Consumers could find ‘meaningful savings’ as carbon tax ends: Desjardins

A new report released on Wednesday suggests that Canadians can expect to feel the immediate absence of the consumer carbon price at the pump, but it may take longer to notice a difference in the price of other goods. The analysis by Desjardins Economics comes in the wake of Prime Minister Mark Carney’s order to set the consumer levy to zero on April 1.

The carbon price, which came with a quarterly rebate to offset the cost of inflation, will see its final rebate in April. The report indicates that this move will push overall inflation down over the next year as a result of Ottawa’s decision to eliminate the consumer price on carbon pollution. This could give the Bank of Canada some breathing room on lowering interest rates and supporting the Canadian economy amidst the ongoing trade war with the United States.

One of the most noticeable impacts will be on gas prices. Randall Bartlett, deputy chief economist at Desjardins, stated that motorists in provinces using federal carbon pricing should see a drop of almost 18 cents in the price of a litre of gasoline, translating to about $9 less to fill a 50 L tank. If the planned hike in the carbon price had gone through, gas prices would have gone up by three cents instead of going down.

The report also predicts a 12.8 percent decrease in the price of natural gas between March and April. The federal consumer carbon price is active in all provinces and territories except British Columbia, Quebec, and the Northwest Territories, which have equivalent systems of their own. British Columbia has announced plans to eliminate its provincial consumer carbon price following Carney’s announcement.

The consumer levy is charged on the purchase of more than two dozen input fuels, including gasoline, natural gas, propane, and coal. The amount of the charge is based on the greenhouse gas emissions of each when burned, currently sitting at $85 per tonne. Desjardins forecasts that Canadians will see inflation cool more gradually at the grocery store as lower transportation costs filter down to the cost of food.

Tu Nguyen, an economist at consulting firm RSM, mentioned that just as the consumer carbon price took time to ramp up, it may take a while for Canadians to see the impact of its absence. Gasoline prices are influenced not only by government tax policy but also by global oil prices, demand levels, and interruptions to production.

The Desjardins report projects that, in the absence of federal consumer carbon pricing, inflation in April will be 0.7 percent lower than it would have been otherwise, bringing the annual inflation rate down to 2.1 percent for the month. Bank of Canada Governor Tiff Macklem also estimated a 0.7 percent drop in inflation due to the elimination of consumer carbon pricing when speaking to the House of Commons finance committee in May 2024.

Bartlett mentioned that inflation should continue easing off at the same rate for about a year, offsetting upward pressure on inflation caused by Canada’s retaliatory tariffs and a weaker Canadian dollar driving import prices higher. Nguyen believes that the impact of the tariff battle will outweigh the absence of the carbon tax, with prices on perishable goods at the grocery store expected to rise first, followed by appliances and other durable goods in the months to come.

Desjardins initially projected that, with consumer carbon pricing in place, annual inflation would rise to over three percent by the end of 2025. However, they are now forecasting inflation of around 2.5 percent. After the Bank of Canada’s recent interest rate cut, Macklem suggested that while monetary policy could help smooth the impacts of the trade war, the central bank remains focused on keeping inflation in check.

A lower inflation rate in the near term, due to the end of consumer carbon pricing, could give the Bank of Canada more flexibility to respond to economic challenges while being less concerned about inflation, Bartlett added. This shift in inflation dynamics will have a significant impact on Canadian households and the overall economy in the coming months.