Ontario, Alberta carbon tax schemes defy economic common sense

Carbon taxes should replace, not add to, existing environmental regulations and subsidies

In an episode of the television program Seinfeld, the bungling George Costanza tells his friends that he’s concluded that every instinct he has is always wrong.

So Jerry suggests George should always do the opposite of his first instinct: “If every instinct you have is wrong, the opposite would have to be right.”

Somebody ought to give Ontario Premier Kathleen Wynne and her Alberta counterpart Rachel Notley the same advice: always do the opposite. Take the carbon tax as a prime example.

Economists have repeatedly stated that any tax on carbon dioxide emissions should be a replacement of – instead of an addition to – existing environmental regulations and subsidies.

As environmental economist Ross McKitrick has written, green subsidies and similar investments are “the worst possible use of the [carbon tax] revenue, since it destroys the microeconomic efficiency of the tax instrument.”

The logic is simple. For example, a carbon tax of $20 per tonne incentivizes the private sector to seek out and implement the least costly emissions reduction methods – all the ones that cost less than $20 per tonne.

So the only emissions reduction methods left for government to enforce and encourage through regulations and subsidies are those the private sector deemed too expensive and inefficient.

Green subsidies and regulations therefore make the carbon tax “cost-maximizing,” according to McKitrick, since “it becomes, in effect, a tax on cheap and effective abatement schemes to subsidize the costly and ineffective ones.”

Yet Ontario’s carbon tax is designed exactly in this cost-maximizing way. A recent news release from that province’s government on the carbon tax advertises its economic illiteracy.

The revenues “must by law be invested in programs that help Ontario families and businesses save money and lower greenhouse gas emissions from transportation, industry, buildings, waste, electricity and agriculture,” reads the news release.

The province has even found the most wasteful way to distribute these funds – such as through grants to municipalities.

No doubt taxpayers will have to foot the bill for municipalities to hire green consultants, grant application writers and professional rent-seekers to chase these provincial funds.

The billions in carbon tax revenues that the government promises to waste annually compounds the Liberals’ other catastrophic energy policies.

Recall the 2015 report of the auditor general, which found Ontario electricity consumers will pay $133 billion over market price for electricity from 2015 to 2032. That’s more than $7-billion wasted annually.

Then there was the announcement earlier this year of the Fair Hydro Plan, which the province’s Financial Accountability Office projects will come at a net cost of $21 billion to $69 billion for Ontario taxpayers.

Costanza couldn’t have bungled this any more than the Ontario government.

Meanwhile, the Alberta government is similarly flushing its billions in carbon tax revenues down the drain. Notley’s New Democrats promised to torch billions of dollars of carbon tax revenues over the next few years on various green “investments.”

In step with imposing the carbon tax, the Alberta government increased personal and corporate income tax rates when it came into office, exacerbating the tax burden on households and businesses.

Like Costanza, the Ontario and the Alberta governments ought to do the opposite of what their instincts tell them. They should be reducing, not increasing, the burden of taxes and environmental regulations.

Matthew Lau is an economics writer in Toronto and a contributor to Canadians for Affordable Energy.


ontario, alberta, carbon tax schemes, common sense

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