A Distributional Analysis of the Federal Fuel Charge – Update
This report provides an update of PBO’s distributional analysis of the federal fuel charge.
Summary
This report provides an update of PBO’s distributional analysis of the federal fuel charge to include recent policy changes and GHG emissions projections, as well as updated microsimulation data and computable general equilibrium (CGE) modelling.
To address the CGE modelling oversight in our March 2022 and March 2023 reports, our updated analysis provides estimates of household net costs that incorporate the economic impact of the fuel charge only. Moreover, given the provincial focus of our analysis, we have used estimates of the economic impact of the fuel charge provided by Environment and Climate Change Canada (ECCC) from their 10‑province and 3-territory, multi-region, multi-sector CGE model of the Canadian economy, EC-PRO.
- ECCC estimates that the fuel charge rising to $170 per tonne in 2030-31 will reduce real GDP in backstop provinces (that is, all provinces except Quebec and British Columbia) by 0.6 per cent and reduce emissions by almost 13 million tonnes in 2030 relative to levels projected under a counterfactual scenario without the fuel charge.
Consistent with our previous reports, our updated analysis does not account for the benefits of reducing Canada’s emissions by, for example, reducing the economic costs of climate change. Further, our updated analysis does not provide estimates of the impacts of alternative policies that would achieve an equivalent reduction in emissions.
- PBO does not provide economic, fiscal or climate policy recommendations to parliamentarians, nor does PBO provide comparative policy or cost-benefit analyses. PBO does not initiate analysis to identify policy options or optimal policy decisions.
In PBO’s recent distributional analyses, the economic impact of carbon pricing was presented relative to a counterfactual scenario in which carbon pricing did not exist. Such a scenario was considered to incorporate the economic impact of carbon pricing into household incomes. PBO’s counterfactual scenario should not be seen as an alternative policy option of “doing nothing”. Estimates of the impact of a given policy are often measured relative to a scenario without the policy in question, with the counterfactual serving as a “control” scenario.
- The counterfactual scenario in this report, prepared by ECCC, removes only the fuel charge and maintains all other emissions-reduction measures, including output-based pricing systems (also referred to as large-emitter trading systems).
Key results
Household net cost of the federal fuel charge (fiscal impact only)
Our “fiscal impact only” estimates of household net cost include the federal fuel charge paid directly and indirectly, as well as the related Goods and Services Tax (GST) paid, less the Canada Carbon Rebate received. These estimates, however, do not incorporate the loss in employment and investment income from the fuel charge as a distinct cost to the household.
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Considering only the fiscal impact of the federal fuel charge, in 2030-31, we estimate that the average household in each of the backstop provinces will see a net gain, receiving more from the Canada Carbon Rebate than the total amount they pay in the federal fuel charge (directly and indirectly) and related GST. See Table 1.
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Moreover, in 2030-31, for all backstop provinces, we estimate that the average household in each income quintile will see a net gain—except for the average household in the highest income quintile in Prince Edward Island, Nova Scotia and New Brunswick—when only the fiscal impact of the federal fuel charge is considered.
Relative to household disposable income, the fiscal-only impact of the federal fuel charge is progressive. That is, lower income households see larger net gains compared to higher income households, reflecting the per capita nature of the Canada Carbon Rebate.
- We estimate that the largest net gain in 2030-31 is for the average household in the lowest income quintile in Saskatchewan (4.5 per cent of disposable income); the largest net cost in 2030-31 is for the average household in the top income quintile in Prince Edward Island (0.1 per cent of disposable income).
Broadly speaking, our updated estimates (fiscal impact only) show larger net gains (lower net costs) for average households across income quintiles in backstop provinces compared to our March 2023 distributional analysis. This revision reflects changes to the projection of emissions subject to the federal fuel charge and changes to assumptions underlying our interprovincial input-output model simulations.
Household net cost of the federal fuel charge (fiscal and economic impacts)
To provide a broader measure of the net cost to households in backstop provinces, we incorporate estimates of the loss in employment and investment income from the fuel charge—the “economic impact”—as an additional cost. Estimates of the economic impact capture the loss in employment and investment income that would result from the fuel charge in a general equilibrium, or macroeconomic, setting.
When the economic impact of the federal fuel charge is combined with the fiscal impact, the net cost increases for the average household across all income quintiles, reflecting the overall negative economic impact of the fuel charge.
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In 2030-31, taking into consideration both fiscal and economic impacts, we estimate that the average household in each of the backstop provinces will see a net cost, paying more in the federal fuel charge and GST, as well as receiving lower incomes (due to the fuel charge), compared to the Canada Carbon Rebate they receive and the lower net taxes they pay (due to lower incomes). See Table 3.
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Moreover, in 2030-31, for all backstop provinces, we estimate that the average household in the top three income quintiles will face a net cost when both fiscal and economic impacts of the federal fuel charge are considered.
That said, relative to disposable income, our estimates of household net cost (fiscal and economic impacts) of the federal fuel charge show a more progressive impact compared to the fiscal-only impact estimates. Given that the fuel charge lowers employment and investment income, which makes up a larger share of total income for higher income households, their net cost is higher.
