A study by the University of Waterloo suggests that Canada’s carbon pricing scheme is creating large financial risks, especially for the resource sector.
The study, titled Carbon Costs and Credit Risk in a Resource-Based Economy: Carbon Cost Impact on the Z-Score of Canadian TSX 260 Companies and recently published in the Journal of Management and Sustainability, warns of “grave uncertainty” facing the Canadian economy as federally mandated carbon levies ramp up to $170 per tonne by 2030.
High-emitting industries such as mining and energy are at the greatest risk of default, placing total assets of $256 billion in jeopardy and exposing almost a quarter of Canada’s GDP. The study says carbon pricing and emissions must be included in credit risk procedures in analyses by financial lenders and regulators.
Co-author Adeboye Oyegunle, Ph.D. candidate in the School of Environment, Enterprise and Development, says lenders need to change their approach.
“Canadian banks are deeply involved in lending to carbon-intensive clients and have increased lending to those companies by billions of dollars despite their public commitments to support global climate goals,” Oyegunle said in a press release.
“If we are not proactive, these investments could create increased costs, default rates and bad debt when you put these investments into context of the changing market and new government regulations.”
The researchers applied the federal government’s carbon price regime and Toronto Stock Exchange data between 2010 and 2020 to analyze variables for predicting bankruptcy. While the results show that high-emitting carbon borrowers and banks are at the greatest risk, the study says the loss could gravely affect the rest of the economy and affordability within Canada as companies pass on increased costs to consumers.
The researchers said lenders must consider a real and a shadow carbon price in their credit risk assessments to set an appropriate interest rate for loans. They further proposed that central banks and other financial sector supervisors should start introducing indicators that measure the financial sector’s exposure to climate-related credit risks.
Despite the potential devastation, Olaf Weber, professor in the School of Environment, Enterprise and Development, does not oppose the carbon pricing, and calls for more and faster measures.
“Implementing a carbon price is a first step, but not the last one if we are to achieve an orderly transition to a low-carbon economy with minimal disruption to credit,” Weber said. “For Canada, we must analyze the financial consequences, develop risk assessment tools and indicators, and accelerate the transition to a low carbon economy.”
The Liberal Party’s platform says the federal levy would create jobs and make Canadians healthier.
“It’s a vital step to grow our economy and protect our environment [and will]reduce the pollution that threatens our clean air and oceans, and the health of Canadians,” said the document.
A spring 2022 report by the Parliamentary Budget Officer projected a “net loss” in 2030 for most households from federal carbon pricing by the time it reaches $170 a tonne.
The Conservatives oppose the carbon tax, citing impacts on the economy and cost-of-living issues. The party has introduced multiple House of Commons motions opposing carbon tax and increases, but the motions have been defeated in the House by other parties.
“Given that the government’s tax increases on gas, home heating and, indirectly, groceries, will fuel inflation, and that the Parliamentary Budget Officer reported the carbon tax costs 60 percent of households more than they get back, the government must eliminate its plan to triple the carbon tax,” read leader Pierre Poilievre’s motion in September 2022.
The Canadian Taxpayers Federation also opposes the additional tax.
“Inflation is one of the key economic issues facing Canadian families and the carbon tax is making these tough times tougher by making it more expensive to drive to work and heat our homes,” federal director Franco Terrazzano said in a press release in February 2022.
