Carbon tax flawed, but it’s best option for now
For months opponents of a federal carbon tax have been hammering away at it as a tax grab that will leave consumers poorer — and the poorest consumers poorer still.
Well, now the Liberal government has unveiled the details of the plan, which will include offsetting payments to every household in the four provinces (Saskatchewan, Manitoba, Ontario and New Brunswick) in which the federal tax will apply — payments that for most households will exceed the cost of the tax.
So, in a trice, the former tax grab has become an irresponsible giveaway.
Conservative leader Andrew Scheer denounced the rebates as a “gimmick” intended to “trick” Canadians into “paying higher taxes on basic necessities,” apparently oblivious to his own support for taxes of up to 300 per cent on basic necessities like milk and eggs. It’s a “cynical vote-buying scheme,” agreed Saskatchewan Premier Scott Moe. Ontario Premier Doug Ford went so far as to claim the rebates would cease as soon as the federal election was out of the way. By tomorrow, they will be back to talking about the “tax on everything” as if the rebates did not exist.
Of course, in one respect, the critics are right. The federal plan is not “revenue-neutral,” either overall or with regard to each province. That would be the case if the government had opted to offset the tax with equivalent cuts in other taxes, such that it took in no more revenue after the tax than before.
But the Climate Action Incentive Payments, as the Liberals have chosen to call them, are not tax cuts, but simply a new spending program. Ottawa will collect billions more in taxes every year that it will then award to recipients of its choice in amounts it decides, i.e. spend.
What is almost certainly true, however, is that the plan will be neutral to positive in its effects on (most) household budgets. Opposition on this point leans heavily on eye-rolling appeals to what “everybody knows.” A tax that makes you better off ? Har!
But while Scheer can scoff that a “measly $12.50 a month” (the amount a single Ontarian would receive in the first year of the plan, when the tax is lowest) could not possibly cover the “true cost” of the tax, the plan’s estimates of the tax’s impact on households are broadly in line with independent estimates that he himself used to cite.
If the amounts Canadians will receive are “measly,” so are the amounts they pay in tax. To be sure, the $244 (rising to $564 in 2022) the tax will cost the average Ontario household is a lot of money to a poor family. But so, by the same reasoning, must be the $300 (rising to $697) rebate they will receive.
Does that make the whole thing, as many critics seem to believe, a wash, with little real impact on emissions?
Is the government, as Manitoba Premier Brian Pallister fumed, simply “taking money and giving it back”? Not a bit. The tax, which applies at different rates to different fuels depending on their carbon content, alters the relative prices of things; like all price signals, it encourages consumers to change their behaviour in order to stay within their budget.
The rebates, on the other hand, are lumpsum: everyone gets the same amount, no matter what.
Well, that’s not quite true. People who live in higher-emitting provinces like Saskatchewan will get more than their counterparts in Ontario or New Brunswick. So will people in the country, compared to city folk. So to some extent the plan “forgives” those who consume more.
Still, people in those areas will have the same incentive as others to cut back on their consumption of fossil fuels at the margin. Maybe the extra income might cause people to consume a little more — but not as much as the increase in price causes them to consume less, or to substitute lower-taxed fuels in their place. They still get the full rebate even if they don’t. But they get to keep a lot more of it if they do.
Pallister knows this, which is why his own plan proposed much the same, before it was abruptly canned three weeks ago. The other Conservative opponents also know it — just as they know their preferred alternatives, a mix of regulatory and subsidy schemes much like the ones that have so signally failed to reduce Canada’s greenhouse gas emissions to date, would cost consumers more than the carbon tax. Only without any offsetting rebates.
I have my own problems with the Liberal plan. It’s overly complicated, with too many exceptions (e.g. greenhouses, certain types of farming and fishing). The revenues would have been better used to reduce corporate and personal taxes, rather than simply handed out as rebates. And it layers carbon pricing on top of existing regulations, rather than replacing them, as it should.
Last, I remain unpersuaded of the need for “output-based pricing” for heavy emitters in “trade-exposed” sectors. The idea is to excuse them from paying tax on much of their emissions — effectively, a subsidy — while still offering them an incentive to reduce at the margins. The argument is that this is necessary to keep them from shifting production to jurisdictions without a carbon tax, namely the United States, on the grounds that this would simply shift emissions from one country to the other, rather than reducing them.
But that’s not our concern: Canada is responsible for its own emissions under the Paris Accord, not America’s. We’re not the ones free riding: they are.
Of course we’d prefer, other things being equal, that heavy-emitting industries didn’t shift production elsewhere. But it’s not worth subsidizing them to stay, since subsidies are always paid for by other firms and industries.
But even with these quibbles, the Liberal plan remains superior to the alternatives. Indeed, as of today, it remains the only plan on offer.