- In 2030-31, accounting for both fiscal and economic impacts, we estimate that the largest net gain is for the average household in the lowest income quintile in Saskatchewan (4.0 per cent of disposable income); the largest net cost is for the average household in the top income quintile is also in Saskatchewan (1.8 per cent of disposable income).
Our updated estimates (fiscal and economic impacts) show lower net costs for average households across income quintiles in backstop provinces compared to our March 2023 distributional analysis. This reflects lower “fiscal” costs of the fuel charge and lower “economic” costs based on ECCC’s estimates from EC-PRO that included the removal of the fuel charge only. That said, consistent with our March 2023 report, the updated estimates continue to show that the average household across most income quintiles will face a net cost when both fiscal and economic impacts of the federal fuel charge are considered.
Given the structure of the federal fuel charge, the overall budgetary impact will be limited to the reduction in net personal income tax revenues (due to the economic impact of the fuel charge on employment and investment income), which is only partially offset by higher GST revenue. We estimate that the federal fuel charge will reduce the budgetary balance (that is, increase the budgetary deficit) by $1.5 billion in 2024-25 and ultimately by $4.0 billion in 2030-31.
GHG emissions reductions under carbon pricing – ECCC estimates
Environment and Climate Change Canada also provided the PBO with EC-PRO estimates of the reduction in GHG emissions attributable to the fuel charge, corresponding to its estimated economic impacts.
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ECCC estimates that the fuel charge in backstop provinces will account for almost 13 million tonnes (Mt) of emissions reductions in 2030 compared with what would have been emitted without the fuel charge.
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At the national level, ECCC estimates that the (equivalent) fuel charge in all provinces and territories will account for 15 Mt of emissions reductions in 2030 and will lower real GDP by 0.7 per cent relative to its level projected under the counterfactual scenario without the fuel charge.
In addition, ECCC provided the PBO with EC-PRO estimates of emissions reductions from the fuel charge and large-emitter trading systems combined (that is, carbon pricing in all provinces and territories).
- ECCC estimates that carbon pricing in Canada will account for 62 Mt of emissions reductions in 2030 and will lower real GDP by 0.9 per cent relative to a scenario without carbon pricing, but with all other emissions-reduction measures maintained.
EC-PRO estimates from ECCC suggest that large-emitter trading systems will be responsible for most of the GHG emissions reductions from carbon pricing in Canada—consistent with results from the Canadian Climate Institute. Moreover, ECCC’s estimates suggest that (per Mt) emissions reductions from large-emitter trading systems are significantly less costly, in terms of their impact on Canadian real GDP.
Introduction
Background
With the coming into force of the federal carbon pricing system in 2018, PBO took steps to adjust its medium-term economic and fiscal projections to reflect, based on external estimates, the impact of carbon pricing on the Canadian economy.[^1] PBO then developed its analytical capacity to generate independent estimates of the impact of carbon pricing on the Canadian economy using a computable general equilibrium (CGE) model. These reports were published annually over 2019 to 2021.[^2]
Over the same period, PBO also provided parliamentarians with independent estimates of the distributional impacts of federal carbon pricing that were published in separate reports.[^3] These estimates, however, did not incorporate the “economic impact” of the fuel charge that is, the loss in household employment and investment income.
Prior to March 2022, following PBO reports on the economic impact of carbon pricing (showing an overall negative impact)[^4] and on the distributional impacts on households of federal carbon pricing (showing most households receiving rebates in excess of the fuel charges paid), PBO received questions from parliamentarians and the media regarding the apparent inconsistency between the two streams of reports.
To address these questions, PBO’s March 2022 report incorporated the economic impact of carbon pricing into its distributional analysis to reflect households’ loss in employment and investment income.[^5] In March 2023, PBO published an update of the March 2022 report, A Distributional Analysis of the Federal Fuel Charge under the 2030 Emissions Reduction Plan, including additional provinces where the federal fuel charge applied.
Following an April 2024 review of the CGE analysis of carbon pricing that had been conducted for PBO’s March 2022 report, staff discovered that both the fuel charge and the (federal-equivalent) output-based pricing system (OBPS) had inadvertently been removed in the counterfactual scenario.[^6] Consequently, estimates of household net costs incorporating “fiscal and economic impacts” published in these distributional analyses, reflected the broader economic impact of federal-equivalent carbon pricing that is, the fuel charge and the OBPS.
Updated analysis
This report provides an update of PBO’s distributional analysis of the federal fuel charge to include recent policy changes, new greenhouse gas (GHG) projections and updated microsimulation data. To address the CGE modelling oversight in our March 2022 and March 2023 reports, our updated analysis provides estimates of household net costs that incorporate the economic impact of the fuel charge only.
Our updated analysis includes recent policy changes to reflect the new allocation[^7] of federal fuel charge proceeds (93 per cent) returned to households and the temporary exemption of the fuel charge on light fuel oil (from November 9, 2023 to March 31, 2027).[^8] In addition, this analysis includes New Brunswick, where the federal fuel charge was effective as of July 1, 2023.
