Jack Mintz: The real climate policy question — why is Trudeau's carbon tax so low?
ASKS A GOOD QUESTION OF THE TORIES
THEY HAVE NO CARBON TAX PLAN
Opinion by Jack M. Mintz -Financial Post
Natural Resources Minister Jonathan Wilkinson speaking to the
Opinion by Jack M. Mintz -Financial Post
Natural Resources Minister Jonathan Wilkinson speaking to the
Calgary Chamber of Commerce.
Public finance economists — myself included — have long argued that the best way to reduce GHG emissions is to impose a “price” via an emission trading system (ETS) or carbon tax . The idea is not new. British economist Arthur Pigou first proposed environmental taxes a century ago.
A Pigou argument for carbon pricing is based on both effectiveness and least economic cost. Businesses and households react to the price by adopting technologies or conservation practices to reduce emissions without any need for further political meddling in markets. As a bonus, recycling the revenues to reduce uncompetitive taxes such as the income tax results in a “double dividend” by improving both the environment and the economy .
The federal minister of natural resources, John Wilkinson, seems to agree — except for the double dividend bit: Ottawa gives its carbon tax revenues back to households in lump-sum transfers. But the minister is so sold on carbon taxes he’s willing to guarantee carbon prices in private-sector contracts and commit to paying penalties if the tax is cancelled — presumably in order to keep a future Poilievre government from doing just that. Legal issues aside, is it really smart to force a policy decision like this on future voters?
In the runup to the COP27 talkfest in Egypt, the OECD published a report on “ Pricing greenhouse gas emissions: Turning climate targets into climate action.” Because worldwide GHG emissions keep increasing and are expected to do so for the rest of decade perhaps it should have been called “Turning climate targets into climate in action.”
The OECD argues that carbon taxation and ETS systems are spreading, with 71 jurisdictions now pricing at least some GHG emissions. But dig into the numbers and you find the average 2021 global carbon tax was only 71 U.S. cents per tonne of CO2 — just 95 Canadian cents! Add in ETS pricing and the average carbon price shoots up to €4.29, or just C$5.80 — which amounts to a hill of beans.
To persuade us carbon pricing is important, the OECD also includes excise taxes on gasoline and diesel. They bring the carbon price up to €17.52 (C$23.67). But in most places the purpose of such taxes has been to fund subsidized road transportation and operate as a surrogate tax on congestion costs, not to price GHG emissions. Besides, it’s a very poor carbon levy because it only applies narrowly to just a few sources.
With the recent spike in energy prices, many countries have been handing out subsidies to help consumers cope. Net of subsidies, the 2021 carbon price (not including excise taxes on fuel) is €3.43 (C$4.06). Despite the Trudeau government’s rhetoric, Canada is in the middle of the pack with the 31st highest carbon price: €21.69 (C$29.36).
Maybe we should start asking the obvious question: why are carbon prices so low? They certainly haven’t caught on — not compared with the value-added tax (VAT), for instance, which started in 1954 in France and grew in 30 years to become an important revenue source in over 150 countries. VAT revenues now account for almost a fifth of total tax revenues in OECD countries while carbon revenues are bupkis – roughly three per cent of the total.
So why is carbon pricing failing as a policy? At least five reasons.
First, it is very visible, leads to higher prices for necessities (transportation and heating), and hurts low-income and rural voters. Hidden taxes and even costly regulations on businesses are politically easier: voters don’t see them raising prices, even though they do.
Second, voters like policies that give them money rather than take it away. Outside California the U.S. has very little carbon pricing. But Washington just passed legislation providing almost a half-trillion dollars in climate subsidies. Subsidies financed by higher deficits or corporate taxes are more appealing than taxes — until they break the bank.
Third, many countries have little faith in the effectiveness of carbon pricing, actually preferring clean energy regulations and mandates. Even Jonathan Wilkinson , when he was environment minister, was convinced that even with the carbon price rising to $170 per tonne mandates and clean fuel regulations were needed if Canada was to reach its (unrealistic) GHG emission targets by 2030.
BULLSHIT
Fourth, without international coordination carbon policies have significant impacts on competitiveness that could lead to deindustrialization and job losses in energy-intensive industries. For Canada, this is especially important. Our carbon policies are on a different track than those of our largest trading partner, the U.S. Even if we match the Americans’ huge new subsidies, our high carbon price will make Canadian businesses less competitive than U.S. companies. Border tariffs with the U.S. might offset our disadvantage but wouldn’t stop Canadian businesses shifting production south to the largest market in the world.
