Social Policy in Ontario

The time is right for a carbon tax that works

Posted on January 1, 2015 in Policy Context

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TheGlobeandMail/com – ROB/Commentary/ROB Insight
Jan. 01 2015.   Glen Hodgson

In our previous Globe and Mail commentary (“Provinces need to act now to fix their ailing finances”, Dec. 17), we described the unrelenting fiscal squeeze facing most Canadian provinces, and the options for mitigating the pressure. The collapse of global oil prices has created a window of opportunity for Canadian governments (not to mention others around the world) to tap into new fiscal revenue, while simultaneously adjusting prices for consumption of hydrocarbon-based fuels in order to reflect the environmental damage they cause.

A carbon tax levied at the gas pump would meet both objectives; so is this the right time for a carbon tax on fuels?

The core economic case for a carbon tax on fuels is evident. By putting a price on what economists call “negative externalities” – specifically carbon and other greenhouse gases (GHG) emitted when we consume gasoline and other hydrocarbon-based fuels – the relative price of those products is raised. A price on carbon will lead consumers to reduce their consumption, suppressing overall demand for hydrocarbons used in vehicles, and reducing the amount of GHGs emitted accordingly.

A fuels carbon tax would complement the regulations already in place to double average vehicle fuel efficiency in North America over the next 20 years. Working together, the combination of price signals and regulations would lead consumers to buy vehicles that are ever more fuel efficient – and thereby generate fewer greenhouse gas emissions.

A carbon tax on fuels implemented by the federal government would establish national coverage and standardized practice across the country, creating a more direct link to national greenhouse gas policy objectives. However, a single national carbon tax on fuels would be largely insensitive to regional and provincial differences in terms of the structure of the economy, vehicle use patterns, degree of urbanization, weather effects (particularly in winter when fuel demand rises), and public transportation alternatives, among other influences.

These factors suggest that a fuels carbon tax at the provincial level probably has more latitude to be tailored to local differences, conditions and needs. A provincial fuels carbon tax would also help to address concerns about revenue transfers or recycling between regions.

Conditions today are ripe for policy action. Gasoline prices have fallen by 30 per cent or more over the past two months, thanks to the Saudi-induced collapse in global oil prices. Governments could introduce a carbon tax at the gas pump while consumers and voters are benefiting from lower prices. A modest carbon tax at the gas pump of 5 or 10 cents a litre would of course increase fuel prices for consumers – that’s the whole point of the exercise. But the resulting end price would still be well below the price of gasoline only a few months ago. If consumers want to avoid paying a fuels carbon tax, they have a growing selection of fuel-efficient vehicles from which to choose for their next purchase. The desired effect is to encourage adoption of alternative technologies that are otherwise less attractive financially.

Moreover, the overall policy design for a carbon tax on fuels could help to mitigate political opposition. Governments could choose a revenue-neutral strategy, using the revenue from a fuels carbon tax to reduce other forms of personal taxation. Funds might also be returned directly to taxpayers, as B.C. did when it introduced its own fuels carbon tax in 2008.

Conversely, governments may decide to invest the revenues in new technologies and processes that would help to further reduce environmental impacts while supporting sustainable wealth creation. Or the new revenues could be used to fund overall government programs. This option may be attractive for provincial governments squeezed between weak revenue growth and relentless health care spending pressures. How to use new revenues is ultimately a political decision, and the policy priorities will no doubt differ by province and region.

Economic analysis can help to raise public awareness of the advantages of using fiscal instruments to serve environmental ends. There is no trade-off between strong environmental performance and a strong economy. They are complements, and we can’t have one without the other. In our view, fiscal reform is a key way to encourage sustained and complementary economic and environmental performance.

What if provincial governments choose not to take advantage of the rare political opportunity created by the collapse in oil prices? In essence, they’ll be giving up the chance to cut taxes on things that add to our welfare, like work effort or investment; or a similar chance to increase funding for valued public services like health care, by putting a price on something – greenhouse gases – that is negative for our society. Either way, it will be an opportunity missed to improve the design and performance of our fiscal system.

In short, sharply lower global oil prices have created a unique opportunity for governments to act by establishing a price for carbon at the gas pump. Carpe diem.

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada.

< http://www.theglobeandmail.com/report-on-business/rob-commentary/rob-insight/a-carbon-tax-that-works/article22250967/ >

Tags: budget, economy, featured, globalization, ideology, tax

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