Our updated analysis uses emissions projections from Environment and Climate Change Canada, based on its E3MC simulation model, that were published in December 2023.[^9] We adopt ECCC’s Additional Measures scenario, which includes all federal, provincial, and territorial policies and measures that were in place as of August 2023, as well as those that have been announced but have not been fully implemented. Further, we use ECCC’s corresponding projections of fuel charge proceeds[^10] to determine the envelope for proceeds returned to households in backstop provinces (that is, the Canada Carbon Rebate) and to derive projected emissions under the federal fuel charge.
Our updated estimates of household net costs (“fiscal impact only”) are calculated using an interprovincial input-output model based on Statistics Canada’s 2019 Supply and Use Tables and household spending data from Statistics Canada’s microsimulation database and model SPSD/M[^11] (version 30.1).
On June 13, ECCC published its estimates of the economic impacts of carbon pricing[^12] (that is, the fuel charge and OBPS) based on its 10-province and 3-territory, multi-region, multi-sector CGE model of the Canadian economy (EC‑PRO)[^13] that had been provided to the PBO in May under Information Request IR0776.[^14] In July, under Information Request IR0790, PBO requested and received from ECCC, its estimates of the economic impacts of the fuel charge only.[^15]
In updating our estimates of household net costs incorporating “fiscal and economic impacts”, we have used ECCC’s estimates of the economic impacts of the fuel charge from EC-PRO instead of estimates from our (national) CGE model of the Canadian economy. Given the provincial focus of our distributional analysis, we judge that EC‑PRO, with its provincial structure and detailed modelling of sectoral measures, should provide more accurate estimates of the economic impacts of the fuel charge in each province under the federal backstop.[^16] Moreover, at the national level, ECCC’s estimates of the economic impacts of carbon pricing (that is, including both the fuel charge and OBPS) published in June, are broadly in line with PBO’s estimates that were used in our March 2022 and March 2023 distributional analyses, based on the CGE model ENVISAGE.[^17]
The following section highlights key limitations of PBO’s carbon pricing analysis. The subsequent sections present our updated estimates of the net cost of the federal fuel charge to households in provinces under the federal backstop, incorporating the fiscal impact only and incorporating both fiscal and economic impacts, consistent with the structure in our previous reports. The next section presents PBO’s estimates of the budgetary impacts of the federal fuel charge from the Government’s perspective. The final section of the report provides ECCC’s estimates of GHG emissions reductions under carbon pricing. Appendices A to C provide methodological detail and additional results.
Key limitations of PBO’s carbon pricing analysis
Comparative policy analysis
PBO does not provide economic, fiscal or climate policy recommendations to parliamentarians. Nor does PBO provide comparative policy or cost-benefit analyses. PBO produces a baseline economic and fiscal projection to provide parliamentarians with an independent outlook for the Canadian economy and the Government’s finances. The projection also serves as the basis for costing proposals under the PBO’s legislative mandate.
PBO’s distributional analyses of the federal fuel charge do not provide estimates of the impacts of alternative policies or measures that would achieve an equivalent reduction in GHG emissions. In recent reports, aside from mentioning that “[t]he general consensus among economists is that explicit carbon pricing is the most cost-effective approach to reducing GHG emissions”,[^18] PBO has not assessed the policy merits of carbon pricing or alternative approaches to reducing GHG emissions.
Providing comparative policy analysis is outside the scope of the PBO’s mandate. Further, in supporting parliamentarians, PBO does not initiate analysis to identify policy options or optimal policy decisions.
Counterfactual scenarios
In PBO’s recent distributional analyses, the economic impact of carbon pricing was presented relative to a counterfactual scenario in which carbon pricing did not exist. Such a scenario was considered to incorporate the economic impact of carbon pricing into household incomes.
PBO’s counterfactual scenario without carbon pricing should not be seen as an alternative policy option of “doing nothing” such that if the economic impact of carbon pricing is negative then it should be jettisoned, and the Government should adopt a do-nothing approach to reduce Canada’s GHG emissions.
Estimates of the impact of a given policy are often measured, or illustrated, relative to a scenario without the policy in question, with the counterfactual serving as a “control” scenario. For example, in its analysis of the impact of carbon pricing on reducing Canada’s emissions, Environment and Climate Change Canada also considered a counterfactual scenario without carbon pricing.[^19]
In addition, the counterfactual scenario in PBO’s March 2022 and 2023 distributional analysis was not a scenario in which all countries “did nothing” in terms of policies to reduce global GHG emissions. Rather, it was a scenario without carbon pricing in Canada only—similar to ECCC’s analysis of emissions reduction—which would have resulted in higher-than-projected GHG emissions from Canada only.
Benefits of reducing Canada’s GHG emissions
In its March 2022 and 2023 distributional analysis—and indeed in all its reports on carbon pricing since 2018—PBO clearly indicated that it did not account for the benefits of reducing Canada’s GHG emissions.
However, as PBO has noted, Canada’s own emissions are not large enough to materially impact climate change and therefore their reduction would not materially affect the Canadian economy.[^20] Of course, significant reductions in global emissions would help to lower the economic costs of climate change in Canada and elsewhere.
PBO has also noted that Canada’s primary means of limiting the economic costs of climate change are through participation in a globally coordinated emissions reduction regime. This does not mean that Canada should be a “free rider” and “do nothing” to reduce its own emissions. Rather, by significantly reducing its own GHG emissions, Canada will actively contribute to the collective effort to limit the impacts of climate change.
