Taxes without targets
Recently, Conservative interim leader Rona Ambrose explained her party’s position on climate policy. She noted that, while in office, the Conservatives had set environmental targets and “put in place a plan to reach that through regulation, as opposed to taxation.” This despite the reality that, as conservatives should easily recognize, the “regulation of i ndustry,” which she seems to prefer, is more economically damaging than the “taxation” she would seem to despise. If carbon emissions really are a significant problem (which remains a matter of debate), the case for taxation over regulation is clear. With taxation, emissionabatement strategies are determined by markets. With regulations, they’re determined by governments. But at least those, like Ambrose, who support regulations can say they are being consistent in using them to try reaching certain emission targets. Meanwhile, those who would use carbon taxes to hit targets like those in the Paris climate treaty are doing it all wrong.
To be sure, when they were i n government, the Conservatives had no trouble coming up awful ideas to help the environment — taking away our incandescent light bulbs, for example. Andrew Coyne twice hammered the Tories last week in the National Post over their preference for a regulatory approach. As Coyne noted, it would be different if the Conservatives rejected both carbon taxes and regulations by maintaining that man-made climate change is not a problem. But then, why the regulations? Coyne accurately labelled the Conserva- tive approach as “economic madness” and not conservative at all.
Still, as is usually the case, the Liberals and New Democrats have managed to come up with even dumber ways to address the climate issue. Their approach is a toxic mix of over- burdensome regulations, higher taxes, and corporate welfare. That this concoction has already sickened Ontario’s economy has not deterred Alberta and Ottawa from mixing up their own version of this poisonous climate policy.
When cast alongside what governments are actually doing, the carbon tax Coyne advocates — one that is a replacement of, not an addition to regulations and that is offset by income tax cuts — does not sound so bad. If emissions must really be reduced (which is far from obvious), this approach is surely the least economically damaging way to do it. In that sense there is what Coyne and others have called a “conservative case for carbon pricing.”
However, one big problem is that self- identified conservative carbon- taxers often advocate a carbon tax that is not really conservative, notwithstanding their calls for revenue neutrality and a rollback of regulations. Take for example Mark Cameron, head of Canadians for Clean Prosperity and a former policy director to Stephen Harper. Canadians for Clean Prosperity, much like politicians of all stripes, has developed an economically unhealthy obsession for reaching emissions targets. The organization has called for a $ 100 per tonne carbon tax by 2030, since a lower tax would leave Canada with no hope of reaching its emissions targets. But carbon-taxers, including those at Canadians for Clean Prosperity, have failed to explain why this precise level of emissions is the optimal result.
The net damages of climate change resulting from an additional tonne of emissions — the so- called “social cost of carbon” — may well be only $ 5, or $ 15, or $ 45 in 2030. But a $ 100 tax would deter additional emissions even if those emissions created $ 60 or $ 80 or $ 99 of social benefits per tonne. Regardless of what the science says about the effect of humans on climate change, basing climate policy on emissions targets is a senseless approach, because carbon taxes are based on the model of a Pigouvian tax ( named after economist Arthur Pigou who advocated taxing negative externalities like pollution). And the correct application of a Pigouvian tax depends on the size of the externality, not on the elasticity of demand. In other words, a properly priced carbon tax would be set at no higher than what we estimate as the impact to society of an additional tonne of emissions ( in fact, as Ross McKitrick recently noted in FP Comment, it should be lower) — not at whatever price we think will curb emissions to meet some government target.
The corollary for this, as difficult as it will be for carbon- taxers to admit, is that a carbon tax cannot be painted as a failure just because it doesn’t achieve significant emissions reductions. It also cannot be called a success just because it hits certain emissions targets. This means that, whether climate change is a large problem, a small problem, or no problem, emissions targets are good for nothing. So if we are going to support a carbon tax because it’s supposedly a market- based approach, let us at least throw the emissions targets in the trash first.