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The Bank of Canada’s carbon tax missteps

Governor Tiff Macklem's recent remarks on the carbon tax have generated more questions than answers this week

The Bank of Canada's unconventional approach to communicating its stance on carbon pricing, particularly its sporadic responses on social media, has raised eyebrows. These responses tend to delve into semantics rather than directly addressing criticisms. It's puzzling to witness the Bank of Canada engaging in this manner, as it calls into question its supposed non-partisan and impartial position in the increasingly polarized political debates surrounding the carbon tax. This strategic blunder underscores the Bank of Canada's mishandling of its communication related to carbon taxation.

This saga began in September when Governor Tiff Macklem casually mentioned during a speech in Calgary that the carbon tax contributed to about 0.15 percentage points of inflation. Notably, he didn't provide supporting data or documentation for this assertion. A similar statement had been made before the finance committee in February, but it hadn't garnered much attention at the time. However, after Macklem's September statement, proponents of the carbon tax began using his assertion as a benchmark to dismiss the concerns of carbon tax critics and convince Canadians that carbon taxing has little or no inflationary impact. Despite the absence of data, models or comprehensive analysis, many economists rallied behind this assertion.

READ: The carbon tax could impact Canada's food affordability 

This issue remained largely unexamined until Dalhousie University requested an explanation. The Bank's prompt response revealed that the 0.15 ratio only considered three components of the Consumer Price Index – natural gas, heating oil, and gasoline – all of which are retail-taxed items. This estimate failed to account for second-round or pass-through effects across the entire supply chain of other major CPI components, indicating a narrow focus in their calculations. 

On Oct. 30, Governor Macklem introduced a new angle, stating that the elimination of the carbon tax would lead to a one-time drop of 0.60 percentage points in the inflation rate due to accumulated tax increases over the years. This essentially means that, with our current inflation rate at 3.8%, the carbon tax is responsible for 16% of inflation. Although the Governor claimed that this had been the Bank's message for some time, he had not explicitly disclosed this ratio until now. This statement, due to its vagueness, raises several important questions that demand thorough examination by reporters, intellectuals, and observers.

For instance, it is crucial to understand the specific data and economic models used to arrive at the 0.6 estimate for the impact of eliminating the carbon tax on inflation. Will this estimate change as the carbon tax approaches the $170/mt mark in 2030, nearly triple its current rate? It is equally important to request a breakdown of the assumptions and variables considered in these calculations. 

READ: Decoding Canada's food inflation maze

Moreover, sensitivity analysis is vital – how does the estimate respond to changes in key assumptions like the carbon tax level and market dynamics? What historical or international examples support this estimate, and how do they align with the Canadian economic context? Equally important is an inquiry into whether the Bank considered the potential second-order effects of removing the carbon tax, such as changes in energy consumption and production, shifts in investment patterns, or impacts on other industries. Why hasn't the Bank analyzed other components of the CPI, such as food, and considered the behavioural changes resulting from fiscal adjustments across the supply chain? Prices undoubtedly influence consumer choices.

The bottom line is that transparency is paramount, and we need clear answers. As Canadians, it is imperative that we question the data presented to us rather than passively accepting it. Blindly accepting data without scrutiny can lead to disastrous policies. While decarbonizing the economy should be a priority, recent government decisions regarding heating oil tax and rebate enhancements have left many skeptical about the moral authority of carbon taxing. Canadians deserve clarity, especially when the planet's well-being comes at a cost. We need to know the price tag. 

In essence, the carbon tax communication challenges at the Bank of Canada highlight a fundamental misstep – the quantification of the carbon tax. The Bank now finds itself committed to this stance, fully aware of the consequences it carries. It gave a number, and it is too late now. In the meantime, the Bank of Canada should refrain from participating in political discussions on social media or any other platform. Doing otherwise will only impact its credibility, making it appear as a crown corporation trying to control the narrative.

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