A new report by the Fraser Institute says Prime Minister Justin Trudeau’s carbon tax will undermine the competitiveness of key sectors of Canada’s economy and could trigger an exodus of jobs and industries to countries without similar schemes such as the United States.

Titled “the impact of the federal carbon tax on the competitiveness of Canadian industries” by Ross McKitrick, Elmira Aliakbari and Ashley Stedman, says this problem, known as “carbon leakage,” occurs because it increases the production costs of industries impacted by carbon pricing.

The fiscally conservative think-tank says this will make them less competitive with similar industries in other countries with less stringent climate policies.

Rather than reducing their emissions in Canada, these industries could well relocate to those jurisdictions.

That would result in their greenhouse gas emissions linked to human-induced climate change increasing, with no benefit to the environment, because what matters is global emissions, not where they come from.

The Fraser study, based on Trudeau’s carbon price of $50 per tonne of emissions in 2022, identifies 13 industries accounting for 7.3% of Canada’s total economic output as the most vulnerable to higher production costs, reduced competitiveness and lost jobs.

These include the petroleum and coal product manufacturing sector, where costs could increase by up to 24.8%; agricultural chemical manufacturing (pesticides, fertilizer, etc.); cement and concrete product manufacturing and primary metal manufacturing.

The overall impact to all industrial sectors of the Canadian economy, the report estimates, would be a 2.4% increase in production costs in the short term.

To counteract the adverse economic impacts of carbon leakage, the Trudeau government has developed what’s known as an output-based pricing system, or OBPS, for major industrial emitters.

This is intended to limit the economic damage to the industrial sectors most exposed to trade and competitiveness pressures because of Trudeau’s national carbon price by lowering their costs and allowing them to trade in carbon credits.

The Fraser Institute study, however, warns that whether this will succeed in effectively addressing carbon leakage depends on how the impacted firms respond, and whether the compensation scheme is sufficiently sensitive to trade exposure.

“While the cost pass through as a result of the carbon tax will be mitigated for sectors under the federal OBPS,” the Fraser report says, “we show that the reduction in competitiveness pressures will not be as large as the tax rebate, and for some firms it may not be reduced by much at all … additional research on the OBPS is needed once data becomes available.”

The fact Trudeau’s carbon pricing scheme will have a negative impact on the Canadian economy is not controversial. The debate is over how severe it will be.

Last year, the independent, non-partisan parliamentary budget officer estimated Trudeau’s carbon pricing plan would “generate a headwind” in the Canadian economy, resulting in a drop of 0.5% in Canada’s gross domestic product, or $10 billion annually, in 2022.

Supporters of carbon pricing say that’s a small price to pay for combating the economic damage caused by human-induced climate change and the adverse impact on the economy will be minimized with Trudeau’s carbon tax because almost all of the money is returned to Canadian consumers in rebates.

But many independent experts also say Trudeau’s carbon tax will have to move far higher than $50 per tonne of emissions after 2022 to be effective, while Environment Minister Catherine McKenna has promised no further increases after that year. She also says carbon pricing will increase employment.

lgoldstein@postmedia.com

@sunlorrie