There are fundamental flaws in the assumptions underlying a carbon tax, says Philip Cross. This post is based on his opening statement to the House of Commons Standing Committee on Finance on May 7, 2018.
By Philip Cross, May 8, 2018
Polls that show a majority of Canadians don’t understand or have never heard of a carbon tax demonstrate the gulf between them and the largely academic-bureaucratic elite who advocate this tax. For nearly three years, pro-carbon tax governments and bodies such as the EcoFiscal Commission have controlled the commanding heights of this debate with funding and media support the fossil fuel lobby can only dream of, but have failed to parlay these huge advantages into public understanding and support.
The main economic selling point for a carbon tax is that it leads to a better tax system. However, this is strictly-based on several conditions, including being revenue neutral; every dollar raised by the carbon tax must be offset by lower income or payroll taxes. These promises were quickly forgotten, revealing it as just another tax grab that antagonized people concerned about the economy.
Meanwhile, the promised reduction of carbon emissions already is falling short because the levies were not enough to materially change behaviour, disillusioning environmentalists. The carbon tax did not bridge the gap between these two opposing groups speaking for the environment and the economy to create the social license to build a pipeline. Finally, the election of a US administration uninterested in its own carbon tax meant higher energy costs in Canada automatically put our industries at a competitive disadvantage without any prospect of lower continental emissions, making the whole exercise both costly and pointless.
For a trading nation like Canada, raising the cost of domestic production but not taxing imports based on their carbon-intensity penalizes our producers. This may curtail Canada’s carbon emissions, but does nothing for global warming if production simply moves to countries with lower emissions standards. Meanwhile, Canadian exporters are at a competitive disadvantage with the US.
As a practical matter, proponents of the tax have not disclosed what level of tax will be required to achieve Canada’s climate change commitments. The case for a carbon tax has been disingenuous; advocates rarely discuss publicly how high a carbon tax is needed to attain the lower emissions targets, if that really is the goal. Is the current $50 a ton carbon tax the long-term ceiling for a carbon tax? If so, then they admit that most of the reduction in emissions is going to come from technology or regulation, since a $50 ton tax has little impact on behaviour given its inelastic demand.
Proponents of the tax have not disclosed what level of tax will be required to achieve Canada’s climate change commitments.
Or is there a plan to raise the tax towards $200 a ton, the level more transparent economists say is needed to change societal behaviour enough to move significantly towards emission reduction targets? But saying so risks public support, so this is rarely mentioned. The Canadian public usually has a good sense when they are not being addressed in a forthright manner.
The politicians who most enthusiastically support a carbon tax are identified with left-wing governments such as in Ontario and Alberta. This has politicized carbon taxes, reducing their potential appeal to the broader base of the population concerned about climate change but hostile to a carbon tax. Instead of cultivating broad-based support, proponents of a carbon tax smugly stayed inside the safety of an echo chamber with their left-wing supporters and declared victory while demonizing opponents as dim-witted fossils from another era.
Without political support across the political spectrum that would ensure its long-term viability, the tax risks disappearing after its opponents are elected. The GST shows how easy it is to get elected by promising to reduce or eliminate an unpopular tax, even if it is universally beloved by academics and bureaucrats. The failure of carbon tax advocates to gain the support across the political spectrum that legitimizes a tax and insulates it from election results reduces the very efficiency of the tax, which is supposed to be its major advantage. The rush to impose a carbon tax before properly building public support for it lowers its efficacity because even when implemented, people don’t believe it will endure and therefore do not invest in the lifestyle changes that would enhance energy efficiency and not just trim energy consumption.
The carbon tax is also unpopular partly because short-sighted, tax-hungry politicians refused to offset them with cuts to other taxes. More importantly it imposes immediate costs on the vast majority of Canadians who still drive to work and heat their homes with fossil fuels while the benefits lie decades in the future. Finally, the federal and Alberta governments must shoulder the blame for failing to deliver on their promise that a carbon tax would buy social license for pipeline construction, with the Kinder Morgan proposal the latest example.
There are two fundamental flaws in the academic assumptions underpinning the carbon tax. First, it assumes that changing long-standing behaviours is best accomplished by tinkering with the price system. This ignores that the true miracle of capitalism is not the efficient allocation of resources through the price system (although that is certainly one of its attributes), but its unmatched capacity for relentless innovation and technological change.
Game-changing new technologies are needed to combat climate change, not government fiddling with relative prices. The fact that our knowledge of how economics works in this area is limited to modelling the price system and not innovation is a reason to be skeptical about economics and to strive to better understand innovation, rather than focusing on the limited and less important areas economics purports to understand.
Second, having claimed that a carbon tax is the most efficient way of reducing greenhouse gas emissions and hence climate change, carbon tax advocates assume that slowing climate change – via a carbon tax or any other mechanism – itself is the most efficient way of improving the human condition. Bjorn Lomborg, the self-styled skeptical environmentalist, convened a panel of experts to ask how limited resources could be allocated for the maximum benefit. Fighting climate change ranked 17th out of 30 initiatives, behind feeding pre-school children, more immunization, fighting malaria, increasing crop yields and implementing early warning systems for natural disasters (like tsunamis and earthquakes).
Climate change ranks low because it imposes large economic costs while delivering uncertain benefits decades in the future. We have many pressing needs that our current state of technology deals with more effectively than climate change.
Philip Cross is a Munk Senior Fellow at the Macdonald-Laurier Institute.
 Bjorn Lomborg. How to Spend $75 Billion to Make the World a Better Place. Copenhagen Consensus Center, 2013.