On Thursday, Canada’s Ecofiscal Commission think tank released a study on what steps Canada should take to fully meet its Paris climate accord commitments. The goal is trimming 2005 emission levels by 30 per cent, by 2030.
Ecofiscal’s preferred solution: a national carbon tax, refunded back to taxpayers, with the levy hitting $210 for every tonne of emissions by the end of the decade.
That would mean an additional 40 cents a litre of carbon tax on a litre of gasoline. That’s on top of the 11 cents a litre that the Trudeau government is targeting with $50-a-tonne carbon pricing by 2022.
Would such a high carbon tax be politically challenging? That steam we see shooting from the ears of many readers answers the question.
Are there other ways to reduce emissions? Yes.
Are any other options less costly? In some cases, maybe. In most cases, no.
There are basically three options in the public-policy tool box. Government can discourage carbon emissions by taxing them. It can regulate the activities that produce emissions, compelling certain practices and forbidding others. Or it can subsidize people to switch to low-pollution technologies.
Every one of those options has a cost, and Ecofiscal rightly emphasizes the benefits of carbon pricing because, in most situations, it’s likely to be the most economically efficient and least costly route. It’s also the tool that puts the most control in the hands of individuals, leaving them to choose among a universe of possibilities for reducing their own emissions and avoiding the tax.
It’s transparent – or to put it another way, its costs are in your face. Like the GST, a levy beloved of economists and more efficient than the hidden taxes it replaced, you know you’re paying the carbon tax, and you’re reminded every time you pay. Like the GST, that’s also its main political obstacle.
At first blush, the idea of a party leader running on a promise to bring in 40 cents a litre of new gasoline taxes sounds absurd. It’s like a blueprint for electoral failure.
But read on. The ideal carbon tax, and the one the Trudeau government has imposed on provinces without carbon pricing, is designed to be refundable to taxpayers. Ecofiscal’s own modelling reveals that a $210-a-tonne carbon tax, while raising gasoline prices by 40 cents, would also pay for dramatic cuts to other taxes.
If anyone’s going to be able to sell much higher carbon taxes – no, it won’t be easy – they’re going to have to show how they’re also a radical tax reform, delivering big tax reductions.
For example, in Saskatchewan, the province with the most carbon-intense economy, a $210-a-tonne carbon tax, refunded to taxpayers on a per-capita basis, would, according to Ecofiscal’s calculations, give a family of four a tax credit worth more than $16,500 a year. That Saskatchewan family, if it had a combined income of $92,000 split equally between two parents, would owe zero federal or provincial income tax. Families with lower incomes would have a negative income-tax rate, meaning that each spring at tax-filing time, they’d be owed money.
In Alberta, whose economy is slightly less carbon-intensive than Saskatchewan’s, the same family of four would get an annual rebate of $9,016. In British Columbia, the tax returned would be worth $3,352; in Ontario, $3,076.
At first blush, regulations or subsidies to reduce carbon emissions always look more politically sellable than a tax, because the benefits are visible while the costs are hidden. But consider a subsidy for buyers of electric cars. It’s really no different than a tax on the fuel used by gasoline-powered cars – except that the beneficiaries and payers are flipped. Programs to subsidize the purchase of electric vehicles effectively raise taxes on those who don’t have a car, including those with lower incomes, in order to give money to those with cars, including those with higher incomes.
There is no free carbon lunch. But there are more and less efficient ways to get to a low-carbon future. For Canada, the key is going to be greening our already clean-ish electricity system, and then figuring out how to move a lot of cars and trucks from gasoline to electricity. The carbon tax will play a big role – but it won’t be the whole story. More on this, next week.