Energy Tariffs and Cost Effectiveness

To say that 2025 has been chaotic in the energy sector is an understatement. From freezes of clean energy projects to cuts to funding and staffing of key government agencies to removal of publicly available data, the Trump administration has slashed our country’s ability to mitigate climate change.

In addition to these attacks, Trump has also imposed tariffs on Canada, Mexico, and many other countries. Notably, the tariffs include a 10% to 25% tariff on energy products from Canada. In response to the US economic aggression, Canada has called for a 25% surcharge on all electricity exported to the US. The exact details of these tariffs change daily.

Generally speaking, the tariffs are not a good idea and will have a negative effect on our lives in the form of higher prices of not only energy but everything, since everything uses energy. However, despite Trump’s railing against low flow showerheads and his administration’s efforts to cut energy efficiency standards, as the price of energy increases, the case for energy efficiency also goes up. Could the tariffs actually help energy efficiency programs by improving their cost effectiveness? Let’s explore.

How Much of the United States’ Energy Comes from Canada?

First, let’s take a step back and look at how much of the US energy mix is imported from Canada.

Overall, only about 1% of American electricity use and 9% of natural gas use is imported from Canada. Location matters, obviously – the closer a state is to the Canadian border, the more likely they are to import energy. For example, in 2024, New York State imported 7.7 TWh of Canadian electricity (about 5% of total state usage). New England has imported between 5% and 14% of its electricity over the past five years, according to ISO New England. Many U.S. states also rely on Canadian natural gas. The largest importing point of entries (in order) are Idaho, North Dakota, Minnesota, Washington, and Montana. Heating oil and delivered fuels are heavily used in the Northeast and much of that fuel comes from Canada.[1] And the US has a whole industry in the Midwest built around refining Canadian crude oil.

How do tariffs affect energy prices?

Increases in the cost of imported electricity and natural gas work together to increase system energy prices. This article provides a lot of detail about how tariffs on Canadian energy would impact the Northeast US. Key takeaways include:

• Both New York (NYISO) and New England (ISO-NE) are very dependent on natural gas for electric generation. During winter peak periods where power plants are competing with home and business space heating for natural gas, the cost of both natural gas and electricity goes up. Importing electricity from Canada reduces reliance on gas-fired power plants during these times.
• The cost of imported Canadian electricity is generally less than electricity produced in the Northeast. Adding a 10% tariff to this cancels out this advantage, resulting in more electricity being generated in the Northeast (with natural gas), which leads to increased carbon emissions and natural gas prices.
• Several East Coast natural gas pipelines originate in Canada. For example, the Iroquois pipeline supplies about 5 GW of gas-fired power plants in New York and New England. A tariff on Canadian natural gas will lead to increases in both people’s heating and electric bills.

Because it is largely derived from hydroelectric plants, Canadian electricity is also relatively clean, and many states use these imports as a way to make their overall energy mix greener and to meet carbon goals.[2]

Impacts on Program Cost Effectiveness

If tariffs drive up the price of energy then the benefit of not using that energy also increases. How would different levels of tariffs affect the cost effectiveness of energy efficiency improvements? To answer this question, I did some rough calculations using a generic energy efficiency program portfolio and . Please note that these are very rough estimates using simplified assumptions and there is a lot of nuance missing, such as how tariffs would affect the avoided cost of generation, transmission, and distribution differently. I also assumed that the incremental cost of the efficient equipment would not change as a tariff on equipment or the raw materials (e.g., aluminum and steel) needed to make it would affect the efficient and baseline equipment equally, which is probably not totally true.

First, I looked at the worst-case scenario[3]: what if the US imposed a 25% tariff on Canadian energy and a utility imported all of its electricity and natural gas from Canada? Then I looked at what a 10% tariff would look like. Finally, I looked at a 25% tariff on Canadian energy, but assumed that only 5% of the energy mix was imported.

As shown in the table above, the tariffs’ effect on portfolio cost effectiveness was relatively minor. However, a 5-10% increase in cost effectiveness for some programs could mean the difference between being cost effective or not. However, looking at the big picture beyond cost effectiveness tests, the tariffs are not just going to be applied to energy, but also many of the energy efficient products themselves. While the incremental cost between an efficient unit and an inefficient unit may not change much, for most businesses or homes, a notable increase in the cost of a major item, such as a water heater or a heat pump would be a major barrier to making any purchase. Any increased energy bill savings would not be enough to overcome that sharp increase to the first cost. Any way you look at it, adding tariffs will hurt people and businesses.

[1] 82% of heating oil is used in the Northeast, according to EIA.

[2] Notably, in Massachusetts, municipal utilities tend to have a greener mix than investor owned utilities and therefore rely more on Canadian hydro (26% of municipal electric utilities’ owned or contracted power was hydroelectric and about 20% of their total energy mix).

[3] Cue Homer Simpson saying “the worst-case scenario so far.”