Don’t (Carbon) Tax Me Bro! 1


In the six days since Episode 2 of PolitiCoast: Green Shift 2.0 Shift Harder was released the feedback we received on Facebook can at best be described as “mixed”.  It turns out Carbon Taxes are controversial. Who would have thought?

The responses can be broken down into four general but over lapping categories.  First climate change doesn’t exist. Second carbon taxes do not work. Third carbon pricing raises the cost of living and hurts families. Finally there is a moral responsibility for corporations not people to pay for the damage of climate change. I am not going to devote much space to the first point because if decades of scientific research and an overwhelming consensus among scientists isn’t enough to convince you of reality of climate change some guy with a politics blog certainly isn’t going to.  The remainder of the responses are worth examining.

The claim that carbon taxes are ineffective was a common critique. If true it would certainly be a solid reason to oppose Trudeau’s plan. However this claim does not stand up to scrutiny on either theoretical or empirical grounds. The economic theory underpinning carbon taxes is pretty simple. It is based on two premises; prices convey information and people respond to incentives. Currently in jurisdictions without carbon prices there is no effective way to convey to people making economic decisions the costs, in terms of environmental damage, of their carbon emissions. A carbon price conveys that information by placing an approximated dollar amount on the damage a tonne of carbon causes to the environment. With that knowledge being transmitted to people via prices they can then assess if the benefits they gain from emitting that carbon are worth the damage inflicted. Perhaps most importantly that evaluation of the tradeoffs cannot be avoided. Because people generally respond to incentives and tend to opt for the lower priced goods or services, people will generally opt for lower carbon emitting options due to the lower relative price. The least marginally beneficial uses of carbon will decrease as the economic calculus no longer makes sense. This will result in reduced carbon emissions. There are well established market mechanisms by which carbon taxes work. Mechanisms, which those on the right ought to accept but often don’t. But that is a topic for a follow up post.

As for the empirical question, it was frequently claimed in our comments section that British Columbia’s carbon emissions had increased since the carbon tax was introduced in 2008.  The data published by the Government of British Columbia shows a decreases of total emissions from 66.8MT to 64.5MT as well as per capita and per dollar of GDP.  Unlike other provinces which have seen a decrease from phasing out coal electricity the composition of the BC electrical grid (predominantly hydroelectric) has remained largely unchanged.

Another frequently raised concern was carbon taxes would raise the cost of living. And that this would be especially hard on the poor and to a lesser extent the middle class. This has been the federal Conservative’s favourite line of attack. While these are reasonable concerns they are neither unaddressable nor sufficiently serious to out weigh the benefits of carbon pricing. The increase cost of many everyday goods and services can be addressed by following the BC model of a revenue neutral carbon tax. Under the BC model the revenue generated by the carbon tax is used to cut other taxes. The net tax burden remains the same however the tax burden is concentrated on those areas of the economy with the highest carbon output. For a family with a low carbon foot print they can come out ahead because their income taxes have been reduced. And for the poor, who have little disposable income and are hardest hit by increases in the cost of living a rebate can be issued to offset the new costs. Perhaps most importantly this increase may be temporary as businesses are incentivized to develop less carbon intensive (and therefore cheaper) ways to provide goods and services. In a competitive market those savings are passed onto the consumer.

The final point raised was that morally the burden of paying for the cost of climate change should fall on corporations, who have profited from carbon emissions rather than on people. However this misses a couple of key points. These business only exist because there is demand from the average citizen for their goods. If people didn’t want oil and products for which oil is a feedstock there would be no Exxon, no Suncor and no BP.  There would be no money to be made because no one would buy their product. Ultimately the huge corporate structure that exists is there to meet the demands people have for goods and services. It is meeting those demands which have resulted in the environmental damage we are trying to address. People should bare the costs associated with their consumption behavior. Without having to bare those costs people will lack the incentive to adjust their consumption.

Furthermore there is the implicit assumption in this argument that an economic agent (in this case a corporation) merely will bare a cost imposed on it without changing behavior or passing that cost onto other parties. Focusing solely on corporations will merely result in them passing the increased cost of doing business onto their customers. It is the same as a tax on consumers, just one that is better hidden.

Carbon taxes are undoubtedly going to be a controversial topic in the coming months and years. It is important for such a critical issue as dealing with climate change that the best arguments are presented and there is no misunderstanding about the benefits and costs of carbon pricing.

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One thought on “Don’t (Carbon) Tax Me Bro!

  • Rob

    Even revenue-neutral carbon taxation sometimes “raises the cost of living and hurts families”. Aside from the first-order question of whether resources are being shifted from the private to the public sector (/ whether tax revenues are increasing), there are long-term effects.

    1) By itself, a carbon tax is a very cost-effective means to reduce emissions.
    Along with other regulatory measures, it ends up being *another* distortionary measure reducing economic efficiency. For a carbon tax to work as advertised, regulatory measures to reduce carbon output (like fuel efficiency standards, bans on incandescent bulbs, etc.) and subsidies (for insulation, clean energy, etc.) would have to be revoked. Otherwise, the regulations end up being implicit extra taxes on top of the explicit carbon tax. The more effective at reducing emissions the overlapping regulation is, the worse the effect of an otherwise optimal carbon tax ends up!

    2) That aside, which taxes are reduced in order to neutralize the carbon tax revenue determine whether the economy grows or shrinks and how particular people (or families or income groups) are affected. In particular, replacing more inefficient taxes — those with high deadweight losses — can improve economic matters as a whole. (See figure 1 on page 10: http://www.rff.org/files/sharepoint/WorkImages/Download/RFF-Rpt-Carbone.etal.CarbonTaxes.pdf) The trouble is that those inefficient taxes (eg. corporate income tax) are both politically popular and progressive, while reducing sales taxes or providing lump sum rebates is a net drag on the economy. Replacing a progressive tax with a regressive one shifts the tax burden away from the wealthy towards the poor (read: “raises the cost of living and hurts families”).

    [3) Due to the way carbon tax interacts with pre-existing distortionary taxes, the optimal tax on carbon is lower than the social cost of carbon (social cost of carbon divided by the marginal cost of public funds). The more inefficient the pre-existing tax structure, the lower the optimal carbon tax. See http://web.stanford.edu/~goulder/Papers/Published%20Papers/Bovenberg-Goulder%20AER%201996.pdf
    This doesn’t change any fundamental arguments for / against *a* carbon tax, but it means that the ideal revenue it brings in will be lower than I would otherwise have expected.]

    So, a carbon tax that does not raise the cost of living would have to replace pre-existing regulatory solutions and subsidies, and compensate for the lowering of a highly distortionary tax. That would be a set of difficult political battles. A carbon tax that does this and doesn’t “hurt families” would have to maintain the progressivity of the tax system too. I’m not certain that’s possible.