Fifth, energy security and poverty will force countries to trade off climate change with other public objectives until practical technologies develop commercially. In today’s energy crisis, European countries are scrambling for coal, natural gas and oil to support both consumers and industries.
Though it does bring in revenues, which is always appealing to governments, carbon pricing just doesn’t cut it for many countries, as the OECD has now shown.
Public finance economists — myself included — have long argued that the best way to reduce GHG emissions is to impose a “price” via an emission trading system (ETS) or carbon tax . The idea is not new. British economist Arthur Pigou first proposed environmental taxes a century ago.
A Pigou argument for carbon pricing is based on both effectiveness and least economic cost. Businesses and households react to the price by adopting technologies or conservation practices to reduce emissions without any need for further political meddling in markets. As a bonus, recycling the revenues to reduce uncompetitive taxes such as the income tax results in a “double dividend” by improving both the environment and the economy .
The federal minister of natural resources, John Wilkinson, seems to agree — except for the double dividend bit: Ottawa gives its carbon tax revenues back to households in lump-sum transfers. But the minister is so sold on carbon taxes he’s willing to guarantee carbon prices in private-sector contracts and commit to paying penalties if the tax is cancelled — presumably in order to keep a future Poilievre government from doing just that. Legal issues aside, is it really smart to force a policy decision like this on future voters?
In the runup to the COP27 talkfest in Egypt, the OECD published a report on “ Pricing greenhouse gas emissions: Turning climate targets into climate action.” Because worldwide GHG emissions keep increasing and are expected to do so for the rest of decade perhaps it should have been called “Turning climate targets into climate in action.”
The OECD argues that carbon taxation and ETS systems are spreading, with 71 jurisdictions now pricing at least some GHG emissions. But dig into the numbers and you find the average 2021 global carbon tax was only 71 U.S. cents per tonne of CO2 — just 95 Canadian cents! Add in ETS pricing and the average carbon price shoots up to €4.29, or just C$5.80 — which amounts to a hill of beans.
To persuade us carbon pricing is important, the OECD also includes excise taxes on gasoline and diesel. They bring the carbon price up to €17.52 (C$23.67). But in most places the purpose of such taxes has been to fund subsidized road transportation and operate as a surrogate tax on congestion costs, not to price GHG emissions. Besides, it’s a very poor carbon levy because it only applies narrowly to just a few sources.
With the recent spike in energy prices, many countries have been handing out subsidies to help consumers cope. Net of subsidies, the 2021 carbon price (not including excise taxes on fuel) is €3.43 (C$4.06). Despite the Trudeau government’s rhetoric, Canada is in the middle of the pack with the 31st highest carbon price: €21.69 (C$29.36).
Maybe we should start asking the obvious question: why are carbon prices so low? They certainly haven’t caught on — not compared with the value-added tax (VAT), for instance, which started in 1954 in France and grew in 30 years to become an important revenue source in over 150 countries. VAT revenues now account for almost a fifth of total tax revenues in OECD countries while carbon revenues are bupkis – roughly three per cent of the total.
So why is carbon pricing failing as a policy? At least five reasons.
First, it is very visible, leads to higher prices for necessities (transportation and heating), and hurts low-income and rural voters. Hidden taxes and even costly regulations on businesses are politically easier: voters don’t see them raising prices, even though they do.
Second, voters like policies that give them money rather than take it away. Outside California the U.S. has very little carbon pricing. But Washington just passed legislation providing almost a half-trillion dollars in climate subsidies. Subsidies financed by higher deficits or corporate taxes are more appealing than taxes — until they break the bank.
Third, many countries have little faith in the effectiveness of carbon pricing, actually preferring clean energy regulations and mandates. Even Jonathan Wilkinson , when he was environment minister, was convinced that even with the carbon price rising to $170 per tonne mandates and clean fuel regulations were needed if Canada was to reach its (unrealistic) GHG emission targets by 2030.
BULLSHIT
Fourth, without international coordination carbon policies have significant impacts on competitiveness that could lead to deindustrialization and job losses in energy-intensive industries. For Canada, this is especially important. Our carbon policies are on a different track than those of our largest trading partner, the U.S. Even if we match the Americans’ huge new subsidies, our high carbon price will make Canadian businesses less competitive than U.S. companies. Border tariffs with the U.S. might offset our disadvantage but wouldn’t stop Canadian businesses shifting production south to the largest market in the world.
Fifth, energy security and poverty will force countries to trade off climate change with other public objectives until practical technologies develop commercially. In today’s energy crisis, European countries are scrambling for coal, natural gas and oil to support both consumers and industries.
Though it does bring in revenues, which is always appealing to governments, carbon pricing just doesn’t cut it for many countries, as the OECD has now shown.
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