Eliminating the Goods and Services Tax in respect of carbon pricing

Bill C-358[^1] proposes to amend the Excise Tax Act to eliminate the Goods and Services Tax (GST) in respect of carbon pricing. The Bill would remove the GST that would be paid: a) on any tax, duty or fee imposed under the Greenhouse Gas Pollution Pricing Act, such as the fuel charge and the Output-Based Pricing System (OBPS); b) on any provincial levy imposed in respect of carbon pricing, such as the cap-and-trade system in Quebec[^2] or carbon tax in British Columbia.[^3]

PBO estimates that this measure would reduce federal GST revenues by $486 million in 2023-24, increasing to $1.015 billion in 2030-31.

• Estimates are presented on an accrual basis as would appear in the budget and public accounts.
• A positive number implies a deterioration in the budgetary balance (lower revenues or higher spending). A negative number implies an improvement in the budgetary balance (higher revenues or lower spending). The value of “0” means that the cost is not material (that is, less than 500 thousand dollars).
• Totals may not add due to rounding.

Based on our interpretation, GST revenue resulting from both direct and indirect costs[^4] of federal and provincial-territorial carbon pricing would be eliminated.

PBO projected the reduction in GST revenues by multiplying final demand greenhouse gas (GHG) emissions for all commodities by a national equivalent carbon price (assuming full pass-through to market prices), and then multiplied these carbon price revenues by the effective GST rates across these commodities.

PBO used an interprovincial input-output model that simulates final demand carbon costs (both direct and indirect) to determine GHG emissions by commodity subject to the GST. The model used data released by Statistics Canada (input-output tables and provincial physical flow accounts for GHG emissions) and Environment Canada (projected sectoral GHG emissions).[^5]

The GHG emissions were adjusted to take into account the temporary pause in the federal fuel charge on heating oil, in all jurisdictions where it currently applies, until 2026‑27.

For simplicity, we assumed that a national carbon price equivalent to federal carbon pricing was applied in every province and territory given that a province or territory must meet a minimum national stringency standard, even if it chooses to use its own pricing system.[^6]

We did not examine the (potential) impact of the Bill on federal compensation to provincial governments under Comprehensive Integrated Tax Coordination Agreements. If compensation to provincial governments would be required under these agreements, the cost of this measure would be higher.

Given that the carbon price embedded in non-energy goods and services is not directly observable, there is uncertainty related to the feasibility of removing the GST related to the indirect costs of federal and provincial-territorial carbon pricing.

We assumed that the projected value of an emissions allowance under Quebec’s cap-and-trade system would be equal to the federal carbon price. However, historical data indicate that the price of an emissions allowance could be lower than the federal carbon price.[^7] There is also uncertainty surrounding projected GHG emissions through 2030-31. Projections of GHG emissions from final demand by commodity are sensitive to assumptions regarding the behavioural impact of carbon pricing.