The federal government’s move to lower the consumer carbon tax rate to zero will temporarily reduce Canada’s inflation rate by around 30 percent, according to the Bank of Canada.
Removal of the tax on April 1, also known as the federal fuel charge, will pull down the annual consumer price index inflation by about 0.7 percentage points for one year, from April 2025 to March 2026, according to the bank’s monetary policy report released April 16. Canada’s annual inflation rate was at 2.3 percent in March.
The central bank said that since the carbon tax came into effect in 2019, it has gradually pushed up the level of consumer prices each year, while eliminating the tax will undo this cumulative impact that amounts to the 0.7 percentage points difference.
The bank noted that it’s a temporary decline in inflation that will primarily be due to lower gasoline prices, as the tax has added an estimated 18 cents per litre to fuel prices since it was introduced.
Immediately after being sworn in as prime minister on March 14, Liberal Leader Mark Carney issued a directive to bring down the consumer carbon tax rate to zero.
Carney said during the Liberal leadership campaign that the tax, which was a key policy of the Liberal government, had become “too divisive,” and that he would instead put the price for emissions on “big polluters” in the industry.
Carney also said he would replace the carbon tax with a new “consumer carbon credit market” that’s integrated into Canada’s industrial pricing system. The new system would reward Canadians for making lower-emission choices, like buying electric vehicles, electric heat pumps, and energy-efficient appliances, while making “big polluters pay” for those incentives, he said.
The carbon tax came into effect in 2019 at $20 per tonne and was set to slowly increase until reaching $170 per tonne in 2030. It was a way of incentivizing Canadians and businesses to transition to greener forms of energy with lower carbon emissions.
Bank of Canada governor Tiff Macklem had said in October 2023 that removing the carbon tax entirely would allow inflation to drop by 16 percent. The inflation rate in Canada at that time was 3.8 percent.
“That would create a one-time drop in inflation of 0.6 percentage points,” Macklem said when testifying before the House of Commons finance committee. He added that increased government spending was making it harder to bring down inflation and noted that dropping the carbon tax would only affect inflation for one year.
The Conservative Party has long been critical of the Liberal government’s carbon tax, saying that it was increasing the cost of food, fuel, and home heating while Canadians were going through a cost-of-living crisis.
Conservative Leader Pierre Poilievre said in March that a Tory government would remove the carbon tax for both consumers and industrial emitters and use “technology, not taxes” to reduce emissions, while also providing tax credits to reward industries that lower emissions.
