Analyst warns of far-reaching carbon tax costs

Research points to higher transportation costs, lower crop prices and a reduction in acres due to rising fertilizer costs

If the carbon tax hits $170 per tonne by 2030, western Canadian farmers will probably be hurt by $169-$182 million per year on rail costs alone, according to analysis just completed by longtime grain industry analyst Blair Rutter.

Add in increased costs to fertilizer use, trucking and grain drying and the Prairies could see crops shift acreage, a flatlining of yields and weaker farm profitability and re-investment.

“The carbon tax increases proposed under Canada’s climate plan will have a major negative impact on western Canadian farm income and potential negative impacts on other players in the Canadian grain industry,” said Rutter in his research, completed in early January.

The federal government plans to increase the current carbon tax by $15 per carbon tonne per year until it hits $170, it announced in late 2020.

A wide spectrum of farm groups has said this would have a punitive and pointless impact on most western Canadian farming because producers have no control over world market prices or charges imposed on them by railways and others involved in getting their crops to market.

Rutter, former executive director of the Western Canadian Wheat Growers Association, said the costs aren’t just direct taxes on railways for getting the crops to port, but also the depressing effect those costs will have on domestic prices. Since domestic prices are based on export prices, a weakening of export values will push down domestic values.

“It is important to recognize that the farmgate impact of the carbon tax on rail shipments is significantly greater than the direct amount paid to the railways,” says Rutter.

“This is because grain sold domestically (to oilseed crushers, flour mills, maltsters, feedlots, etc.) is priced off the export price. Thus, any reduction in the netback to farmers resulting from the application of carbon taxes on export shipments also reduces the price paid to farmers on domestic sales.”

It will also push farmers to ship more grain by truck to the United States and to haul back fertilizer because of lower shipping costs and lower or non-existent carbon taxes in many U.S. states, he argues.

Already, carbon taxes cost farmers $34-$37 million per year under the much lower tax rate, Rutter estimates.

If farmers face increasingly higher costs to use fertilizer due to carbon taxes, they are likely to scale back their use of fertilizers from optimal levels. This would hurt the value of western Canadian crop production.

Analysts trying to figure out the carbon tax impact on rail costs are hampered by lack of information because the posted railway carbon tolls, which are passed on to farmers, are inaccurate, he said. The federal government should improve the transparency.

“It would be a straightforward matter for the government of Canada to provide instruction to the Canada Transportation Agency, by regulation if necessary, to release this information publicly,” writes Rutter.

“In the author’s view, transparency demands it. Farmers have a right to know how much carbon tax they are paying on rail shipments.”

He says the real solution to remove the inequities of the carbon tax on grain transportation for farmers is to “entirely exempt carbon taxes on the shipment of grain by rail, given that the costs are passed on to farmers, who, in turn, have no ability to pass the added costs on to consumers. Failing to do so will likely result in a sharp increase in the shipment of grain to the U.S. by truck and also by rail in an effort to avoid the carbon tax costs applied on Canadian rail shipments.

“It would also result in reduced economic activity for canola crushers, flour mills, maltsters and other processors.”

Altogether, the impact on farmers is heavy and negative for the size and strength of Canada’s agricultural economy, Rutter said.

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