An inability to convince governments to pair a carbon tax with a corresponding income tax cut is just one of the reasons why Philip Cross is declaring the Ecofiscal Commission a failure.
By Philip Cross, March 1, 2016
Fifteen months ago, the Ecofiscal Commission was launched, with some of Canada’s most renowned self-appointed commissioners making it their goal to reduce carbon emissions by creating a more efficient tax system. Judging by either of those two criteria, the project could be rechristened the EcoFailure Commission, since it has not made any progress on either.
How can I call it a failure, when governments across the country are poised to impose taxes on carbon, the favourite tool of commission chair Christopher Ragan and his merry band of Ecofiscalists? First, the commission has abysmally failed to convince governments to offset higher carbon taxes with lower income taxes, which has left us with tax grabs instead of a more efficient tax system. Second, it has failed to convince ordinary Canadians of the need to change their behaviour, without which carbon taxes will not be high enough to change anything, especially when oil prices are collapsing and auto and gasoline sales are soaring. Third, the commission has ignored technological innovation, the real long-term way to increase energy efficiency, because of its single-minded devotion to controlling carbon emissions by tinkering with the price system.
To reduce petroleum demand in this country would require either taxes that raise prices well above their 2014 highs or a recession in incomes such that Canadians could not afford to consume at current rates. Gasoline prices today in most parts of the country are 30 to 40 cents a litre below their 2014 highs so, by itself, a carbon tax would have to boost prices by well more than that to lower consumption (barring a recession). There is no government in Canada publicly considering a gasoline tax of 50 to 60 cents a litre. That would be political suicide.
The Ecofiscal Commission doesn’t even hint at the tax increase that eventually will be required to meet its carbon ambitions.
The current carbon tax of a few cents a litre being proposed in Alberta, Ontario and Quebec, and already in effect in B.C., are the modern equivalents of the papal indulgences issued in medieval times: a token paid to assuage the conscience for having committed a sinful activity. To the degree that carbon taxes mislead people into thinking they are alleviating a problem while still burning fossil fuels, they may worsen their desired outcome.
The Ecofiscal Commission doesn’t even hint at the tax increase that eventually will be required to meet its carbon ambitions. It trumpets studies that pretend to measure the responsiveness of emissions to carbon taxes, and we know the future emissions targets Canada is committed to achieving. But the commission refuses to meld the two to come up with even a rough estimate of what it will cost Canadian consumers to hit the carbon target. This silence probably reflects that the needed tax increase would be enormous, taking the whole idea of a carbon tax off the table immediately. There is much that is disingenuous about a Trojan Horse plan that aims to first get everyone onside with the idea of a carbon tax, only to then slowly reveal the magnitude that will be required.
The real work the commission should be undertaking is the heroic task of convincing Canadians they need to accept sharply higher energy taxes to fundamentally alter their behaviour. Instead, the EcoFailure brain trust simply provides a convenient intellectual cover for governments to engage in a tax grab that does nothing to address the long-run trend of rising fuel consumption. Convincing Ontario Premier Kathleen Wynne to raise taxes is child’s play, not a signature achievement.
Governments no longer even pretend to be designing a more efficient tax system, unlike the way B.C. did when it offset higher carbon taxes with lower income taxes. Instead, cash-strapped governments in Alberta, Ontario and Quebec are simply raising carbon taxes with no offsetting cuts. And let’s be clear: Revenue neutrality means an equal reduction in other taxes, not an equal hike in spending on the environment, as Rachel Notley’s government claimed in Alberta’s budget. Only in the warped world of NDP accounting is a tax hike combined with more spending “revenue neutral.” Instead of being outraged that governments are so brazenly distorting its ideas, the EcoFailure Commission meekly watches in silence, lacking the courage of its own convictions that the tax system should be designed more efficiently.
The real work the commission should be undertaking is the heroic task of convincing Canadians they need to accept sharply higher energy taxes to fundamentally alter their behaviour.
The timidity of governments in raising carbon taxes may also reflect the fact that they know the only real solution will come from technological innovation (just as the solution to traffic congestion is driverless vehicles, not the road tolls Ragan advocates). However, as Steve Johnson noted in his book Where Good Ideas Come From: The Natural History of Innovation, we lack a solid theory of how innovation occurs.
Johnson argues that, contrary to assumptions, innovation may not be primarily driven by profit or high prices. Instead, innovations are most likely to come in clusters and in areas researchers are already working on (“the adjacent possible” — extensions of what innovators are already working on — not “lightning bolt” ideas out of the blue). This is encouraging since there is plenty of work actively going on in reducing greenhouse gas emissions, including within the oil industry. Until such innovations occur, governments should drop the pretense that carbon taxes are about anything except raising their own revenues.
Philip Cross is the former chief economic analyst at Statistics Canada.