In November 2022, PBO published its report, Global greenhouse gas emissions and Canadian GDP, which was a first step in reporting the economic impacts of climate change to parliamentarians.[^21] This report focused on changing weather patterns (in terms of temperature and precipitation) and estimated the impact on Canada’s real GDP over the long term if current changes in weather patterns persisted along with future changes to weather patterns (higher-still temperature and precipitation). The baseline scenario assumed that all climate commitments made by governments around the world (even if the required policies were not yet fully specified) would “be met in full and on time”.
To provide an illustrative estimate of the economic impact of reducing global emissions under our baseline scenario, we considered an alternative scenario in which global policies remained closer to current settings and global climate commitments were not met. We estimated that the level of Canadian real GDP in 2100 would be approximately three-quarters of a percentage point lower compared to the baseline scenario in which all countries fully met their climate commitments. The report, however, noted that our estimate likely understates the negative impact on GDP “given that it does not capture exceptional increases in severe climate events that scientists warn would occur as global temperatures rise significantly above key thresholds.”
In its June 2024 publication of carbon pricing data, ECCC noted that “[a] full economic assessment of carbon pricing cannot be done without considering the benefits of reducing emissions and the costs of not taking action.”[^22] To quantify the economic benefit of GHG emissions reduction under carbon pricing in Canada, ECCC used the social cost of carbon, which “is an estimate of the global damages associated with one tonne of carbon emitted”.[^23] In PBO’s view, the potential economic benefits of reducing Canada’s emissions based on the social cost of carbon would largely accrue to residents in other countries. That is not to say that these economic benefits should be dismissed rather, they could be considered in a cost-benefit analysis of carbon pricing, which is beyond the scope of our report and PBO’s mandate.[^24]
Household net cost of the federal fuel charge – fiscal impact
Consistent with our previous reports, the scope of our analysis is limited to estimating the distributional impact of the federal fuel charge. Recall that the federal fuel charge increased from $20 per tonne in 2019-20 to $80 per tonne in 2024-25 and is set to increase further to $170 per tonne in 2030-31.
Appendix A provides an overview of our methodology and key assumptions.
Distribution of household net costs (fiscal impact only)
Considering only the fiscal impact of the federal fuel charge, we estimate that the average household in each of the backstop provinces in 2030-31 will see a net gain (Table 1), receiving more from the Canada Carbon Rebate (CCR) than the total amount they pay in the federal fuel charge (directly and indirectly)[^25] and related Goods and Services Tax (GST). In 2030-31, the net gain for the average household in a backstop province ranges from 0.2 per cent of disposable income in Prince Edward Island to 1.0 per cent of disposable income in Saskatchewan.
Moreover, in 2030-31, for all backstop provinces, we estimate that the average household in each income quintile will see a net gain—except for the average household in the highest income quintile in Prince Edward Island, Nova Scotia and New Brunswick—when only the fiscal impact of the federal fuel charge is considered. It is important to note that our estimates for each income quintile represent the average household within an income group—there are households within the same group that will face higher or lower net costs.
Our finding that there is a net gain for the average household across almost all income quintiles in backstop provinces—when only the fiscal impact is considered—reflects the fuel charges paid by firms (producing for domestic and foreign markets), of which 93 per cent are recycled to households through the CCR.[^26]
Relative to household disposable income, the fiscal-only impact of the federal fuel charge is progressive. That is, lower income households face lower net costs (larger net gains) compared to higher income households, reflecting the per capita nature of the CCR.[^27] With the federal fuel charge at $170 per tonne in 2030-31, the largest net gain is for the average household in the lowest income quintile in Saskatchewan (4.5 per cent of disposable income); the largest net cost is for the average household in the top income quintile in Prince Edward Island (0.1 per cent of disposable income).
Backstop province | 1st quintile | 2nd quintile | 3rd quintile | 4th quintile | 5th quintile | Average |
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Newfoundland and Labrador | -$893 | -$971 | -$642 | -$606 | -$467 | -$713 |
Newfoundland and Labrador | -2.8% | -1.8% | -0.8% | -0.5% | -0.2% | -0.7% |
Prince Edward Island | -$491 | -$404 | -$317 | -$123 | $302 | -$204 |
Prince Edward Island | -1.6% | -0.7% | -0.4% | -0.1% | 0.1% | -0.2% |
Nova Scotia | -$598 | -$549 | -$222 | -$249 | $50 | -$313 |
Nova Scotia | -2.0% | -1.0% | -0.3% | -0.2% | 0.0% | -0.3% |
New Brunswick | -$472 | -$336 | -$240 | -$178 | $22 | -$241 |
New Brunswick | -1.5% | -0.6% | -0.3% | -0.2% | 0.0% | -0.2% |
Ontario | -$642 | -$472 | -$243 | -$277 | -$28 | -$331 |
Ontario | -1.9% | -0.7% | -0.2% | -0.2% | -0.0% | -0.3% |
Manitoba | -$793 | -$636 | -$611 | -$537 | -$126 | -$537 |
Manitoba | -2.5% | -1.1% | -0.7% | -0.4% | -0.1% | -0.5% |
Saskatchewan | -$1,424 | -$1,385 | -$1,298 | -$1,185 | -$733 | -$1,205 |
Saskatchewan | -4.5% | -2.2% | -1.4% | -0.9% | -0.3% | -1.0% |
Alberta | -$768 | -$888 | -$856 | -$339 | -$782 | -$725 |
Alberta | -2.1% | -1.3% | -0.8% | -0.2% | -0.2% | -0.5% |
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal impact only) is calculated as the federal fuel charge and related GST paid (that is the gross cost), less the Canada Carbon Rebate received. A negative cost is a “net gain”, meaning the amount of the Canada Carbon Rebate received exceeds the gross cost to the household. The 1st quintile represents the lowest household income quintile; the 5th quintile represents the highest household income quintile.
