Government’s economic outlook and carbon pricing

Two seemingly unrelated events happened last week. Canada’s Finance Minister Bill Morneau held virtual pre-budget consultations and disclosed the government’s analysis of the Canadian economy. And Prime Minister Justin Trudeau achieved a climate-change agreement with most Canadian provinces to meet the country's 2030 emissions reduction targets.

These events seem unrelated primarily because there is a lack of analysis in the media of the expected economic effects of carbon pricing in Canada. But there is now a clearer picture of the weight that the Canadian economy will need to carry for some time in the future, according to the government’s analysis disclosed during the pre-budget consultations. The government’s slide show, obtained by CBC News, reveals that, from 2010 until now, the cumulative shortfall of nominal Canadian GDP has amounted to $430 billion, as compared to the Budget Outlook for 2011. According to CBC, the government expects weak annual GDP growth of just 1.8% per year on average until 2029.

So, how is this economic outlook affected by the future carbon tax? It remains unclear. One study, which puts the effect of carbon pricing on the Canadian economy in layman terms, is provided by the Price Carbon Now campaign which advocates for “broad, effective and equitable carbon pricing”. It says that the Canadian economy would grow by 39% by 2020 relative to 2006 in the absence of any carbon pricing policy, and under a carbon pricing policy the GDP will grow by 34% by 2020.

That study was based on a higher carbon price and a different introduction schedule than is envisioned in the actual climate-change accord with the provinces, therefore it cannot be used to gauge the effect of the future carbon tax. But it does state that carbon tax slows GDP growth projections. In that particular case, the GDP growth without carbon pricing between 2006 and 2020 would be 5% higher than in the carbon pricing scenario (39% vs. 34%).

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