Carbon Tax Responsible for 16% of Inflation: Bank of Canada Governor

The BoC governor says inflation would drop 16 percent if Ottawa was to remove its carbon tax altogether.

Bank of Canada governor Tiff Macklem speaks during a news conference following an interest rate announcement, in Ottawa on Oct. 25, 2023. The Canadian Press/Adrian Wyld

If the Liberal government were to abandon the carbon tax entirely, inflation in Canada would drop 16 percent, says Bank of Canada governor Tiff Macklem.

Mr. Macklem provided this information while testifying before the House of Commons finance committee on Oct. 30.

“That would create a one-time drop in inflation of 0.6 percentage points,” said Mr. Macklem in response to a question from Conservative MP Philip Lawrence. Inflation is currently at 3.8 percent in Canada.

Mr. Macklem was visiting the committee to discuss the central bank’s latest policy decision to hold its overnight rate at 5 percent.

The central bank has been battling elevated inflation for months, and Mr. Macklem said his job is made harder by government spending.

“It would be helpful if monetary and fiscal policy was rowing in the same direction,” he said.

“Any standard economic textbook will tell you [that] if you cut government spending, that will tend to slow growth, raise the unemployment rate, and reduce inflation.”

Mr. Lawrence asked the governor if dropping the carbon tax would make his job easier given the “sizeable drop in inflation” it would create. Mr. Macklem replied it would only affect inflation for one year.

The Conservatives under Pierre Poilievre have steadily raised cost-of-living issues, accusing the Liberal government of driving up inflation with deficit spending and creating an undue burden on Canadians with surcharges on fuel.

The carbon tax adds more than 17 cents to a litre of light fuel oil in most provinces, and Ottawa seeks to raise it to more than 45 cents a litre by 2030. It adds more than 14 cents to a litre of gasoline, and it would rise to 37 cents a litre by 2030.

The Liberals partially backtracked on the surcharge a week ago, announcing a three-year pause on the federal carbon tax on heating oil. The move mostly affects the Atlantic provinces.

“We’ve heard clearly from Atlantic Canadians through our amazing Atlantic MPs that since the federal pollution price came into force, ... certain features of that pollution price needed adjusting to work for everyone,” said Prime Minister Justin Trudeau in announcing the measure on Oct. 26.

The government had previously said that Canadians receive more in climate action incentive payments than the carbon tax they pay. The Parliamentary Budget Officer disputed that claim in March.

Critics have seized on the move to say that if climate incentive payments really benefited Canadians, a pause of the surcharge on heating oil would not be necessary.

“Isn’t that an admission that the Trudeau carbon tax is making life a lot less affordable?” asked Saskatchewan Premier Scott Moe on social media on Oct. 26. He added that the pause won’t impact his province, where more than 90 percent of households heat with natural gas.

Mr. Moe said on Oct. 30 that he would stop collecting the federal carbon tax if the exemption is not extended to Saskatchewan.