Broadly speaking, our updated estimates (fiscal impact only) show larger net gains (lower net costs) for average households across income quintiles in backstop provinces compared to our March 2023 distributional analysis. This revision reflects changes to the projection of emissions subject to the federal fuel charge and changes to assumptions underlying our interprovincial input-output model simulations.[^28] On balance, these changes resulted in downward revisions to our estimates of the cost of the federal fuel charge (fiscal impact only).
Appendix C provides our estimates of average household net cost (fiscal impact only) by income quintile over 2024-25 to 2030-31 for backstop provinces.
Household net cost of the federal fuel charge – fiscal and economic impacts
Our “fiscal impact only” estimates of household net cost include the federal fuel charge paid directly and indirectly, as well as the related Goods and Services Tax (GST) paid, less the Canada Carbon Rebate received. These estimates, however, do not incorporate the loss in employment and investment income from the fuel charge as a distinct cost to the household. Adding the economic (“source-side”) impact of the federal fuel charge to our fiscal-only impact (“use-side”) estimates provides a broader measure of the net cost to households in backstop provinces.[^29]
Economic impacts of the fuel charge – ECCC estimates
Estimates of the economic impacts of the fuel charge only are based on ECCC’s multi-region, multi-sector CGE model of the Canadian economy, EC‑PRO, and were provided to the PBO under Information Request IR0790. To produce these estimates, ECCC simulated a reference scenario that included all announced measures[^30] and a counterfactual scenario in which only the fuel charge was removed, and all other emissions-reduction measures were maintained, including output-based pricing systems (also referred to as large-emitter trading systems (LETS)).[^31]
Table 2 presents ECCC’s estimates of the economic impacts of the fuel charge in backstop provinces in 2030. Appendix B provides the annual impacts over 2024 to 2030 for backstop provinces.
ECCC’s estimated impact of the fuel charge on real GDP in 2030 in backstop provinces is broadly uniform, averaging 0.6 per cent. The impact in Newfoundland and Labrador (in absolute terms) is somewhat larger, reflecting sharper reductions in output (gross value added) in the buildings and electricity sectors. ECCC’s estimated impacts on economy-wide labour and capital incomes are also broadly uniform, with the exception of Saskatchewan (due in part to larger reductions in the agriculture and transportation sectors).
While not strictly comparable to our March 2022 estimates of economic impacts from the CGE model ENVISAGE (which included the fuel charge and federal-equivalent OBPS), ECCC’s estimates of the impact of the fuel charge on labour and capital incomes in backstop provinces in 2030 are roughly 40 per cent smaller compared to our March 2022 estimates at the national level.[^32]
Distribution of household net costs (fiscal and economic impacts)
Estimates of the economic impact capture the loss in employment and investment income that would result from the federal fuel charge in a general equilibrium, or macroeconomic, setting. Differential impacts on employment and capital income, combined with differences in the distribution of employment and investment income drive the variation across income groups.
In 2030-31, taking into consideration both fiscal and economic impacts, we estimate that the average household in each of the backstop provinces will see a net cost (Table 3), paying more in the federal fuel charge and GST, as well as receiving lower incomes (due to the fuel charge), compared to the CCR payments they receive and lower net taxes they pay (due to lower incomes).[^33] In 2030-31, the net cost for the average household in a backstop province ranges from 0.5 per cent of disposable income in New Brunswick to 0.7 per cent of disposable income in Saskatchewan.
Moreover, for all backstop provinces, we estimate that the average household in the top three income quintiles will face a net cost. Compared to the fiscal-only impact estimates, the net cost increases for the average household across all income quintiles, reflecting the overall negative economic impact of the fuel charge.
That said, relative to disposable income, our estimates of household net cost (fiscal and economic impacts) of the federal fuel charge show a more progressive impact compared to the fiscal-only impact estimates. Given that the fuel charge lowers employment and investment income, which makes up a larger share of total income for higher income households, their net cost is higher.
In 2030-31, accounting for both fiscal and economic impacts, we estimate that the largest net gain is for the average household in the lowest income quintile in Saskatchewan (4.0 per cent of disposable income); the largest net cost is for the average household in the top income quintile is also in Saskatchewan (1.8 per cent of disposable income).
Our updated estimates (fiscal and economic impacts) show lower net costs for average households across income quintiles in backstop provinces compared to our March 2023 distributional analysis. This reflects lower “fiscal” costs of the fuel charge and lower “economic” costs based on ECCC’s estimates from EC-PRO that included the removal of the fuel charge only.
