Last week, the Fraser Institute released a new study on the economic impacts of industrial carbon pricing in Canada. While we welcome alternative analyses and opinions to inform policy debates, we cannot reconcile the results presented by the Fraser Institute against the assumptions they claim to have used. Further, the impacts presented are outliers against other analyses examining industrial carbon pricing in Canada.
The Fraser Institute study is an outlier—by an order of magnitude
Let’s start with economic impacts. Overall, the Fraser Institute results do not align with findings from other studies. In their study, they indicate that industrial carbon pricing of $170 per tonne will reduce Canada’s GDP by 1.3 per cent in 2030.
By contrast, Environment and Climate Canada estimated that the GDP impacts of industrial carbon price to be 0.2 per cent of GDP. The Parliamentary Budget Officer estimated similar impacts: it estimated impacts of both the industrial and consumer carbon prices to have impacts of 0.8 per cent, with the fuel charge alone at 0.6 per cent. Our own modelling of industrial carbon pricing suggests impacts in the range of 0.1 per cent of GDP. Yet Fraser estimates the impact of the industrial price alone to be 1.3 per cent, putting it far outside the range of other studies, by an order of magnitude.
Similarly, our microeconomic analysis has shown that costs for firms are small. Across all covered sectors, compliance costs are much lower than carbon prices. Our estimate of the costs for oil sands firms, for example, are just 9 cents per barrel under current carbon prices and 50 cents per barrel if credit prices were to rise to $130 per tonne. These costs are small relative to profits.
Sector impacts of industrial carbon pricing are inconsistent with policy assumptions
The fact that the Fraser Institute is an outlier, does not necessarily imply it is wrong. But when digging into their study, the impacts of the policy simply do not add up.
For example, sectors with little to no exposure to industrial carbon pricing experience some of the largest impacts. Impacts on these sectors are important because they account for a large portion of Canada’s total GDP. According to the study, “agriculture, fishing and trapping,” sees at 1.2 per cent reduction in activity, despite the vast majority of the sector being exempt from industrial carbon pricing. Likewise, “other manufacturing”, which has low emissions intensity and mostly comprises small facilities exempt from industrial pricing, has more than double the impact of “oil sands” (-2.8 per cent versus -1.3 per cent). While we expect sectors that are exempt from carbon pricing to experience indirect costs, the scale of the projected impacts—larger than those sectors with direct compliance costs—isn’t easily explained.
The study also has a separate issue with respect to the assumptions it makes about policies that impact sectors operating in highly competitive markets (e.g., petrochemicals and cement).
Under industrial carbon pricing, all sectors pay for emissions only above a threshold, and can sell credits if their emissions decline below that threshold. In reality, that threshold varies across sectors, recognizing that some industries are more exposed to competitiveness pressures than others. In practice, chemicals and cement have a higher threshold under existing industrial carbon pricing systems. Yet the model assumes each sector faces the same threshold. As a result, it likely overestimates the extent to which the most exposed sectors reduce production as a result of the policy.
The disproportionate impact on services raises additional questions. Based on our analysis, industrial carbon pricing covers roughly half of Canada’s greenhouse gas emissions, but these sectors directly account for only about 10 per cent of Canada’s GDP. Services, on the other hand, account for roughly three quarters of Canada’s total GDP. The connection between sectors covered by industrial pricing and the demand for services is complex, with industrial sectors both directly and indirectly generating demand for services. But the majority of service demand in Canada is unrelated to industrial activity. We cannot reconcile a decline in the service sector activity of between 0.6 per cent and 1.1 per cent with the decline in activity indicated for covered industrial sectors.
The study also projects much higher-than-average impacts for the electricity sector. Our own analyses indicate that GDP from the electricity sector actually increases with industrial carbon pricing and with climate policy in general. This raises a question about how the Fraser Institute simulates abatement of greenhouse gas (GHG) emissions. Abatement is achievable both within the electricity sector (e.g., wind farms in Atlantic Canada will reduce natural gas generation) and the electricity sector can contribute to GHG reductions elsewhere via electrification. Both pathways for abatement tend to increase GDP in the electricity sector. However, the Fraser Institute indicates a large negative economic impact on electricity generation in Canada.
The study’s modelling assumptions may be biasing impacts upwards
What other factors could explain discrepancies in the Fraser Institute’s study?
It’s possible that the Fraser Institute modelling framework doesn’t fully account for how industry will adopt low-carbon technologies to avoid paying the carbon price. If firms have limited ability to improve their emissions intensity, they respond (in the model) by reducing production, not improving emissions performance. In that case, the model would significantly overstate costs. Computable general equilibrium models, such as those used in the study, tend to have this challenge without additional specification of new technologies and options for emissions reductions because they are grounded in historical market responses and don’t capture alternative, nascent technologies.
It is also unclear whether the analysis includes or excludes the federal carbon tax, which was repealed in 2025. In one section, the report clearly suggests the carbon tax has been removed from the analysis: “In both the base case and experiment runs, as of 2025 both these components disappear since the household carbon charge was set to zero.” But when reporting impacts on government finances in 2030, they clearly show an increase in “indirect taxes (including the carbon tax)” of $19.3 billion. Considering that the entire economy is contracting in their analysis, we speculate that this entire increase in tax revenue is from the now defunct consumer carbon tax because we would expect indirect taxes, excluding the carbon tax, would have likely declined along with the rest of the economy.
Incidentally, the 2030 tax revenue amount is equivalent to 114 megatonnes of carbon dioxide equivalent (i.e., $19.3 billion divided by $170 per tonne). That number vastly exceeds the likely contributions to a technology fund under industrial carbon pricing. If the Fraser Institute only removed the carbon tax on households, but kept it on lower-emitting industrial businesses that are, in reality, not covered by industrial carbon pricing (e.g., other manufacturing) this may explain some of their results. This assumption would not reflect the current policy reality.
The model’s treatment of capital allocation could also be amplifying impacts within emissions-intensive provinces such as Alberta across sectors not directly affected by policy. Because the model doesn’t account for how resource royalties can absorb shocks, this issue may be particularly acute for Alberta results.
Ultimately, however, we do not have sufficient detail to identify which modelling choices are driving the strange results. These results do, however, raise important questions about the modelling’s credibility.
