CARBON TAXES IN TWILIGHT ZONE.

Canadians for Clean Prosperity published a report last week estimating that a carbon tax will make every Canadian better off, be they rich or poor, if the money is rebated to every person as equal per capita grants. Yippee — everyone’s a winner with a rebate that exceeds the carbon tax!

But something doesn’t make intuitive sense here. How can rebates be more than household carbon-tax costs for everyone? Shouldn’t they, at most, add up across the population as the same?

I went through the thinly documented report of 14 pages to find out. The paper calculates carbon-tax revenues ramping up by $9.2 billion by 2022 in Ontario, Saskatchewan and Alberta for “compliance” GHG emissions. The revenues are returned to households as per capita rebates under three scenarios.

Under one scenario, governments refund 100 per cent of carbontax revenues to households — including carbon-tax revenues collected from businesses — thereby providing individuals and families with the largest grants possible.

A scenario on the other extreme assumes that households only get a refund from the taxes they pay themselves — in their electricity and heating bills, gasoline and embedded in the goods and services they buy — but their refund does not include transfers from other carbon taxes paid by businesses (such as those embedded in exports). This results in the smallest rebates for households. A third scenario is somewhere in the middle, but I’ll stick with discussing the two scenarios on either extreme.

Obviously, there is a significant difference in impacts between the two scenarios. Under the first scenario, with transfers coming from businesses, Ontario households, for example, receive on average $866 in annual rebates. Under the other extreme, where other business carbon taxes aren’t included in the refund to households, rebates shrink by a third, to $555.

The carbon costs per capita — which are assumed to be reduced by abatements made by families making “investments” in energy efficiency to avoid paying higher taxes — are then estimated for each income group, taking into account direct and indirect costs imbedded in consumer prices. And under the first, “all revenue” rebate assumption, every income group is better off.

However, when rebates are only based on what households pay directly or indirectly in carbon taxes, the results actually show that lower-income groups win — but higher-income groups lose. For example, in Ontario, all households earning below $80,000 in income come out ahead with bigger rebates than they pay in taxes. Everyone earning more than $80,000 pays more in carbon taxes than they get in rebates. Given that the median household income in Ontario is just shy of $80,000, about half of the province loses money on the carbon tax. It’s roughly the same case in Alberta and Saskatchewan.

But even that exaggerates the amount of people benefiting overall from the rebates. Firstly, because the Canadians for Clean Prosperity paper does not account for the indirect cost to households of carbon taxes levied on exported production. In our small open economy, Canadian businesses have little room to raise prices on exports to account for higher carbon taxes at home; otherwise their exports become globally uncompetitive. That means raising prices on Canadians at home, laying off workers, or reducing wages or dividends. So not only will Canadian families face higher prices for the carbon used in the products and services they purchase here at home (which they could theoretically get refunded for), they’ll have to pay even higher prices, or suffer investment, wage or job losses to cover the carbon used in the exports of those same products and services to other markets outside Canada. Those carbon-tax rebates won’t include the money families lose to the lower wages exporters exposed to our carbon tax will have to pay.

Second, a carbon-tax regime requires significant administrative and compliance costs. Carbon-tax payments have to be collected and audited. Some cost will be involved with sending cheques to households (this can be minimized if it’s done through the tax system, like the GST tax credit). Businesses must comply with the carbon tax by setting up evaluation and accounting systems. The total may not be large, but administrative and compliance costs for a giant redistribution scheme will likely eat up two cents for each tax dollar, similar to sales taxes.

And then there is the cost of consumers “investing” in abatement — spending money on efficiencies that will reduce their emissions. The study uses abatement to make carbon expenditures go down, helping to make the carbon tax’s benefits to the family’s bottom line look even better. But it fails to look at another side of this “investment” — where rebates shrink as families using abatements actually consume less carbon, which is the whole point of the exercise. Abatement also requires investment expenditures such as on fuel-efficient cars and better insulation. Given that households would invest in low-carbon technologies up to the point that costs are equal to their savings on carbon taxes, the abatement savings are negligible, at least for incremental expenditures.

Just adding up these three adjustments, I estimate roughly that the household carbon tax would cost $124 more per household in Ontario, for example. And that all households with incomes above $40,000 would come out losers, facing costs in excess of rebates. It would be a direct hit on Canada’s middle class.

And that’s not the end of the story. First of all, the idea of governments rebating carbon taxes in a purely revenue-neutral way has been proven to be the great Canadian myth. It never happens. Governments always take a cut of the revenues, if not all the revenues, for more spending programs.

Secondly, the implementation of the carbon tax will create various economic costs by distorting household and business decisions. For example carbon taxes, like a sales tax, increases the tax on labour (by reducing purchasing power), compounding the ill effects of personal income tax and payroll taxes on work effort.

Meanwhile, the Liberal government’s plan to provide special carbon-tax breaks only for major emitters distorts markets, too, since less-protected firms face higher electricity, fuel and heating costs than those enjoyed by the government’s favourites. Overall these economic costs add up to lower incomes for all Canadians. That’s why most economists do not support the kind of carbon-tax rebates being proposed by the Liberals and promoted by Clean Prosperity, which have no economic virtue. Better that carbon-tax revenues should instead be used to lower the most harmful taxes in the economy to help with competitiveness.

It remains true that if a government wants to reduce carbon use, a tax is still better than the plethora of high cost regulations and subsidies currently used to reduce emissions. But that’s as good as a carbon tax gets. It’s not going to make everyone richer through magical rebates. To paraphrase a beleaguered U.S. Supreme Court nominee, that’s something right out of the Twilight Zone.