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Many governments use carbon pricing, such as carbon tax and cap-and-trade, to mitigate greenhouse gas emissions. Critics argue these policies increase food prices, but this study examines their impact in Canadian provinces. Using a staggered difference-in-difference approach, it finds that carbon pricing leads to a 2% to 4% decrease in food prices over time. The deflationary effect is attributed to lower consumption rather than changes in farm input costs, countering claims that carbon pricing harms food affordability.
Carbon pricing is increasingly popular among nations aiming to reduce greenhouse gas emissions. As of 2023, 39 countries, including Europe, Canada, New Zealand, and Mexico, have implemented carbon pricing, covering 23% of global GHG emissions. There are two main approaches: carbon taxes, which levy a tax on each unit of pollution, and emission trading systems (ETS), which allocate tradeable emission permits. Concerns about carbon pricing’s impact on food prices have been addressed by economists who find minimal inflationary effects, and some even note deflationary impacts due to tax revenue recycling and changes in consumer preferences.
This study aims to analyze the short- and long-term effects of carbon pricing on food inflation across Canadian provinces, using difference-in-difference (DiD) methods with data from Statistics Canada and the U.S. Bureau of Labor Statistics. Results indicate a deflationary effect on food prices, particularly in the long term, largely due to reduced consumption rather than changes in farm production costs.
The history of carbon pricing in Canada began in 2007 with Quebec and Alberta implementing the first carbon tax and cap-and-trade systems, respectively. Quebec’s initial tax, targeting energy producers, had low rates and was ineffective in inducing behavioral changes. Alberta’s cap-and-trade system under the Specified Gas Emitters Regulation (SGER) required industries to reduce emission intensity or use various compliance options, excluding agriculture but leveraging it for offsets. British Columbia introduced a carbon tax in 2008, replacing Quebec’s ineffective tax with a cap-and-trade system in 2013. By the end of 2016, Alberta, British Columbia, and Quebec had active carbon pricing systems. The 2016 Pan-Canadian Framework mandated all provinces to meet federal carbon pricing benchmarks by 2018, with a federal backstop to ensure compliance. Post-2018, all provinces and territories adopted carbon pricing systems, some replacing previous ones.
The literature on the economic effects of carbon pricing is not extensive, but most studies indicate it does not significantly impact affordability. For instance, Tombe and Winter (2023) found that in British Columbia, carbon taxes increased most item prices by less than 0.3%, with a slightly higher impact on food. Similarly, Moessner (2022) reported minimal effects on food and core CPI from a $10 per ton CO2eq increase in 35 OECD countries. Kanzig (2023) noted that while carbon pricing raised headline and core CPI, the overall impact was minimal compared to energy prices. Some studies, like McKibbin et al. (2021), found mixed inflation effects in Europe. Various factors explain these counter-intuitive results, including consumer shifts to green products, output-based pricing systems, and the carbon tax rebate for lower-income families. Additionally, carbon pricing may drive innovation in renewable energy, though its short-term effect on prices is limited.
This study finds that carbon pricing policies in Canadian provinces have a deflationary effect on food prices, requiring about 24 months to manifest. However, the deflation is minimal, and carbon pricing is not responsible for the current high food prices. According to Tombe and Winter (2023), carbon pricing has negligible effects on the cost of living for most commodities. Recent research by Chen and Tombe (2023) attributes high inflation in Canada to supply shocks in global energy and food markets. The study supports a demand-driven mechanism of deflation, where reduced consumption per capita is linked to carbon pricing. Although carbon pricing lowers food prices, it does so by decreasing consumption rather than predicting future welfare gains, underscoring the importance of federal rebates for low-income households.
Farmers receive exemptions and aid to alleviate the impact of carbon pricing on food inflation, but these benefits are set to diminish with the passing of Bill C-234 in 2023. The bill removes exemptions for fuels used in heating and cooling farm structures and shortens the sunset clause for propane and natural gas used in grain drying. Without additional support, these changes may increase food prices. The primary goal of carbon pricing is not to affect food affordability but to reduce fossil fuel use and promote greener energy sources, a topic for future research. A limitation of the study is its data scope, which could be improved by calculating price indices for different municipalities using scanner data.
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