Writing in the Financial Post, MLI Senior Fellow Philip Cross writes that people are fooling themselves if they think that introducing a carbon tax won’t be harmful to economic growth.
He advises the Ontario government – which is currently mulling introducing the policy – to not read too much into the popularly-held notion that the BC economy has felt no ill effects from introducing the tax.
“The idea that you can curb energy consumption without slowing economic growth is a fantasy, akin to believing Santa Claus delivers economic growth”, Cross writes.
By Philip Cross, Jan. 14, 2015
Momentum quickly has been building for a carbon tax, fueled by the recent drop in gas prices which some view as a smokescreen behind which governments can increase fuel taxes that won’t be noticed until world oil prices rebound or motorists venture into another jurisdiction. Economists are mesmerized by the rationality of taxing the negative externality of carbon emissions while lowering income taxes (which should increase the labour supply) and the seductive appeal that this can improve the environment while encouraging economic growth. Who could resist such win-win solutions?
Before getting on the carbon tax bandwagon, which already has dropped the pretense of revenue-neutral income tax cuts, it is worth remembering a few important points. First, carbon taxes need to be hefty (“damaging” as bluntly stated by the University of Colorado economist Keith Maskus at a recent conference) to be effective, especially when energy prices are plummeting. Minor tinkering won’t have much impact, but high taxes will produce negative net overall benefits.
Second, it “would be suicidal for Canada to act unilaterally in a manner not replicated by the U.S.,” says Derek Burney, Brian Mulroney’s former chief of staff, in the new book Brave New Canada. Premier Jim Prentice has stated that Alberta won’t change its carbon levy on large producers until other governments do so, to preserve its competitiveness. Ontario is exhibit A for what happens when one jurisdiction pursues energy policies that put its costs out of line with its neighbours.
Third, as concluded by University of Guelph economist Ross McKitrick, “energy consumption is a limiting factor in economic growth.” The idea that you can curb energy consumption without slowing economic growth is a fantasy, akin to believing Santa Claus delivers economic growth.
Fourth, tinkering with relative prices is small ball when it comes to carbon emissions. The bigger story is technological change, notably the U.S. shift from coal to natural gas resulting from the fracking revolution that lowered greenhouse gas emissions without a formal government policy. However, since technological change is impossible to forecast, economists play with relative prices.
The denial of these basic economic truths is behind the idea that carbon taxes will lower energy consumption with no ill effects on the economy. This denial is rooted in widely-cited but erroneous studies of B.C.’s experience with carbon taxes. Starting in 2008, B.C. adopted a carbon tax, rising to the equivalent of about 7 cents a litre. Proponents claim that it led to a drop in fuel consumption in B.C. up to 2012, while pretending economic growth bettered the Canada average.
Nicholas Rivers and Brandon Schaufele, two researchers at the University of Ottawa (the well-spring of much of the flawed discussion of the costless benefits of a carbon tax) marvel how the B.C. carbon tax magically depressed consumption seven times more than a market-induced increase in gas prices. They are unequivocal that “we believe that it was B.C.’s carbon tax that caused the decline in provincial gasoline demand.” At least they were honest that this is based on beliefs and not facts.
There are two problems with attributing spectacular drops in gasoline demand to the carbon tax. Gasoline consumption is measured by gas sales in B.C., which misses filling up at pumps outside the province.
Rivers and Schaufele dismiss the possibility that the unbelievable carbon tax response was actually a cross-border shopping effect because “it is doubtful that a sizeable share of residents suddenly began cross-border shopping.” If they had bothered to look, they would have seen a sudden doubling of cross-border trips to the U.S. after B.C. introduced the carbon tax, from 3.9 million in 2008 to 8.0 million in 2013 (this was unique to B.C., as Ontario and Quebec posted increases of only 17%) Evidently a sizeable share of B.C. residents do care about shelling out their hard earned dollars for government levies, green or any other colour.
And everyone should have been suspicious that claims of a mysterious drop in B.C. gas consumption are based on data that end in 2012, when Statistics Canada numbers are available through 2014. The reasons B.C. gas consumption fell between 2008 and 2012 remain unclear, although more purchases in the U.S. clearly played a role. More importantly, the drop has not persisted.
Gasoline consumption in B.C. soared 6% after 2012, overwhelming the 4.8% drop between 2008 and 2012 (see the nearby graph). If proponents want to credit the carbon tax for the initial drop, they then have to admit its effect was minor and transitory at best and had no lasting impact on carbon emissions. In fact, B.C. gas consumption was falling more in the decade before the carbon tax was implemented. Not updating the data for fuel consumption after 2012 suggests claims that B.C.’s carbon tax lowered demand are at best based on intellectual laziness and at worse are an overt attempt to deceive the public and policymakers (Statcan’s suppressing the April 2013 data due to confidentiality is easily worked around).
Politicians should be careful before following Premier Kathleen Wynne, who evidently wants to be the first lemming over the cliff in hiking gasoline taxes to boost Ontario’s sagging finances. A group of Conservative thinkers called the ‘Blue Chips’ warned Margaret Thatcher in the 1970s that “a political strategy based on economic theory is a house built on sand.” The Conservative party in Canada learned that lesson after introducing the GST in 1991, a tax widely applauded by economists but detested by the public. Any government that bases its policy on an idea that seems too good to be true will inevitably find that the promise is illusory.
Philip Cross is the former chief economic analyst at Statistics Canada.