Federal carbon pricing leaves a majority of households financially worse off once its impact on the wider economy is added into the equation, concludes a new study from the Parliamentary Budget Officer.
The study, released on Thursday, adds up the direct costs households pay in the four provinces that are subject to federal carbon pricing, and the indirect costs passed on to them by businesses. Previous PBO studies have done the same. But this latest version goes on to include the costs of reduced growth in income and capital that result from Ottawa’s signature climate policy, which imposes escalating fees on the use of fossil fuels and offsets those payments with rebates to households.
The PBO says the highest earning 60 per cent of households in Ontario, Manitoba, Saskatchewan and Alberta are worse off under carbon pricing than if the policy did not exist, while the bottom 40 per cent are somewhat better off in the current fiscal year. That is in contrast with – although not a contradiction of – the Liberals’ much-repeated assertion about the costs of carbon pricing, namely that 80 per cent of households receive more in offsetting payments than they pay in carbon costs.
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“In provinces where our system is in place, 8/10 families get back more than they paid,” Environment and Climate Change Minister Steven Guilbeault wrote in a Twitter post on Wednesday as the government announced the size of climate change payments to households for the coming fiscal year.
Parliamentary Budget Officer Yves Giroux said the government’s assertion is correct but that it is “only part of the picture.” Not included in the government’s assessment are factors such as reduced growth in employment earnings and investment income resulting from higher carbon costs. Economists have extensively modeled those economic effects for years, but the PBO has gone a step further and projected how they would be distributed between households of varying incomes.
Poorer households tend to use less energy and hence pay lower carbon charges. Conversely, higher income households – with larger homes, more vehicles and higher energy consumption over all – pay higher carbon charges. In addition, those higher income households bear the brunt of the secondary costs of reduced economic growth, particularly any reduction in the growth of investment income.
In Ontario, for instance, households with incomes in the top 20 per cent face an average net cost of $1,137 in the current fiscal year that ends on March 31, even including offsetting payments from the federal government. Households with income in the bottom 20 per cent, however, came out ahead by $239. For all households, the costs were higher, or the benefits smaller, once economic effects were added in.
The picture was similar in the three other provinces in which federal carbon pricing for households applies, with the gap most pronounced in Alberta. In that province, the highest earning fifth of households had a net cost of $1,925, while the bottom earning quartile had a net benefit of $246. Mr. Giroux said those figures reflect the negative impact of carbon pricing on the province’s oil and gas sector.
Over time, middle-income households in Alberta and Ontario will see their net benefits shrink or even flip into negative territory, according to the PBO analysis, which extends through to the 2030-31 fiscal year. In Alberta, households in the second-lowest income quintile had a net benefit of $86 in the current fiscal year. That small benefit, however, is projected to shrink over time and by fiscal 2028-29 will turn into a net cost of $26. There’s a similar pattern in Ontario, except households in that income range are expected to face net costs several years earlier, in fiscal 2024-25, as the chart below shows.
In both provinces, 80 per cent of households will be worse off under carbon pricing within a few years – an inversion of the Liberals’ assertion.
Federal finances will also be affected. The PBO estimates the federal deficit will be $900-million higher in the current fiscal year than it would be without carbon pricing’s drag on the economy, a price tag rising to $5.2-billion in fiscal 2030-31.
University of Calgary professor Trevor Tombe cautioned against simply concluding carbon pricing is a costly policy. Any policy to reduce greenhouse gas emissions will carry costs, he said. The question is how efficient such measures are in minimizing those costs.
On that front, he said, the market-based mechanism of carbon pricing is widely acknowledged to be much more efficient than regulatory measures. Such regulations might be less visible and, perhaps because of that, less controversial. But according to Prof. Grave, they would ultimately require higher economic costs to achieve the same level of reductions.
Inaction is not cost-free, either, he said. A rapidly warming climate would disrupt the global economy, although other countries would likely bear a disproportionate share of those costs, he noted.
In a statement, the federal Environment and Climate Change department said carbon pricing is recognized as “the most efficient policy to reduce emissions as it imposes the lowest overall cost on the economy.” The statement also noted that weather-related disasters tied to climate change have soared over the past five decades.
Michael Bernstein, executive director of Clean Prosperity, a non-profit group, criticized the PBO study as being too narrowly focused. The analysis did not, for instance, attempt to account for the economic benefits of the emerging green economy, he said.
Mr. Bernstein acknowledged there will be costs associated with any transition away from fossil fuels, but the question, he said, is how to minimize those costs and maximize the benefits. It is “plausible” that those benefits will outweigh costs in the long run, he added.
He said he understands why the federal Liberals chose to emphasize most households would receive rebates larger than their direct costs from carbon pricing, given the intensity of critics’ attacks. But he said political strategy has come up against the reality he has seen in focus groups, where participants express fundamental skepticism that people can be made better off through this kind of government program.
A more nuanced approach that talked about relative costs, and the relative advantage of carbon pricing, would be preferable, he added. “Focusing on how many people were better off is probably not the most compelling way to sell this in the long run, even if there is math that supports them.”
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