National Post

THIS IS NO WAY TO TAX CARBON.

- Jack M. Mintz

An esteemed colleague of mine showed up in Twitterlan­d on Tuesday to graciously offer me credit for the Liberal government’s carbon-pricing announceme­nt this week. This fellow economist made the link to a 2008 paper I co-authored with Nancy Olewiler which proposed converting the federal fuel excise tax into a carbon tax in Canada.

While recognitio­n of my past work is always appreciate­d, I don’t think I can take credit for this Liberal plan. In fact, I am disillusio­ned with these evolving climate policies that seem to be laid out in a helter-skelter fashion — and with high economic costs.

I stand behind the points of the 2008 paper. I still maintain that a single uniform carbon tax is the least distortion­ary way to implement carbon policies. And we should integrate existing federal-provincial fuel taxes — for example, almost 25 cents per litre on gasoline in Ontario — by transformi­ng them into general carbon taxes. With a single carbon tax rate, businesses and consumers can determine the best way to respond to reducing emissions.

But a single uniform carbon tax is supposed to make regulation­s and various subsidies (with their own implicit tax costs) unnecessar­y, except perhaps for funding research. If producers see that they can save more carbon tax by investing in a technology or process, they will adopt it. If the technology is prohibitiv­ely expensive (such as carbon capture and storage) they won’t. This is how a carbon tax works: Not government­s trying to make decisions for us, without any idea what new technologi­es might arrive tomorrow, lacking the wisdom to assign differenti­al carbon prices. Yet that’s what the government will continue doing with a plethora of taxes, regulation­s and subsidies, despite politician­s’ attempts to argue that the carbon tax is their “marketbase­d” solution to climate control.

I continue to maintain, as I have all these years, that the best way to implement carbon taxes is to use the revenues to reduce harmful corporate and personal taxes (I’ve since added land-transfer taxes to the original list). This includes removing anticompet­itive levies while also providing support for lowincome households to cope with higher electricit­y, heating and transporta­tion costs.

However, what was unveiled Tuesday by the federal Liberal government in its carbon-pricing plan fails to achieve what I would have argued to be an ideal carbon policy. What is being advertised as a climate plan for provinces that fail to follow Ottawa’s carbon-tax directives — currently New Brunswick, Ontario, Manitoba and Saskatchew­an, but they’ll likely be joined by others — instead comes across as a grand redistribu­tion scheme administer­ed by an expanding government bureaucrac­y.

While the federal carbon tax is almost uniform (electricit­y is not yet included), it provides special exemptions for certain sectors such as farmers, fishers, aviation, power producers in the North and greenhouse operators, although not the ones growing recreation­al cannabis.

But the departure from uniformity is marginal and not nearly as concerning as the Trudeau government’s continuing commitment to existing and even new regulation­s and subsidies to promote “clean energy,” each with their implicit carbon price. While economists repeatedly argue for a carbon tax precisely because it means we can forgo these high-cost interventi­ons, somehow that has all been lost. While plenty of the economists behind the carbon-tax lobby were cheering Prime Minister Justin Trudeau’s new plan yesterday, I somehow missed their demands that we now must eliminate clean fuel and renewable electricit­y standards, subsidies for electric vehicles and ethanol — all of which have carbon costs well in excess of the $50-a-tonne carbon tax planned for 2022.

Another failure of the federal plan is to pass on carbon taxes in the form of Justin Bucks — or, to use the more laborious official name for these tax rebates: Climate Action Incentive Payments. So, rather than include carbon taxation as part of comprehens­ive tax reform to make the tax system simpler, less distorting and fair, these Justin Bucks will be paid to households, small businesses, municipali­ties, universiti­es, colleges, hospitals, non-profit and Indigenous population­s.

A fatal flaw in federal pricing plan is a major shift in taxes from individual­s to businesses. The average per household rebate — $1,161 in Saskatchew­an in 2022 for example — is more than the cost per household of $946 (not including GST or HST on any energy bills). Even though the document states that business taxes are fully shifted forward to households, something is amiss here. How can household rebates average more than costs?

The answer is evidently that businesses will be paying more so that the Liberal government can give more Justin Bucks to households. So while large emitters will be getting some relief from the tax, given their exposure to trade, most service and low-emitting manufactur­ers will be stuck paying more for their energy costs. Any business with more than $15 million in assets (which is a fairly low minimum) that doesn’t enjoy a special subsidy will be hit by this plan. And exporters will be unable to pass carbon bills onto world markets, which means the costs will all shift back into Canada.

Workers will take the biggest brunt of the hit from these extra business costs in the form of lower wages. Meanwhile, imports will now enjoy a new advantage over Canadian producers, since the federal plan does not include an import carbon tariff (something that is not simple to implement and subject to political whims). So this new carbon tax — like costly regulation­s and subsidies — effectivel­y operates as subsidy for American, Chinese and other imports flowing into New Brunswick, Ontario, Manitoba and Saskatchew­an.

This anti-competitiv­e aspect of the Liberal plan will become increasing­ly important as the carbon tax is set to rise. For example, B. J. Venkatacha­lam at the University of Calgary’s School of Public Policy estimated the Alberta’s current carbon tax of $30 per tonne results in an equivalent 2.4-per-cent tax on all labour, capital and intermedia­te business costs in the forest sector. The Liberals’ tax for Saskatchew­an, New Brunswick, Manitoba and Ontario is set to rise to that level by 2020.

When it starts at $20 a tonne next April, the Liberal plan won’t hurt total Canadian GDP too much: Estimates are it will shave 0.1 per cent off what would otherwise be 1.7-per-cent annual growth. Although that adds up to a lot over 50 years.

But $10 a tonne also won’t affect emissions enough to offset other factors like income and population growth, despite the government’s prediction­s to the contrary. As the carbon-tax rates rise, Ottawa needs to get the trade-off between emission reduction and growth right. No less an expert than William Nordhaus, awarded the Nobel Prize this month for his work on carbon taxes, has argued this vital point. The first steps in that plan should be phasing out highcost regulation­s and subsidies and sensible policies that offset carbon taxes with better overall tax policy to make our economy more competitiv­e. That’s what I’ve been arguing since 2008 and the Liberal plan is far from anything like it. I certainly won’t take credit for it.

 ?? NATHAN DENETTE / THE CANADIAN PRESS ?? Prime Minister Justin Trudeau speaks to the media and students at Humber College in Toronto regarding his government’s new federally-imposed carbon tax on Tuesday,
NATHAN DENETTE / THE CANADIAN PRESS Prime Minister Justin Trudeau speaks to the media and students at Humber College in Toronto regarding his government’s new federally-imposed carbon tax on Tuesday,

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