Ontario’s ‘carbon tax’ offers no benefit

Throwing a carbon tax on top of the current pile of regulations does nothing to fix the inherent inefficiency of current regulations

Download Ontario’s ‘carbon tax’ offers no benefit.

By Kenneth Green
and Ross McKitrick
The Fraser Institute

CALGARY, AB and GUELPH, ON, Feb 24, 2015/ Troy Media/ – The Ontario government’s Climate Change Discussion Paper, released on Feb. 12, is essentially a laundry list of public policies that have been sought by environmentalists and allies for decades,

Among them are smart growth, public transit, electric cars, biofuels, manual transportation (walking/biking), more recycling, replacing traditional manufacturing with green-tech manufacturing, and now, “putting a price on carbon.”

Carbon tax does not promote efficiency

So let’s talk about carbon pricing, where governments charge those who emit carbon dioxide (CO2).

First, carbon price advocates would have us believe that economists universally support the idea of pricing carbon because it’s the “most efficient” policy. But they don’t. The economic literature only suggests that a carbon tax would be an efficient policy for controlling emissions if used instead of, not on top of, command-and-control regulation, which includes things like biofuel mandates, green energy programs, appliance efficiency standards, corporate fuel economy standards and the panoply of regulatory measures that indirectly, and with gross inefficiency, now control greenhouse gas emissions. Simply throwing a carbon tax on top of the current pile of regulations does nothing to fix their inherent inefficiency.

carbon tax
The hidden costs of a carbon tax

Carbon price proponents also claim that if you start with a low, revenue-neutral tax, increase it slowly over time, and make it universal across your economy, you can mitigate the economic damage that accompanies carbon taxation. Not so much. For decades, economists have known that a revenue-neutral carbon tax imposes a hidden cost by exacerbating pre-existing distortions of the tax system, adding a drag onto the economy that would exceed the benefits from recycling the revenue. This “tax interaction effect” was first proven theoretically in the 1970s and was confirmed empirically in the 1990s. Once the tax interaction effect is accounted for, in an economy with relatively high marginal tax rates like Canada, even if revenue from a carbon tax – set at the currently estimated social cost of carbon – is used to fund a reduction in income taxes, the net economic effect must be negative.

Well, but what about the benefits? The government wants to dramatically reduce carbon emissions – 80 per cent by 2050, to be precise. But because energy demand is relatively insensitive to prices, carbon taxes would have to be set far beyond the level of harms they are intended to reduce to produce any significant reduction of emissions. For example, to get even a 30 per cent reduction from Canada’s motor vehicles would require a gasoline tax of about $975/tonne of carbon dioxide, an order of magnitude beyond B.C.’s current tax of $30/tonne. So much for a low and slow price.

But there’s little need to get into esoteric economic theory in the case of Ontario, because the likelihood of any textbook-perfect carbon tax being put in place in Ontario is virtually nil.

Ontario’s finance minister says that his spring budget will not contain a carbon tax (while being open to some other form of carbon pricing), while Ontario’s energy minister is already refusing to commit to revenue neutrality. Whatever is done will ultimately have to raise revenues simply because the steps laid out in the government’s Discussion Paper will cost many billions of dollars to achieve.

And then there’s that whole debt and deficit thing, wherein Ontario is expected to run a $12.5 billion deficit this year, with the provincial government debt towering at $287 billion. Does anyone really think that carbon revenues won’t be diverted toward general revenues at some point?

Carbon pricing not all it’s cracked up to be

Ontario’s Climate Change Discussion Paper is a repackaged wish list that environmentalists and planners have sought for the last 40 years, this time, with a spiffy new funding mechanism: a carbon price. But carbon pricing is not all it’s cracked up to be. In the real world, any carbon price that significantly reduced emissions would have to be far higher than the public would ever accept; and would have to replace – not augment – regulations to be economically “efficient.”

And even if it were miraculously implemented with 100 per cent revenue neutrality, it would drag the Canadian economy down for little or no benefit. Ontario has enough challenges without hanging the albatross of a new green carbon price around its neck.

Kenneth P. Green is Senior Director, Natural Resource Studies at the Fraser Institute. Ross R. McKitrick is a Senior Fellow at the Fraser Institute, and a Professor of Economics at the University of Guelph.

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