The Impact of a Pan-Canadian Carbon Pricing Levy on PBO’s GDP Projection

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In PBO’s April 2018 Economic and Fiscal Outlook (EFO), we incorporated the economic impact of a carbon pricing levy, rising to $50 per tonne in 2022, that would apply over our medium-term projection horizon.

We projected that real GDP would be 0.5 per cent ($10 billion) lower in 2022 compared to a scenario without the carbon pricing levy. PBO’s GDP impact was based, in large part, on analysis conducted by the Ecofiscal Commission in 2016.

PBO’s GDP impact was expressed relative to a scenario in which carbon pricing does not take place. Under this hypothetical “counterfactual” scenario, there is no carbon pricing levy, either at the federal level or at the provincial-territorial level. The rationale for using a no-carbon-pricing scenario was to show the impact that a carbon pricing levy would have on our economic projection given that we did not account for it in our previous EFO.

Based on our assessment of current policy trends at the provincial level, we chose to analyse the carbon pricing levy as if the revenues generated from the levy would be returned through provincial and territorial governments to households as lump-sum payments. We judged that this assumption was the most appropriate for our projection and provided references to provincial programs to highlight the relatively high-cost recycling policies currently in place.

Our estimate of the impact of a Canada-wide carbon pricing levy—consistent with the levy under the federal carbon pricing backstop—is broadly in line with Environment and Climate Change Canada’s (ECCC) estimated impact of measures under the Pan-Canadian Framework published in 2016. ECCC estimated that measures under the PCF, including carbon pricing but excluding infrastructure investments and technology incentives, would reduce the level of GDP by 0.35 per cent in 2022.

While PBO’s estimate is based on coverage of 70 per cent of emissions, consistent with the levy under the federal backstop, ECCC’s estimate covers a broader source of emissions. However, ECCC’s estimated impact is expressed relative to their 2016 reference scenario that already included the effects of significant policies at the provincial level (e.g., British Columbia’s carbon price levy, Ontario and Quebec’s cap-and-trade systems, Alberta’s policy, etc.). Those provincial policies were not included in PBO’s counterfactual scenario. If ECCC’s reference scenario was adjusted to remove those policies, their estimated GDP impact would be larger in absolute terms (i.e., more negative) than their reported estimate of -0.35 per cent.

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