| MONTREAL, March 2
MONTREAL, March 2 The introduction of carbon
pricing in Canada will have a transitory effect on inflation and
the profound structural changes involved will likely hit supply
and demand, a senior Bank of Canada official said on Thursday.
Deputy Governor Timothy Lane said the central bank will need
to consider those impacts carefully as it conducts monetary
policy during the shift mandated by the federal government,
adding that if "we get the price right, we can do a lot right."
"We will continue to pursue low, stable and predictable
inflation amid the structural shift to a lower-carbon economy,"
Lane said in prepared remarks to the Finance and Sustainability
Initiative in Montreal.
Lane said the central bank will look through the transitory
effect of carbon pricing because it is due to a one-off
structural change, noting that the introduction of carbon
pricing was evident in the most recent monthly inflation data.
"But the more profound structural changes that will be
taking place are likely to have important consequences for both
aggregate supply and demand, which we will need to consider
carefully as we conduct monetary policy," he added.
Canada and most of its provinces agreed in December to
introduce a landmark national carbon price. Under the plan set
by Prime Minister Justin Trudeau, carbon pollution would cost
C$10 a tonne in 2018, rising by C$10 a year until it reaches
C$50 in 2022. The provinces can either implement a carbon tax or
a cap-and-trade market.
Lane said that while some are skeptical that carbon pricing
will motivate changes in behavior, experience confirms that
price incentives work, adding that properly aligned incentives
can reduce the need for pervasive regulation.
While carbon pricing has economic consequences, they need
not all be negative, Lane said, noting that new revenue streams
can be used to help companies remain competitive and lower taxes
in other areas.
Lane said that if rising temperatures were to bring
increasingly frequent adverse shocks, the central bank would
need to factor that into its policy stance and risk management
"In the short run, they may be viewed as a downside risk to
economic activity in Canada, which we would take into account in
our risk management framework for monetary policy," Lane said.
In the longer term, the downside turns from risk to
near-certainty, he added, with a lower growth track for the
Canadian economy than could otherwise be achieved.
(Additional reporting by Andrea Hopkins and Leah Schnurr)