Canada’s top banker dragged into carbon tax carveout debate

Prime Minister Justin Trudeau faced a second day of criticism over the carbon tax carveout but resolved there will be no similar breaks for other provinces.

The Liberal government has faced non-stop blowback over its recently announced three-year exemption for the carbon price on home heating oil, a costly fuel widely used in Atlantic Canada.

Even Bank of Canada governor Tiff Macklem was drawn into the debate when he appeared Monday at the House finance committee and acknowledged eliminating the carbon tax could create a one-time drop in inflation of 0.6 percentage points: theoretically, bringing the inflation rate from 3.8 per cent to 3.2 per cent.

Philip Lawrence, the Conservative MP questioning Macklem, later posted a video clip of the exchange on X, formerly known as Twitter, saying: “There you have it. #AxeTheTax and you get immediate relief for all Canadians.”

That admission was seized Tuesday by Conservative House Leader Andrew Scheer who used it to bolster the Conservatives’ rallying cry to “axe the tax.”

In question period, Scheer said the Bank of Canada confirmed the carbon tax is responsible for 16 per cent of total inflation.

Hadrian Mertins-Kirkwood, a senior researcher at the Canadian Centre for Policy Alternatives, described Scheer’s framing of Macklem’s comments as “misleading” because Scheer’s math suggests the carbon price increased inflation by 0.6 percentage points this year alone, however Macklem said the average year-over-year increase is 0.15.

Macklem made that point clear to the House committee as well. The 0.6 percentage point decrease would only last one year “and because you can only eliminate it once, the next year it would have no effect on inflation,” Macklem told the committee. On an annual basis, the carbon price adds about 0.15 percentage points to inflation, 0.6 is the estimated impact over the carbon price’s lifetime, he added.

Lawrence asked Macklem if eliminating the carbon tax — and thus bringing inflation from 3.8 per cent to 3.2 per cent — would be “helpful” and Macklem refused to offer an opinion and just repeated it would only affect inflation for one year.

A 0.6 percentage point decrease in inflation for one year doesn't structurally solve the inflation problem, said Mertins-Kirkwood. “It wouldn't really be a meaningful contribution to dealing with inflation.”

The roughly 0.15 percentage point increase to the inflation rate is “not nothing,” Mertins-Kirkwood noted, but said it's also “not a main driver.”

Other factors such as increasing energy prices, supply chain issues, corporate profits and higher rent and mortgage payments and wage increases can all cause inflation.

“You kind of have to come at this problem from all angles,” said Mertins-Kirkwood. “It's corporate profits, it's wages, its resource issues. It's all sorts of things. Carbon pricing is way, way down that list.”

On Oct. 26, Trudeau announced a three-year exemption on carbon pricing for fuel oil used to heat homes after a group of concerned Atlantic Liberal MPs advocated for changes. The three-year exemption applies across Canada but about 30 per cent of households in Atlantic Canada now use home heating oil, compared to just eight per cent in the rest of Canada, according to the federal government. During the three-year exemption, the federal government is pushing out more funding to help Atlantic Canadians make the switch from costly fuel oil to heat pumps.

Scheer and Ontario MP Adam Chambers both tied the Bank of Canada governor’s comments about the carbon price to affordability and repeated calls for the government to cancel its pollution pricing policy.

In response to Chambers, Liberal MP Taleeb Noormohamed said it's “wonderful to hear the Conservatives quoting the governor of the Bank of Canada,” noting their leader, Pierre Poilievre, previously said he would fire the Bank of Canada governor if elected.

“But it's surprising and it's wonderful because if we actually listened to what the governor of the Bank of Canada said, he said the carbon pricing was contributing 0.15 per cent to inflation, and that cutting carbon tax would have … no long-term effect on inflation and no effect past that one year,” said Noormohamed.

While the Liberals are taking heat from both the Conservatives and NDP, University of British Columbia political science professor Kathryn Harrison says Poilievre is getting a “free pass.”

“Mr. Poilievre's credibility on the carbon tax is not very good, either,” said Harrison in a phone interview with Canada’s National Observer, noting the federal party’s persistent lack of a clear or credible climate plan.

“Mr. Poilievre is holding ‘axe the tax’ rallies in British Columbia [where] the federal carbon tax doesn't even apply,” Harrison noted. “He is really emphasizing that it's a cost-of-living issue and various analyses are finding the carbon tax increase is a very small fraction of the inflation that Canadians are experiencing.

“If you want to have a serious policy to address cost of living, ‘axe the tax’ is not that,” said Harrison.

At the beginning of question period on Oct. 31, Trudeau and Poilievre went head-to-head on the carbon price carveout issue. Poilievre repeated his line that last week’s move is an admission the carbon price is unaffordable and demanded to know why the federal government won’t exempt cleaner natural gas used to heat homes across the country.

“It is amazing to me that after three failed elections in a row by the Conservatives, they still want to fight another election on denying climate change, on denying the costs of climate change,” Trudeau responded near the end of the two leaders’ exchange.

For the remainder of question period, Natural Resources and Energy Minister Jonathan Wilkinson fielded many of the Conservatives’ questions about carbon pricing.

“The focus of this program is enabling affordability, getting people off of heating oil, which is more than double on average the cost of natural gas in this country,” said Wilkinson. He described the changes, including new support for heat pump adoption in Atlantic Canada, as “an enormously important affordability measure” that will save Canadians who switch off home heating oil “upwards of $2,500 a year.”

Natasha Bulowski / Local Journalism Initiative / Canada’s National Observer