Munir Sheikh is an executive fellow at the School of Public Policy, the University of Calgary, and a former Chief Statistician of Canada.
In two recent pieces, The Globe and Mail has taken on the good fight in arguing that a carbon tax and economic conservatism go hand in hand. They correctly suggest that pricing carbon should satisfy both environmentalists and conservatives. This is, however, an incomplete story.
A carbon tax is good for the environment. Period. Is a carbon tax good for the economy? Not necessarily if implemented incorrectly. It depends on how two policy issues related to a carbon tax are addressed: the actual design of a carbon tax; and the use of revenue it generates. If they are handled poorly, a carbon tax can impose an economic cost. In this trade-off between the environment and the economy, an environmentalist may strongly support a carbon tax. An economic conservative may strongly oppose it. And both for good reason as they may not share the same objectives when there are trade-offs.
Why is a proper resolution of these two issues important? A carbon tax would increase the tax burden like any other tax, thus distorting labour supply, saving and investment decisions (the magnitudes of these economic costs differ from tax to tax and economists believe the GST is the least and business taxes the most economically costly). The fundamental principles to be followed in assuring that a carbon tax does not hit the economy are: first, the tax be designed such that the improvement in the environment is maximized for any given size of the carbon tax (the tax design issue); and, second, the revenues generated by the carbon tax be used to reduce other taxes whose economic costs exceed those of the carbon tax (revenue use issue).
Both are complex issues. The tax design issue needs to deal with questions like: the appropriate base for taxation (e.g. production or consumption of energy); single or multi-stage taxes, as emissions occur at multiple points in the production and consumption chains; origin or destination-based tax; and administrative and compliance costs. In general, to achieve the objective of capturing most emissions from a pollutant at least cost, the base for its taxation should be as close as possible to the source of its emissions, be as broad in coverage as possible, applied at production points that are administratively feasible and trade law compliant, and by a level of government that governs a geographical area that is closest to the area impacted by a pollutant. If these conditions are not met, the tax rates needed to achieve an environmental objective could be unacceptably high, and not supported by economic conservatives.
On the revenue-use issue, there seems to be a view among some that this is secondary. If other taxes can be reduced, well and good. If not, these revenues can be used for other purposes, such as achieving social, environmental and fiscal objectives. All of these uses may more worthwhile from the perspective of national well-being than reducing other taxes. But that is not the point. The point is that an economic conservative might not support a carbon tax that worsens the economy because of the way revenues from the increased tax burden are used. Taking steps to ensure that revenue is used to, at the very least, offset the negative economic effects of carbon taxes could be a prerequisite for such support. A reduction in just about any other tax won't do. For example, reducing the GST with carbon tax revenue would not necessarily be a smart thing. Reducing business taxes or taxes on savings could be.
Here is the bottom line: a carbon tax designed to improve the environment may be bad for the economy if implemented poorly. On the other hand, a carbon tax designed to improve the economy would be good for the environment. It would be helpful, therefore, that this debate focus on the economy rather than the environment. We have a great opportunity to achieve both objectives and we should. If we do introduce a carbon tax, let us make sure it does not join the list of policies that began with good intentions and ended up with less than stellar performance, such as provincial anti-poverty policies, social-assistance systems, the employment insurance program and – do I dare add – our health care system.