Carbon tax smackdown: what is this argument really about?

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NationalPost.com – Opinion – Conservatives want people to believe we can do nothing, even as they insist they agree we have to do something
May 25, 2019.   Andrew Coyne

“Be it resolved that a carbon tax is the policy Canada needs to fight climate change.”

Terence Corcoran and Andrew Coyne go head-to-head on whether a carbon tax is the proper tool to fight climate change.

I’ll assume from the outset that we’re not arguing about climate change itself — whether it is happening, whether it is man-made, whether it is potentially harmful enough to be worth some cost to avoid — as virtually all mainstream carbon tax opponents claim to believe all three.

Likewise, I’ll assume we are not arguing whether Canada should at least try to meet the commitments it made at the Paris climate summit — targets for reducing greenhouse gas emissions that were first set by the Harper government and adopted by the Trudeau government. While there’s room to doubt how seriously either party takes this commitment — at present we’re nowhere near achieving it or even on course to do so — both at least profess to support it.

So I’ll assume, for the sake of argument, we are agreed Canada should do something. The question we are arguing here is whether that something should include carbon pricing.

The only credible reason to oppose carbon pricing, if we’re agreed we have to do something, is if there is some better way of doing it. This bears repeating: The unspoken assumption in a lot of carbon tax critiques is that we can do nothing instead. While doing nothing has an obvious appeal, we’ve agreed to rule that out.

Carbon taxes allow the burden of achieving a given overall reduction in emissions to be shared more efficiently

The case for carbon pricing is the case for pricing in general: the signals we use to guide decisions across the economy. Prices give us a constant, omnipresent, inescapable incentive to economize on our consumption of goods and services.

Typically, they will reflect the costs of producing them (including the return to capital), in which case the consumer, through the choices he makes in the marketplace, will be an effective agent, not only of his own interest, but of society’s.

But sometimes the price of a good does not include all the costs. If the production or consumption of a good gives off emissions that are harmful or unpleasant or otherwise costly to others, then consumer choices based on market prices will not produce the best result for society. That’s the point of a carbon tax: to build into the market price costs that would otherwise be imposed on the rest of society, or indeed the planet.

Why are carbon taxes preferable to other approaches? Carbon taxes may strike some as a licence to pollute: why not just limit emissions of greenhouse gases directly, by law? Or why not give people positive incentives, rather than negative — subsidize them to adopt more climate-friendly technologies or consume fewer carbon-intensive goods? There’s no doubt that regulations and subsidies can achieve reductions in emissions. The question is whether they can do so at the same cost, per tonne of emissions, as carbon taxes.

In fact they turn out, almost without exception, to cost more — much more. Why is that? Regulations only induce people to reduce their emissions so far as required, and no further. They take no account, what is more, of differences in costs: some companies can cut emissions relatively cheaply, while for others it is more expensive. By contrast, carbon taxes allow the burden of achieving a given overall reduction in emissions to be shared more efficiently.

Much of the cost of subsidies, meanwhile, is wasted, so far as they pay people to do what they were going to do anyway. And of course, like regulations, subsidies only apply to those things it occurs to governments to apply them to, whereas carbon taxes harness the ingenuity of the entire population, all of them constantly searching for ways to reduce their emissions by whatever means they can devise.

So the case for a carbon tax is really the case against other approaches. That means using it as a replacement for subsidy-and-regulation policies, existing or contemplated — not, as its current sponsors propose, in addition to them. There’s an opening there for conservatives to reclaim an idea they once owned, given their interest in limiting the size and scope of government. Instead, they have led the charge against.

Why is that? The most obvious reason: they want people to believe we can do nothing, even as they insist they agree we have to do something.

Slightly less cynically, subsidy-and-regulation schemes, though they impose greater costs on the economy, do so in ways that are hidden from consumers, who also tend to be voters. Politicians of all stripes pretend the costs of these programs are restricted to the “big polluters” to which they nominally apply — as if these costs are not passed on to people.

By and large it works: though more economically costly, they are less politically costly. Even some carbon tax advocates have conceded this point. But that’s an argument about what is possible politically, not what is the best policy.

What actual arguments are there against the carbon tax? One is that it makes Canadian businesses uncompetitive, given the failure of our trading partners, notably the United States, to impose their own carbon taxes. Leave aside that carbon pricing does apply in much of the U.S. — notably the cap-and-trade system in California. And leave aside the “output-based pricing” system the federal plan proposes for large, trade-exposed emitters, under which they will only be obliged to pay the tax at the margin, rather than on all of their emissions.

The only credible reason to oppose carbon pricing, if we’re agreed we have to do something, is if there is some better way of doing it

The broader point is that a carbon tax is a cost, like any cost; and like any cost, to the extent that it puts Canadian businesses at a disadvantage generally, the exchange rate adjusts to offset it. If we can’t compete at 75 cents to the dollar, we can at 70 cents.

A second argument is that carbon taxes, so far as they raise the prices of things, impose an especially heavy burden on the poor. That would be a real concern, if the federal government were not also providing rebates covering the cost of the tax (none of the other approaches come with similar compensation attached, though they cost more).

The precedent for this was the GST tax credit, which like the carbon tax rebate more than compensates poor families for whatever it adds to the cost of living, though unlike the GST rebate, the carbon rebate also goes to non-poor families. That part of it might have been better used to cut income taxes.

If nothing else, that would put to rest a third argument: that the carbon tax is a revenue grab. It’s true the tax does not contribute any revenues to the federal government net the cost of the rebates, but that does not make it quite “revenue neutral” — in the way that British Columbia’s carbon tax was. And yes, it was — for the first decade.

Does the fact that a subsequent government changed the rules make a revenue-neutral carbon tax a chimera? Of course not. You might as well say we should never cut taxes, because some future government might raise them. In a democracy, issues have to be constantly litigated and relitigated. You make the best policy you can, and then you fight to defend it.

The final argument against carbon taxes is the simplest: they don’t work. My friend Terry Corcoran, oddly, has been one of the leading exponents of this view — oddly, since the same argument could be made against prices in general, and with them the market economy. It amounts to saying people are impervious to price signals, in the face of mountains of empirical evidence to the contrary. Even for government-set prices, the demand curve slopes down.

It’s true that a $20-a-tonne carbon tax will not achieve anything like the required reduction in emissions. Even at $50 a tonne, the level to which the federal tax is scheduled to rise by 2022-23, we would be well short of our targets.

But that is not to say they are entirely ineffective. Even at $30 a tonne, B.C.’s tax is estimated to have reduced emissions by 15 to 20 per cent from what they would have been without it. Somewhere around $200 a tonne should do it.

Is that a lot? In today’s terms, it’s about $50 billion annually. Suppose, for the sake of simplicity, the federal government collected it all. That’s equivalent to another six points on the GST. It’s also enough to cut personal income taxes by a quarter to a third — or eliminate the corporate tax altogether. Why do Conservatives assume they would lose this fight?

In any event, the onus is still on carbon tax critics to say what system they prefer — what approach they think would cut emissions more at less cost. Unless their alternative is in fact to do nothing. Unless this really is just an argument about climate change.

Carbon tax smackdown: Andrew Coyne asks what is this argument really about?

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