Monetary Policy Report—April 2025—In focus
The removal of the consumer carbon tax will temporarily lower inflation and result in a one-time reduction in the level of consumer prices, mostly reflecting a decline in gasoline prices.
The federal fuel charge rate—also known as the consumer carbon tax—came into effect in 2019. Subsequent annual increases put modest upward pressure on inflation every year until 2024. On April 1, 2025, the federal government set the rate to zero, which will push down inflation for only one year.
The price effect of the consumer carbon tax
Since coming into effect, the carbon tax has added 0.1% to 0.15% to the level of consumer prices each year. This adds up to a total increase in the price level of about 0.7%.
Removing the carbon tax will undo this cumulative impact, decreasing the level of the consumer price index by 0.7% from April 2025 to March 2026 (Chart 22).1 This means, all else being equal, year-over-year inflation will be 0.7 percentage points lower for one year.
This temporary decline in inflation will be due primarily to lower gasoline prices. The carbon tax is estimated to have added roughly 18 cents per litre to fuel prices.
Starting in April 2026, year-over-year inflation will no longer be affected by the elimination of the consumer carbon tax.2 Its removal has the same effect under both outlook scenarios because it is unrelated to the trade conflict.
Chart 22: The removal of the consumer carbon tax permanently lowers the path of consumer prices and lowers inflation for one year
Illustrative data (see note for details)
Note: This is a stylized example to illustrate how the removal of the consumer carbon tax will affect the level of consumer prices and the year-over-year inflation rate, assuming constant underlying inflation of 2% and holding other factors constant.
Source: Bank of Canada calculations and estimates
Last data plotted: June 2026
Source: Bank of Canada calculations and estimates
Last data plotted: June 2026
Endnotes
- 1. The estimates include British Columbia’s removal of its consumer carbon tax but exclude Quebec, which uses a cap-and-trade system. The estimates reflect the direct impacts on consumer energy prices only. They exclude any indirect effects on other prices or the impact of taxes that are applied in addition to the consumer carbon tax, such as the harmonized sales tax.[←]
- 2. The inflation outlook in the January Report included increases of 0.1 percentage points in the consumer carbon tax in April 2025 and April 2026. Removing the consumer carbon tax lowers the inflation outlook by 0.8 percentage points between the second quarter of 2025 and the first quarter of 2026 and by 0.1 percentage points between the second quarter of 2026 and the fourth quarter of 2026.[←]