That said, consistent with our March 2023 report, the updated estimates continue to show that the average household across most income quintiles will face a net cost when both fiscal and economic impacts of the federal fuel charge are considered.
Backstop province | 1st quintile | 2nd quintile | 3rd quintile | 4th quintile | 5th quintile | Average |
---|---|---|---|---|---|---|
Newfoundland and Labrador | -$798 | -$612 | $183 | $1,164 | $3,314 | $652 |
Newfoundland and Labrador | -2.5% | -1.1% | 0.2% | 1.0% | 1.5% | 0.6% |
Prince Edward Island | -$443 | -$137 | $202 | $753 | $2,488 | $575 |
Prince Edward Island | -1.5% | -0.2% | 0.2% | 0.6% | 1.1% | 0.6% |
Nova Scotia | -$500 | -$218 | $370 | $654 | $2,593 | $580 |
Nova Scotia | -1.6% | -0.4% | 0.5% | 0.6% | 1.2% | 0.6% |
New Brunswick | -$410 | -$120 | $214 | $609 | $1,991 | $457 |
New Brunswick | -1.3% | -0.2% | 0.3% | 0.5% | 0.9% | 0.5% |
Ontario | -$540 | -$87 | $588 | $1,085 | $3,467 | $903 |
Ontario | -1.6% | -0.1% | 0.6% | 0.7% | 1.1% | 0.7% |
Manitoba | -$670 | -$211 | $218 | $817 | $3,295 | $693 |
Manitoba | -2.1% | -0.4% | 0.3% | 0.7% | 1.3% | 0.6% |
Saskatchewan | -$1,275 | -$698 | $155 | $1,316 | $4,970 | $894 |
Saskatchewan | -4.0% | -1.1% | 0.2% | 1.0% | 1.8% | 0.7% |
Alberta | -$641 | -$400 | $130 | $1,265 | $3,122 | $697 |
Alberta | -1.8% | -0.6% | 0.1% | 0.8% | 1.0% | 0.5% |
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal and economic impacts) is calculated as the federal fuel charge and related GST paid, plus the income loss due to the economic impact of the fuel charge (that is the gross cost), less the Canada Carbon Rebate received and the reduction in net taxes paid (due to lower incomes). A negative cost is a “net gain”, meaning the amount of Canada Carbon Rebate received and reduction in net taxes paid exceeds the gross cost to the household. The 1st quintile represents the lowest household income quintile; the 5th quintile represents the highest household income quintile.
Appendix C provides our estimates of average household net cost (fiscal and economic impacts) by income quintile over 2024-25 to 2030-31 for backstop provinces.
Budgetary impacts of the federal fuel charge
Table 4 presents updated estimates of the impact of the federal fuel charge on federal budgetary revenues and program spending over 2024-25 to 2030-31. Our estimates are partial in nature. They include federal fuel charge proceeds and GST revenues from the backstop provinces (that is, all provinces except Quebec and British Columbia) and they incorporate only reductions in net personal income taxes[^34] that arise from the economic impact of lower household employment and investment income in backstop provinces.
Based on projections from ECCC, with the federal fuel charge set at $80 per tonne in 2024-25, the Government will collect $13.0 billion from backstop provinces. With the fuel charge rising to $170 per tonne in 2030-31, we project that the Government will collect $24.4 billion in proceeds from backstop provinces.
With the return of fuel charge proceeds to households and provincial governments through higher program spending, there is no direct impact on the budgetary balance.[^35]
However, the Government will also collect revenue from the GST on its fuel charge. We estimate that $0.4 billion in GST from the fuel charge will be collected in 2024-25, rising to $0.7 billion in 2030-31.
When the economic impact of the fuel charge is incorporated, we observe a decrease in employment and investment income, which leads to a reduction in net federal personal income tax (PIT) revenues in the backstop provinces. In 2024-25, we estimate that the federal fuel charge will reduce net PIT revenues by $1.9 billion. The impact on net PIT revenues is projected to reach $4.8 billion in 2030-31.
Given the structure of the federal fuel charge, the overall budgetary impact will be limited to the reduction in net personal income tax revenues (due to the economic impact of the fuel charge on employment and investment income), which is only partially offset by higher GST revenue. We estimate that the federal fuel charge will reduce the budgetary balance (that is, increase the budgetary deficit) by $1.5 billion in 2024-25 and ultimately by $4.0 billion in 2030-31.
GHG emissions reductions under carbon pricing – ECCC estimates
In response to Information Request IR0790, ECCC also provided estimates of the reduction in GHG emissions attributable to the fuel charge based on its EC-PRO reference (all announced measures) and counterfactual scenario simulations. ECCC estimates that the fuel charge in backstop provinces will account for almost 13 million tonnes (Mt) of GHG emissions reductions in 2030 compared with what would have been emitted without the fuel charge (Table 5).
