The magic carbon dividend plan

GUEST COLUMN

Clean Prosperity report’s model say otherwise?

Because the model doesn’t fully account for where businesses get the money to pay their share of the tax burden. It acknowledges that firms will pass along some costs to households in the form of higher prices. But that only accounts for a fraction of the new tax burden facing the business sector (except in the unlikely case that markets do not respond to price changes, which, ironically, would mean carbon taxes have no effect on emissions).

In the real world, businesses cover part of the burden of new taxes by reducing earnings for workers and investors. If the Clean Prosperity model included this aspect, it would have shown a set of cost tables estimating the reductions in wages and investor returns. Yes, households would get carbon tax rebate cheques — but they would also get smaller paycheques and reduced earnings on their investments.

The report also assumes that every business in the affected provinces will continue to operate as before, forever. But we know that the business tax burden directly affects investment and entrepreneurship decisions. While the Clean Prosperity model accounts for the fact that some large emitters receive partial exemptions based on their historical output levels, that form of rebate does not mitigate the competitiveness problem.

The proposed tax reduces marginal returns on new investments for large and small firms alike, and will be a long-term disincentive for new business formation, especially when compared to the new tax regime in the United States. This effect will be particularly acute in provinces such as Ontario that already have very high income and consumption taxes.

As with any tax policy change, the carbon tax and dividend mechanism would likely create some winners and some losers. But for Clean Prosperity to suggest that almost everyone would win is far-fetched, to say the least. Given the inadequacy of its model, the results cannot be considered a reliable assessment of the likely impacts of the federal backstop carbon tax plan.

Instead, it’s very likely that the costs omitted from the Clean Prosperity model exceed the reported net benefits, making the average effects negative rather than positive.

Ross McKitrick is a professor of economics at the University of Guelph and a senior fellow of the Fraser Institute. Distributed by Troy Media.