Canada's Industrial Carbon Tax Set to Worsen Investment Climate

The Industrial Carbon Tax (ICT) in Canada is set to increase to $170 per tonne by 2030, despite Ottawa's suspension of the consumer carbon tax. A new study by the Fraser Institute uses a Computable General Equilibrium model to analyze the costs of the ICT increase. The study finds that the policy will lead to a reduction in real GDP of 1.3% federally and 2.0% in Alberta.

The bulk of the costs fall on the capital side, with real after-tax labour income declining by only 0.6% nationally (0.7% in Alberta) but capital income falling by 8.0% nationally (10.8% in Alberta). This will further worsen Canada's already weak environment for investment and drive down capital formation.

The ICT increase is expected to reduce greenhouse gas emissions, with a 14.3% reduction relative to the base case. However, this falls short of Canada's 2030 Paris target. The policy costs the economy about $308 per tonne abated, which is above the carbon tax rate itself.