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The costs of carbon pricing are real, but so too is the revenue. (ANDREW VAUGHAN/CP)
The costs of carbon pricing are real, but so too is the revenue. (ANDREW VAUGHAN/CP)

BLAKE SHAFFER

Carbon tax: The real debate is about how the revenue is used Add to ...

Blake Shaffer co-authored “Choose Wisely: Options and Trade-offs in Recycling Carbon Pricing Revenues” by Canada’s Ecofiscal Commission. The opinions expressed are his own.

If you’ve driven the TransCanada highway through Calgary recently, you will have seen a sign saying “By 2018, the carbon tax will cost your family over $600/year.” The same Canadian Taxpayers Federation responsible for the billboard is pegging that cost to increase by more than 300 per cent to $2,500 when the tax increases (by 66 per cent, mind you) from $30/tonne to $50 in 2022.

Lost in these (inconsistent) claims is that the tax revenue does not disappear. The costs of carbon pricing are real, but so too is the revenue.

Saskatchewan Premier Brad Wall’s recent claim that the carbon tax will cost his province $2.5-billion is a case in point. He ignores the fact these funds remain in Saskatchewan’s control. Mr. Wall could simply turn around and eliminate nearly all personal income taxes, if he so chose.

I’m not advocating that particular choice, but I do think it’s time to refocus the debate from whether or not carbon pricing makes sense, to how the revenue is used. To that end, I suggest following these three principles: efficiency, equity and competitiveness.

On efficiency, there’s no greater target than lowering corporate income taxes. Despite their popularity, corporate income taxes are the most distortionary revenue-raising tool in our toolkit. Research by Bev Dahlby and Ergete Ferede, published by the School of Public Policy at the University of Calgary, finds that, for every $1 raised by corporate income taxes, $3 to $5 is taken out of the economy (for comparison, sales and personal income taxes are less distortionary, costing $1-$3 for every $1 raised). If we’re concerned about limiting the economic harm of a carbon tax, reducing distortionary taxes is our strongest weapon.

But efficiency is not our only guiding metric. Equity (or the distribution of costs) is important. Carbon taxes risk burdening low-income and rural households disproportionately. Recognizing this, Alberta plans to provide rebates to the bottom two-thirds of households based on income. British Columbia, similarly, offers low-income and northern and rural homeowner benefits. To gain even broader support for carbon pricing, provinces could also consider reducing personal income taxes so that all households benefit to some degree. This has the added bonus of gaining on the efficiency front as well.

Another key concern is carbon pricing’s effect on domestic competitiveness. To the extent emissions simply “leak” to jurisdictions without carbon taxes, the result is (economic) pain with no (environmental) gain. Alberta’s proposed Carbon Competitiveness Regulation for large emitters is an example of policy that directly addresses these concerns. It does so by setting sectoral benchmarks for emission intensity, in effect combining a carbon tax with output subsidies. Firms near the benchmark face little to no increase in their average cost but, critically, retain a strong incentive to reduce emission intensity.

To be fair, tax cuts and rebates are not the only options, nor are they necessarily feasible in a time of structural deficits. Spending on complementary programs such as energy efficiency and R&D has merit, but the benefits of these programs need to be weighed against the marginal cost of public funds to support them. If the social cost-benefit is positive, the case is strong. The options and tradeoffs of various revenue recycling options are outlined in a recent report by the Ecofiscal Commission entitled “Choose Wisely.”

But with all the revenue getting recycled, why have the tax at all?

The point of carbon pricing is to raise the relative price of emissions-intensive goods, taking into account their full social costs. The goal is to induce substitution, not to make you poorer. Recycling the revenue in a way that is decoupled with emissions reduces the average cost of carbon pricing while maintaining its strong marginal price incentive. Economist after economist will line up to tell you that a tax is the lowest-cost way to reduce emissions. (Those that say a tax won’t change behaviour are ignoring the evidence that it does.)

Rather than slogans of “Scrap the Tax” and “NEP 2.0,” thoughtful opposition should be debating how best to use the funds. Fighting Ottawa on a policy that just makes sense is a losing proposition. Instead let’s focus on using the revenue from carbon pricing in a way that lessens the burden, protects competitiveness, and maintains the incentive to reduce emissions in the most efficient and equitable way.

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