Carbon tax pass‐through in western Canadian grain transportation

Abstract This paper examines the impact of Canada's federal carbon tax on farmgate grain prices, focusing on pass‐through in the grain transportation sector. The tax, which was eliminated in April 2025 amid concerns about rising food costs, was widely criticized by farmers for increasing expenses related to fertilizer, propane, and rail shipping. I develop a theoretical model of a farm‐to‐port supply chain to identify the determinants of carbon tax pass‐through and test its predictions using monthly wheat and canola prices. The empirical framework features pairwise regional price gaps and exploits the interaction between shipping distance and the escalating carbon tax as the key source of variation. The results point to considerable overshifting in the wheat market, a possibility that is accommodated within the theoretical framework. Estimated pass‐through effects are generally imprecise, with large standard errors and sensitivity to specification choices. My findings highlight the value of the carbon tax as a natural experiment on market pass‐through and the empirical challenges of pass‐through estimation.