How Canada can tax carbon efficiently
Carbon tax should replace other, less efficient policies with the same objective and be offset by cuts in other taxes.
Economists generally agree that imposing a price on greenhouse gas (GHG) emissions is the most efficient way to reduce them while minimizing the drawbacks associated with intervention.
The devil, however, is in the details. And when you look at the details, the carbon pricing systems the federal and provincial governments of Canada have put in place leave a lot to be desired.
Three conditions in particular should be met for a carbon tax or cap-and-trade scheme to be efficient:
• Such a policy should be fiscally neutral, which is to say that a new tax should be offset by other tax reductions and not be just another way to raise government revenues.
• The taxing of GHGs should replace all other policies that have the same objective, such as the regulation of emissions and subsidies for green energy.
• A carbon tax should take into account whether our neighbours and competitors have similar policies.
In some provinces, like Quebec, carbon-pricing systems explicitly aim to increase government revenues. In BC, the tax was fiscally neutral to begin with but it’s now a net source of revenues for the province.
The federal tax will be fiscally neutral for households, which will receive 90% of the revenues from the tax. That’s more than the estimated amount they will have to pay for their GHG emissions.
However, it won’t be neutral for companies. The federal government has promised companies assistance that corresponds to less than 10% of the revenues from the tax, but this will be destined solely for small and medium-sized businesses.
The second condition is not respected either, as governments subsidize a multitude of projects to reduce GHG emissions.
In Ontario, the cost of such policies ranges from $100 per tonne for incentives to use trucks and buses that emit less GHGs, to $500 per tonne for bike path subsidies. In Quebec, the cost of GHGs eliminated through measures financed by the Green Fund averaged around $1,130 per tonne.
There’s no good reason for this waste of public funds. These subsidies are more popular than taxing carbon and more politically expedient, but they should be eliminated in favour of the more efficient reduction methods encouraged by carbon pricing.
A carbon tax must also take into account the competitive context of the Canadian economy. Carbon taxation could lead to the displacement of production and investment (and jobs) toward the US (GHG emissions are taxed in just 11 states).
Such a scenario could even entail an increase in global GHG emissions. For example, if aluminum plants in Canada were to close because of the carbon tax, they could be relocated to countries whose environmental records are much worse than ours.
If governments want to reduce Canadian GHG emissions, they have to go about it the right way.
Any carbon tax should replace the whole set of other, less efficient policies with the same objective, like emissions regulations and green energy subsidies.
Any carbon tax should be offset by reductions in individual and corporate income taxes, which are far more harmful than a carbon tax, since they discourage work, saving and investment.
And given that our most direct competitor, the US, does not tax CO2 emissions, Canadian rates should remain reasonable enough to not lead to the flight of companies and production to other regions.
Canada won’t save the planet single-handedly. Any public policy aiming to reduce Canada’s contribution to global emissions must be based on sound economic principles. That’s not the case now.
© Troy Media 2019