A carbon tax – on two conditions only

If the government is committed to intervening to reduce greenhouse gases (GHGs), then putting a price on carbon, by using a tax or by allocating carbon credits, is a more efficient way of achieving this goal than handing out subsidies for specific measures like the purchase of electric vehicles, for example.

In this, I am in agreement with the majority of economists. They believe that the harmful welfare effects of negative externalities, like pollution, can be reduced through the creation of a cost for emitters, which allows the market to find solutions. Other methods are normally more expensive and less effective.

Taxing carbon is increasingly contested, however. In Ottawa, the Conservatives recently announced they were abandoning the carbon tax and are instead proposing to create tax incentives to encourage firms to reduce their emissions. In Alberta, the official opposition, well-positioned to win the next election, also rejects the carbon tax, as does the Saskatchewan government.

In Ontario, the Conservative Party is of the same opinion.

This change of attitude on the part of politicians is undoubtedly related to the fact that GHG emission taxation policies, in addition to producing very little so far in the way of results, are not popular.

In Nov. 2016, the Abacus Data polling firm reported that “the environment or climate change” was fifth among Canadians’ concerns. Only 8% of people polled said that this was the top concern, versus 34% for the economy in general, 14% for health care, 14% for poverty or inequality, and 9% for unemployment.

Another poll — this one carried out in 2014 by Leger for the MEI — showed that while 77% of Canadians (and 78% of Quebecers) believed that the fight against climate change was important, only 25% (29% in Quebec) were willing to pay more in order to reduce oil consumption by a quarter. Yet, it is becoming increasingly evident that the price of carbon will have to be set very high in order to succeed in significantly reducing GHG emissions.

This is the heart of the problem. At prices ranging from $10 to $50 per tonne of carbon, as is the case now and for the medium term, a carbon tax is not much more than “virtue signalling,” a kind of phoney commitment rather than a serious effort to achieve objectives. People will sooner or later contest policies that cost them money but have little effect.

Because a carbon tax that really works would need to be high, this policy only makes sense if it is applied everywhere. Barring this, it simply leads to the displacement of production and jobs without reducing emissions, a phenomenon known as “carbon leakage.” But the United States, our largest competitor, is not following us down this path. Will a company that emits GHGs and that is thinking of expanding in North America choose the costlier option?

Finally, just about everywhere it has been tried, the tax has served as a pretext for increasing the general tax burden. Even where the tax was billed as neutral, it didn’t end up being so. In British Columbia, for instance, instead of serving to reduce the tax burden, carbon tax revenue was used among other things to shower the film and video game industries with gifts. The imposition of a carbon tax, therefore, led to the impoverishment of households through higher prices on energy and transportation, without being offset by the lowering of other taxes.

It bears repeating that a carbon tax is a good policy only if two conditions are met: It must be applied everywhere, and it must be revenue neutral. In other words, a carbon tax is a “package.” If there are missing elements, it won’t work, and it won’t be accepted by the population.

For the moment, these conditions are not met in Canada.

*This op-ed was also published in the Ottawa Sun, The Sun Times and The Sault Star

Germain Belzile is a Senior Associate Researcher at the MEI. The views reflected in this op-ed are his own.

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