Carbon pricers have lost

The Abacus survey on carbon taxes, released last week for the Ecofiscal Commission, revealed that 30 per cent of Canadians considered it a “good” idea for governments to tax carbon. Thirty five per cent consider it “acceptable.” And 24 per cent think it’s “poor” or worse. More interestingly, almost twothirds of Canadians report that they are not actually familiar with carbon pricing, which is destined to become a major wedge issue between conservative and non-conservative parties in the elections coming federally, in Ontario and Alberta in 2018 and 2019.

How can that be? So much has been written and said about carbon taxes, how could most Canadians be unfamiliar with the concept? Don’t be surprised. Governments themselves believe in carbon pricing only half-heartedly. None has yet been willing to rely on it as a key policy. They all still prefer carbon regulations to achieve their emissions targets. And now that Alberta and B.C. have recently delivered budgets revealing that their future carbon revenues will be used for general spending, carbon pricing has been exposed for what it is: A tax grab.

Economists, including myself, have argued over the years that if policy-makers are intent on reducing emissions, the least-costly policy is putting a price on GHG emissions, either via a tax or a cap-and-trade system.

The carbon tax, now used in Alberta, B.C. and Manitoba, regulates the carbon price, but not emission quantities. In principle, the tax should be applied comprehensively, affecting both households and businesses with exemptions for exports but levied on imports. And economists have touted a potential “double dividend” if carbon-tax revenues are used to reduce the most harmful taxes on the economy, such as corporate and personal income taxes.

The cap-and-trade system used in Quebec, Ontario and Nova Scotia, dictates carbon emission quantities but not carbon prices. Firms that emit more than their allowance can invest in new technologies or, if cheaper, buy carbon credits from other companies that have emitted below their allowance. Governments auction off the allowances, which means more revenue for them.

Economists’ champion the theory behind these models because, they rightly argue, businesses and households make the best decisions about how to best reduce their emissions, to save on carbon costs, better than governments picking winners and losers by subsidizing “green” companies and disfavouring less-efficient ones. Therefore, regulations to phase out coal, promote ethanol, or subsidize electric cars, among other policies, are unnecessary. Wherever the cost to reduce emissions is less than the carbon price, consumers and businesses will naturally adopt that technology without needing any further incentive.

That’s the theory. But it’s not the politics. Carbon pricing fails politically on two counts. For one, its costs are too visible to voters. Regulations that reduce emissions have unmeasured “implicit” carbon prices. Those costs are hidden and so they deceive voters into thinking they won’t be the ones paying for them.

Secondly, the impacts of carbon pricing are simply too unpredictable. A carbon tax cannot meet specific emissions targets, since its impact can be muted by many other factors (strong economic growth, or an energy-price collapse, for example). Overall, Canada’s GHG emissions have barely changed since 2005 — down just two per cent — and have actually risen somewhat since 2010. If the federal government hopes to reduce GHG 2030 emissions by 30 per cent below 2005 levels, as it promised the UN in Paris, its carbon tax plan won’t do the trick, unless prices are ramped up punishingly.

Now, if carbon tax goes from the Liberal government’s currently planned minimum of $30 per tonne of CO2, to $200 per tonne, you don’t have to be an economist to predict emissions will decline, even if no one can say with precision how much. But that, of course, would mean significantly higher energy prices (about 50 cents per litre of gas, for one thing) and risking more lost investment and production to other countries with less stringent carbon policies, including the U.S. and China, an effect known as “carbon leakage.”

Although cap-and-trade systems promise politicians the certainty of hitting specific emissions targets, the government loses control of carbon prices, which can zoom up or down. So governments often dampen prices by setting low emissions targets or doling out free allowances to businesses. Carbon permits in Europe have been selling this year for 12.60 euros (about $20), about 20-per-cent lower than 2010, so it’s even cheaper to emit than it used to be. California’s permit prices, at US$15, are not much different than in 2012. Not much incentive to keep slashing.

That’s how cap and trade and carbon taxes turned from a meaningful climate policy into just a plain old tax grab. Governments, unwilling to impose high, explicit prices, continue piling on “complementary” policies (many of which come with high but well hidden costs: ethanol requirements in gasoline equate to a carbon tax of $200 per tonne; electric vehicle subsidies cost $400 per tonne or more; and phasing out coal can exceed $100 per tonne). B.C., once seen as a “model” carbon taxer by economists, now resorts to 40 “action areas” of additional climate rules. Alberta’s complementary policies have included an expensive coal phase-out, renewable electricity standards and caps on oil sands and certain oil-well emissions. They all do it.

If governments actually believe in the elegant efficiency of carbon pricing to reduce emissions, they don’t show it. All real progress is being made through regulations, not carbon pricing. Ontario reduced GHG emissions by almost 20 per cent since 2005, largely by phasing out coal-fired power and paying exorbitant subsidies for renewable energy. Nova Scotia reduced emissions 30 per cent from 2005 solely through regulations and subsidies.

We still hear economists arguing for carbon pricing, but they have clearly lost the battle. Governments will keep deploying costly regulations to hit emissions targets, letting future politicians, as always, worry about the bills, while carbon taxes — if they survive the upcoming elections — become just another government tax-and-spend slush fund.