At the national level, ECCC estimates that the (equivalent) fuel charge in all provinces and territories will account for 15 Mt of GHG emissions reductions in 2030 and will lower real GDP by 0.7 per cent relative to a scenario without the fuel charge, but with all other measures maintained, including large-emitter trading systems (Table 6). ECCC’s estimate of 15 Mt of GHG emissions reductions in 2030 from the fuel charge is somewhat lower than the 19 to 22 Mt range estimated by the Canadian Climate Institute in its March 2024 analysis.[^36]
In addition, under Information request IR0790, ECCC provided estimates of emissions reductions from the fuel charge and LETS combined (that is, carbon pricing in all provinces and territories) based on the EC‑PRO reference scenario (all announced measures) and a separate counterfactual scenario that excluded both the fuel charge and LETS, but included all other emissions-reduction measures. ECCC estimates that carbon pricing in Canada will account for 62 Mt of GHG emissions reductions in 2030 and will lower real GDP by 0.9 per cent relative to a scenario without carbon pricing, but with all other emissions-reduction measures maintained.[^37]
EC-PRO estimates from ECCC suggest that LETS will be responsible for most of the GHG emissions reductions from carbon pricing in Canada—consistent with the Canadian Climate Institute’s March 2024 analysis. Moreover, ECCC’s estimates suggest that (per Mt) emissions reductions from LETS are significantly less costly, in terms of their impact on Canadian real GDP, compared to the fuel charge.
In its June 2024 publication of carbon pricing data, which was based on analysis undertaken in the fall of 2023 (and provided to the PBO under Information Request IR0776), ECCC estimated the reduction in GHG emissions from carbon pricing (fuel charge and LETS) in Canada to be 78 Mt in 2030. ECCC’s estimate (prepared in March 2024) of 62 Mt was based on updated projection scenarios and supply and use tables.
Moreover, ECCC’s March 2024 counterfactual scenario without carbon pricing included 13 Mt in flexible credit purchases permitted under the cap on oil and gas sector emissions, which was not reflected in ECCC’s fall 2023 analysis. Adjusting ECCC’s March 2024 counterfactual scenario by 13 Mt to account for these credits would increase the emissions reduction from carbon pricing from 62 Mt to 75 Mt—in line with the estimate of 78 Mt in ECCC’s fall 2023 analysis. The impact of carbon pricing on Canadian real GDP in 2030 is similar in both vintages of ECCC’s estimates (0.9 per cent).
Methodology and key assumptions
Our “fiscal impact only” estimates of household net cost of the federal fuel charge in backstop provinces[^38] include:
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direct costs (from the consumption of fuel for private transportation and residential use);
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indirect costs (from the consumption of non-energy goods and services with the fuel charge embedded);
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Goods and Services Tax paid on the federal fuel charge for household consumption of both energy and non-energy goods and services; and,
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the Canada Carbon Rebate.
The direct cost of the federal fuel charge for households in a backstop province is taken directly from ECCC’s 2023 Additional Measures projection, based on its E3MC simulation model.[^39] The direct cost related to fuel consumption for private transportation and residential use incorporates full passthrough of the federal fuel charge to households. In addition, ECCC’s projection includes all federal, provincial, and territorial policies and measures that were in place as of August 2023, as well as those that have been announced but have not been fully implemented. In principle, ECCC’s 2023 Additional Measures projection (based on its E3MC model) reflects, to some degree, changes in household behaviour in response to the fuel charge, as well as changes due to other policies and measures. Direct costs in each province are allocated to household income quintiles using Statistics Canada’s 2019 data on household spending by household income quintile.[^40] Over the projection horizon, this imposes proportional changes in fuel consumption across income quintiles in response to the fuel charge.[^41]
The indirect cost to households captures the federal fuel charge that is passed through by firms to the prices of non-energy goods and services that households consume. We use an interprovincial input-output (I-O) model[^42] based on Statistics Canada’s 2019 Supply and Use Tables (SUT).[^43] To calculate the indirect cost to households, we use the interprovincial I-O model to estimate (by industry) the share of gross provincial output from household consumption in 2019.[^44] For each province under the backstop, these shares are then applied to the projection of fuel charge revenues by industry. Indirect costs from interprovincial imports of non-energy goods and services (corresponding to household consumption) from backstop provinces are calculated in a similar manner. To allocate indirect costs to household income quintiles, we use household spending data from Statistics Canada’s Social Policy Simulation Database and Model (SPSD/M).
The 5 per cent GST rate is applied to the price of most goods and services that households consume with the fuel charge included (directly and indirectly). Using Statistics Canada’s 2019 SUT we calculate effective GST rates for each commodity category, which are then applied to the federal fuel charge paid by households by commodity.
The projection of fuel charge proceeds collected in each backstop province is taken directly from ECCC’s 2023 Additional Measures projection.[^45] All federal fuel charge proceeds collected in a backstop province are returned (or “recycled”) to that province: 93 per cent are returned to households through the Canada Carbon Rebate, 5 per cent to small- and medium-sized enterprises and 2 per cent to Indigenous governments. Canada Carbon Rebate amounts are based on household composition. To calculate average rebate amounts by income quintile in each backstop province, we use the average household composition structure (by income quintile) from Statistics Canada’s SPSD/M.
Our “fiscal impact only” estimates of household net cost include the federal fuel charge paid directly and indirectly, as well as the related Goods and Tax (GST) paid, less the Canada Carbon Rebate received. These estimates, however, do not incorporate the loss in employment and investment income from the fuel charge as a distinct cost to the household.
