The folly of carbon taxes – opinion/editorial – The folly of carbon taxes
Published: Friday, June 06, 2008

We awoke to yesterday’s papers and found Ontario Premier Dalton McGuinty urging the federal government to take a “more aggressive approach” and join the provinces in using public policy tools to fight global warming. He meant, of course, that Ottawa should embrace the cap-and-trade model exemplified in the new accord between himself and Quebec Premier Jean Charest. But there is another option on offer from British Columbia, in the form of a carbon tax. In terms of broad economic principles, there is little to distinguish between the alternatives. So just which province should the federal government be following?

When it comes down to details — wherein the devil is proverbially said to reside–carbon taxation has some obvious advantages. Cap-and-trade has a poor international track record so far, and it devolves the right to pollute in the future on those who have hitherto done it most aggressively. Unless permits are awarded without respect to some existing baseline, they end up rewarding those who have delayed action on carbon output, and hurting those who acted early, without the goad of policy. A carbon tax, in theory, can treat everybody more fairly. Output one tonne of carbon, and you pay the same price for it, no matter who you are.

The problem is that no carbon tax is likely to be implemented this way, ever. B. C.’s government has promised that its carbon tax will end up being “revenue neutral”: every dollar collected will be put back into the economy in the form of income tax reductions. Unfortunately, this is an inherently unbelievable promise, of exactly the sort that has preceded every major structural change to the tax system ever made.

More to the point, the promise should mean that progressive, wealth-redistributing income taxes are replaced by taxes that are no respecter of persons. But B. C. has been very particular about just which taxes it will replace, trying to preserve the progressive character of the overall system. The more a “carbon tax” is designed to protect lower-and middle-class carbon outputters, the less effective it will actually be at bringing about the desired behaviour changes. Making emitters suffer is the whole point. It should be amusing to hear Stephane Dion explain to an electorate how he is going to use taxation to reduce carbon outputs without punishing middle-class commuters or raising poor people’s heating bills.

Ottawa, of course, has other issues it must consider when mulling over a carbon tax. A tax that penalized energy-producing provinces for the carbon their oil and gas is going to output in other countries, and redistributing their energy income to non-producers, would be regarded in places like Alberta as a mere seizure of energy assets — with good reason. Regional fairness is effectively an essential component of any federal carbon tax, but like progressivity, it is inherently inimical to the concept. Meanwhile, and perhaps most importantly, Canadian businesses will be forced to compete in world markets with rivals that aren’t being charged for the carbon they emit.

Is it any wonder that the current government is moving slowly and focusing on reductions in per-unit intensity, where immediate progress may be easier and more desirable anyhow?

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