February 25, 2012 – In today’s Financial Post, MLI author and University of Guelph economics professor Ross McKitrick writes a column on how the costs far outweigh the benefits when it comes to reducing transportation-related GHG emissions. This column is based on a recently released study commissioned by the Macdonald-Laurier Institute by Professor McKitrick, The High Price of Low Emissions: Benefits and Costs of GHG Abatement in the Transportation Sector. The full column is below:
Gas price up, but how about a 2.30 tax?
By Ross McKitrick, Financial Post, February 25, 2012
A carbon tax won’t stop Canadians from driving
as prices are back up to pre-recession levels, and appear to be headed even higher. Most people dislike this trend, but for advocates of aggressive greenhouse gas policy, this is just a small taste of the kind of price changes they would like to see.
One of the favourite ideas for socially engineering our transportation system toward fewer cars and more transit is a hefty carbon tax. But the fact that driving habits are so resilient to gas price hikes has important implications for understanding the limits to pursuing economically sensible reductions in vehicle-related greenhouse gas (GHG) emissions. The potential social costs of trying to engineer a large change in Canadian transportation modes likely outweigh any potential benefits, even after taking into account the presumed value of reducing GHGs.
In a new report for the Macdonald-Laurier Institute, I examine the extent to which transportation contributes to total GHG emissions in Canada, how costly it would be to shift motorists to mass transit, and how raising the cost of gasoline (through a carbon tax) would affect GHG emissions.
In 2009, Canada emitted 690 megatonnes CO2 equivalent (MtC) of GHGs, of which 190 MtC, or 27.5%, were from transportation-related activities. It is necessary to understand how strong Canadians’ preferences are for private cars over public transit to understand why it would be difficult to reduce this number.
In 2005, 74% of Canadian adults reported going everywhere by car, up from 68% in 1992. In 2010, 82% of Canadians commuted to work by car, 12% took public transit, and 6% walked or cycled. Trips between cities are also mainly by car. In 2003, Canadians traveled 1.4 billion passenger-kilometers (pkms) by rail, 90.3 billion pkms by air, and 463.2 billion pkms by automobile.
Economists like pollution control measures that work by building the social cost of private actions into market prices. Many studies of the marginal social costs of GHG emissions yield estimates of about $25 per tonne of CO2, assuming climate models are accurate.
This works out to about 6¢ per litre of gasoline. If this were added to the price of gasoline, in the short run GHG emissions from vehicles would fall by between 0.3% and 1.0%. Over the longer term emissions would only fall between 2 and 5 MtC, which is under 4% of the total emission reduction commitments made under the Kyoto Protocol.
Now suppose we adopt an arbitrary target, like a 30% cut in GHG emissions from motor vehicles. To get there in the short run would likely require a carbon tax of about $975 per tonne, or a gasoline tax of about $2.30 per litre. Even if all the new tax revenue were returned to Canadians there would still be deadweight losses (economic losses after accounting for the environmental benefits) of roughly $9.6-billion.
In the long run, as people change vehicles, move houses, and undertake other adjustments to the new prices, the tax could come down but would still need to be above $195 per tonne, or about 46¢ per litre, to hold emissions at the new level, and this would cause deadweight losses of about $2.9-billion. Alternatively, if cap and trade or similar regulatory measures were used instead of a carbon tax, since these measures do not yield tax revenue to fund compensation for higher fuel prices, the policy would cost about $1600 per household, per year, over and above the environmental benefits.
The cost of transit is not the main reason people prefer cars: Convenience and time savings matter more. According to Statistics Canada, commuters who travel by car spend an average of 24 minutes getting to work, whereas those who use public transit to go the same distance spend 44 minutes, or nearly twice as long. Improvements in transit service (such as introducing light rail within cities) might benefit existing transit users, but would be unlikely to generate large switches away from private vehicle use. Likewise, increasing the cost of parking and road usage might prompt greater interest in mass transit, but survey evidence indicates that such changes would still be relatively small.
Incorporating reasonable GHG costs into the price of gas would not change driving habits. Policymakers must therefore be careful not to assume GHG abatement provides a rationale for transportation policy agendas that would otherwise fail an ordinary cost-benefit test. In other words, bad policy ideas do not become good policy ideas just because they slightly reduce GHG emissions.
Ross McKitrick is a professor of economics at the University of Guelph and author of the recently released, The High Price of Low Emissions: Benefits and Costs of GHG Abatement in the Transportation Sector.