Our “fiscal and economic impacts” estimates of household net cost of the federal fuel charge include, in addition to the above components:
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the economic impact of the fuel charge on household employment and investment income; and,
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the reduction in net taxes[^46] paid resulting from lower household employment and investment income.
We use ECCC’s estimates of the impact of the fuel charge on labour and capital income from its CGE model EC-PRO. In the case of employment income, for each year of the projection, we apply the percentage change in (constant dollar) labour income by industrial sector from the EC-PRO results to the baseline level of employment income (under current policy) in the corresponding sector in SPSD/M to determine the associated cost. In the case of investment income, for each year of the projection, we apply the percentage change in (constant dollar) capital income from the EC-PRO results to the baseline level of investment income (under current policy) in SPSD/M to determine the associated cost.[^47]
Based on ECCC’s EC-PRO estimates, the economic impact of the federal fuel charge will result in lower employment and investment income for households in backstop provinces, which in turn will reduce their net taxes paid. We estimate the reduction in net taxes due to lower employment income and investment income using SPSD/M.
Economic impacts of the fuel charge – ECCC estimates
Environment and Climate Change Canada.
Environment and Climate Change Canada.
Impacts are measured as the percentage difference between the projected level of the economic indicator under a scenario with the fuel charge and its projected level in the same year under a scenario without the fuel charge. Labour and capital income are expressed in real (inflation-adjusted) terms.
Household net costs by province, 2024-25 to 2030-31
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal impact only) is calculated as the federal fuel charge and related GST paid less the CCR. Net cost (fiscal and economic impacts) is calculated as the federal fuel charge and related GST paid, plus the income loss due to the economic impact of the fuel charge less the CCR and the reduction in net taxes paid (due to lower incomes). Q1 (Q5) corresponds to the lowest (highest) household income quintile.
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal impact only) is calculated as the federal fuel charge and related GST paid less the CCR. Net cost (fiscal and economic impacts) is calculated as the federal fuel charge and related GST paid, plus the income loss due to the economic impact of the fuel charge less the CCR and the reduction in net taxes paid (due to lower incomes). Q1 (Q5) corresponds to the lowest (highest) household income quintile.
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal impact only) is calculated as the federal fuel charge and related GST paid less the CCR. Net cost (fiscal and economic impacts) is calculated as the federal fuel charge and related GST paid, plus the income loss due to the economic impact of the fuel charge less the CCR and the reduction in net taxes paid (due to lower incomes). Q1 (Q5) corresponds to the lowest (highest) household income quintile.
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal impact only) is calculated as the federal fuel charge and related GST paid less the CCR. Net cost (fiscal and economic impacts) is calculated as the federal fuel charge and related GST paid, plus the income loss due to the economic impact of the fuel charge less the CCR and the reduction in net taxes paid (due to lower incomes). Q1 (Q5) corresponds to the lowest (highest) household income quintile.
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal impact only) is calculated as the federal fuel charge and related GST paid less the CCR. Net cost (fiscal and economic impacts) is calculated as the federal fuel charge and related GST paid, plus the income loss due to the economic impact of the fuel charge less the CCR and the reduction in net taxes paid (due to lower incomes). Q1 (Q5) corresponds to the lowest (highest) household income quintile.
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal impact only) is calculated as the federal fuel charge and related GST paid less the CCR. Net cost (fiscal and economic impacts) is calculated as the federal fuel charge and related GST paid, plus the income loss due to the economic impact of the fuel charge less the CCR and the reduction in net taxes paid (due to lower incomes). Q1 (Q5) corresponds to the lowest (highest) household income quintile.
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal impact only) is calculated as the federal fuel charge and related GST paid less the CCR. Net cost (fiscal and economic impacts) is calculated as the federal fuel charge and related GST paid, plus the income loss due to the economic impact of the fuel charge less the CCR and the reduction in net taxes paid (due to lower incomes). Q1 (Q5) corresponds to the lowest (highest) household income quintile.
Office of the Parliamentary Budget Officer.
Office of the Parliamentary Budget Officer.
Net cost (fiscal impact only) is calculated as the federal fuel charge and related GST paid less the CCR. Net cost (fiscal and economic impacts) is calculated as the federal fuel charge and related GST paid, plus the income loss due to the economic impact of the fuel charge less the CCR and the reduction in net taxes paid (due to lower incomes). Q1 (Q5) corresponds to the lowest (highest) household income quintile.
Communications
Quotes
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The main finding from our updated analysis is, as we expected, consistent with our previous reports. When only the fiscal impact of the fuel charge is considered, the average household across most income quintiles will see a net gain. However, when both the fiscal and economic impacts of the fuel charge are considered, the average household across most income quintiles will face a net cost.
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Considering only the fiscal impact of the federal fuel charge, in 2030-31, we estimate that the average household in each of the backstop provinces will see a net gain, receiving more from the Canada Carbon Rebate than the total amount they pay in the federal fuel charge and related GST.
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In 2030-31, taking into consideration both fiscal and economic impacts, we estimate that the average household in the top three income quintiles will face a net cost when both fiscal and economic impacts of the federal fuel charge are considered.
Parliamentary Budget Officer