anywhere between $1.5 trillion and $3.5 trillion will need to be invested between 2017 and 205o, according to the report.

The shift would require heavy investment into increasing the adoption of electric vehicles and expanding current infrastructure. Meanwhile, power suppliers will need to double or even triple their current capacity while replacing coal and natural gas with cleaner supplies.

“It is a very massive transformation of the economy,” Coad said.

The report did not assess the impact on Canadian oil and gas companies specifically, but Coad said costs will rise for those companies as well. Some producers have begun electrifying their upstream processes as a way to reduce emissions, but many are still dependent on burning natural gas to power their operations.

He said oilsands and other Canadian unconventional basins “are both expensive resources to develop, so adding additional cost from carbon pricing does put additional pressure on them and their competitiveness.”

Another challenge for Canadian companies and consumers are lingering questions over whether the U.S. and other jurisdictions will implement similar carbon policies.

Rigid carbon restrictions on Canadian companies could put them at a disadvantage to competitors with different tax rates.

“Even after passing on the higher costs to their workers, exporters will still be at a competitive disadvantage, as they will not be able to pass on any of those higher costs to foreign buyers,” the report said.