According to a report in the Globe and Mail, Finance Canada is quietly promoting the idea of a federal carbon tax, or at least, a minimum carbon price, in order to reduce greenhouse gas emissions as Canada has pledged to do in last December’s Paris Agreement.
The problem is, Canada’s track record at implanting economically benign carbon pricing is not very good: three of the four Canadian Jurisdictions with carbon taxes or pricing are in complete violation of economic theory about benign carbon pricing.
Carbon taxes in Quebec and Alberta (or recently proposed carbon trading in Ontario) are not revenue-neutral (defined as neither increasing nor decreasing tax revenues), they are not imposed uniformly across the economy, they exempt (or worse) reward the largest emitting industries, and they are layered on top of regulations, all of which damages the economy.
British Columbia’s carbon tax comes close to a “textbook” implementation of a revenue carbon tax, but given that it’s piled on top, instead of in lieu, of a raft of climate-related and economically distorting regulations it’s probably far less benign than it seems, and in recent years, has morphed into an instrument of industrial policy, with virtually all the growth in revenues from the tax, post 2013, being directed to governmentally favoured industries such as agriculture and the entertainment sector.
A federal tax or mandate would almost certainly promote more of the same. Media reporting on the idea already suggests that federal tax requirements would allow spending on green policies as long as the revenue doesn’t leave the province. (Tell that to Ontario, which is expected to buy carbon credits from California as part of their cap-and-trade plan.)
Environmentalists (and many economists) posit carbon taxes as the best approach to controlling carbon. But the way carbon taxes have been implemented in Quebec, Alberta and proposed in Ontario clearly show that governments are not inclined toward fully revenue neutral carbon taxes. Instead, they implant indirect energy taxes to generate new revenue streams that let governments dictate how energy is produced, how it is consumed, and to reward their friends and punish their opponents.
These new “carbon” taxes or trading schemes will further distort energy markets, raise energy prices, raise food prices, increase energy poverty, and reduce economic competitiveness in the province.
And again, it has to be said, there is virtually no environmental benefit – Canada is such a small emitter of GHGs that shutting the entire country down would not produce measureable impacts on climate change. In fact, Canada’s global share of emissions is shrinking as China’s and India’s grow. And, China and India will not likely be swayed by Canadian leadership.
But perhaps carbon pricing will buy the social license Canada needs to develop its energy resources? Just ask Alberta how well that has worked out. Alberta has rolled out massive new carbon taxes and a climate action plan that hamstrings future oilsand development with its 100 megatonne annual emission limit – and still no pipeline agreement. And waiting for ENGOs to say “Okay, you’ve paid your social license, we’ll stop opposing your infrastructure now” is a mug’s game.
Carbon taxes and carbon pricing are all the rage at present, but don’t be fooled. They are overwhelmingly likely to violate the benign economic models that economists like to talk about on television and, instead, largely function as energy taxes to generate a new source of revenues for cash-hungry governments.
Kenneth P. Green is senior director of Natural Resource Studies at the Fraser Institute.