Would Ending the Consumer Carbon Tax Save Canadians Money?

Canadians are likely to notice the immediate effect of removing the consumer carbon price at the gas pump, while changes to prices for other goods may emerge more slowly, according to a new analysis released Wednesday by Desjardins Economics.

The report was published less than a week after the federal government announced that the consumer carbon levy would be set to zero starting April 1. The consumer carbon price had been accompanied by a quarterly rebate intended to offset some of the added costs; the final rebate payment is scheduled for April.

How the change will affect household finances

Desjardins’ analysis finds that the elimination of the consumer carbon price will lower overall inflation over the coming year, a development that could give the Bank of Canada some extra room to consider interest rate adjustments while the economy navigates trade tensions with the United States.

A large share of the immediate impact stems from lower gasoline costs. Randall Bartlett, deputy chief economist at Desjardins, estimates that motorists in provinces where the federal consumer carbon price applied will see fuel prices fall by roughly 18 cents per litre. For a typical 50-litre tank, that works out to about $9 in savings at the pump. Had the scheduled carbon-price increase proceeded instead, gas prices would have risen by roughly three cents.

Desjardins also projects that the price of natural gas will drop by about 12.8% from March to April following the removal of the consumer levy.

The federal consumer carbon price previously applied in provinces and territories that did not have their own equivalent pricing systems—British Columbia, Quebec and the Northwest Territories had existing programs. British Columbia announced plans to discontinue its provincial consumer carbon charge after the federal decision.

The consumer levy was applied to more than two dozen input fuels, including gasoline, natural gas, propane and coal. The charge was calculated according to the greenhouse-gas emissions produced when each fuel is burned; at the time of the report the rate was $85 per tonne.

The carbon price and Canada’s inflation rate

Desjardins expects the reduction in transportation costs to gradually filter through to the prices of goods such as groceries, so shoppers may see food inflation ease over time rather than instantly. RSM economist Tu Nguyen notes that just as the consumer carbon price took time to affect prices when it was introduced, its removal may likewise produce a lag before consumers see widespread changes in what they pay.

Gasoline prices reflect a range of influences beyond domestic tax policy, including global crude oil prices, shifts in demand and disruptions to production—factors that can be more influential than changes in the carbon levy. Nguyen suggests those broader market forces are likely to have a larger overall effect on fuel prices than the tax adjustment alone.

Desjardins’ calculations indicate that, without the federal consumer carbon price, inflation in April would be about 0.7 percentage points lower than it otherwise would have been. That reduction is projected to bring the month’s annual inflation rate to roughly 2.1%. By comparison, February’s inflation data showed a surprise rise to 2.6%, driven in part by the end of a temporary federal sales-tax break.

Bank of Canada Governor Tiff Macklem previously estimated a similar 0.7 percentage-point reduction in inflation attributable to the elimination of the consumer carbon price when testifying to the House of Commons finance committee in May 2024.

Trade tensions and other risks to prices

While Desjardins expects inflation to ease at a steady pace for about a year, other factors could push prices higher. Bartlett warns that Canada’s retaliatory tariffs in response to U.S. levies and a weaker Canadian dollar that raises import costs could create upward pressure on inflation.

Nguyen argues that the forthcoming price impacts from the tariff dispute may outweigh the inflation relief produced by removing the consumer carbon price. She expects perishable food items to experience price increases first, followed by higher costs for appliances and other durable goods in subsequent months.

Prior to the policy change, Desjardins projected that keeping consumer carbon pricing in place would have pushed inflation above 3% by the end of 2025. It now forecasts inflation of around 2.5% by year-end.

Following the Bank of Canada’s recent interest-rate cut, Governor Macklem indicated that while monetary policy can help smooth the economic effects of the trade dispute, the central bank remains committed to keeping inflation under control. A near-term decline in inflation related to the end of the consumer carbon price could give policymakers a bit more flexibility to address economic shocks without immediately tightening policy to counter inflation, Bartlett said.

Read more economic news:

• Why is gas so expensive in Canada?
• Inflation’s surprise jump could push the Bank of Canada to pause rate cuts
• Why Canada is ending the consumer price on carbon
• What is the Canada carbon rebate?