The Role of Carbon Pricing in Food Inflation: Evidence from Canadian Provinces

TL;DR

This study finds that carbon pricing in Canadian provinces has a deflationary effect on food prices, reducing food CPI by 2-4%, and does not increase food inflation, challenging common concerns.

Contribution

It provides empirical evidence that carbon pricing does not raise food prices in Canada, using a difference-in-difference approach across provinces.

Findings

Carbon pricing leads to a 2-4% decrease in food CPI.

No significant impact of farm input costs on food prices.

Lower consumption partly explains the deflationary effect.

Abstract

In the search for political-economic tools for greenhouse gas mitigation, carbon pricing, which includes carbon tax and cap-and-trade, is implemented by many governments. However, the inflating food prices in carbon-pricing countries, such as Canada, have led many to believe such policies harm food affordability. This study aims to identify changes in food prices induced by carbon pricing using the case of Canadian provinces. Using the staggered difference-in-difference (DiD) approach, we find an overall deflationary effect of carbon pricing on food prices (measured by monthly provincial food CPI). The average reductions in food CPI compared to before carbon pricing are $2\%$ and $4\%$ within and beyond two years of implementation. We further find that the deflationary effects are partially driven by lower consumption with no significant change via farm input costs. Evidence in this paper suggests no inflationary effect of carbon pricing in Canadian provinces, thus giving no support to the growing voices against carbon pricing policies.